STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
the maximum aggregate commitment underSRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the credit facility from $30.0 million to $60.0SRT 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 June 30, 2021, the SRT Loan had a principal balance of approximately $18.0 million. The credit facility matures on February 15, 2020. Each loan made pursuant to the Key Bank credit facility will be eitherSRT Loan is a floating LIBOR rate loan orwhich bears interest at 30-day LIBOR (with a basefloor of 1.50%) plus 2.80%. The default rate loan, atis equal to 5% above the election of the Company, plus an applicable margin, as defined.rate that otherwise would be in effect. Monthly payments are interest onlyinterest-only with the entire principal balance and 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 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. At June 30, 2021, the Company was in compliance with the loan requirements in effect as of 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 San Francisco assets.
Loans Secured by Properties
On May 7, 2019, the Company refinanced and repaid its financing from Loan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of June 30, 2021, the Wilshire Construction Loan had a principal balance of approximately $12.5 million, with future funding available up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR (with a floor of 2.467%) 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 will payexecuted a guaranty that guaranties that the lender an unused commitment fee, quarterlyloan interest reserve amounts are kept in arrears, which will accrue at 0.30% per annum, ifcompliance with the usage underterms 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 credit is 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 is greater than 50% of the line of credit amount. The Company is providing a guaranty of all of itsborrower’s obligations under the Company’s lineloan agreement with respect to the completion of creditcapital 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 all otherthe prior loan, documents. Asto pay transaction costs, as well as to fund certain required interest and construction reserves.
Loans Secured by Properties Under Development
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 September 30, 2017,approximately $8.7 million, and had an interest rate of 6.9% per annum. The original Sunset & Gardner Loan agreement matured on October 31, 2019. The Company extended the Company’s lineSunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of credit was6.5% per annum. On July 31, 2020, the Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. The new maturity date is October 31, 2021. 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, 20172021 (amounts in thousands):
|
| | | |
| Remainder of 2017 | $ | 354 |
|
| 2018 | 20,661 |
|
| 2019 | 3,710 |
|
| 2020 | 20,968 |
|
Total (1) | $ | 45,693 |
|
| |
(1) | Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $0.2 million deferred financing costs, net. |
Recent Financing Transactions
Line of Credit | | | | | |
| Remainder of 2021 | $ | 8,700 | |
| 2022 | 12,510 | |
| 2023 | 18,000 | |
| Total future principal payments | $ | 39,210 | |
| Unamortized financing costs, net | 578 | |
| Notes payable, net | $ | 38,632 | |
During the ninethree months ended SeptemberJune 30, 2017 and 2016, the following transactions occurred under the Company’s line of credit:
Nine months ended September 30, 2017:
On January 4, 2017,2021, the Company drew $4.0incurred and expensed approximately $0.3 million and usedof interest costs, which included the proceeds to acquire 388 Fulton.
On January 6, 2017, the Company consummated the dispositionamortization of Pinehurst Square East, located in Bismarck, North Dakota, for a sales pricedeferred financing costs of approximately $19.2 million in cash, $18.4 million of which was used to pay down$0.1 million. During 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.
three months
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On February 28, 2017,ended June 30, 2020, the Company drew $9.8incurred and expensed approximately $0.1 million of interest costs, which consisted of amortization of deferred financing costs. Also during the three months ended June 30, 2021 and 2020, the Company incurred and capitalized approximately $0.4 million and used the proceeds to pay off the mortgage loan$0.6 million, respectively, of interest expense related to Woodland West Marketplace.the variable interest entities which included amortization of deferred financing costs of approximately $44 thousand and $0.1 million, respectively, for each period.
On February 28, 2017,During the six months ended June 30, 2021, the Company drewincurred and expensed approximately $0.6 million and usedof interest costs, which included the proceeds to pay certainamortization of deferred financing costs forof approximately $0.2 million. During the refinancing of the Company’s line of credit.
On March 29, 2017,six months ended June 30, 2020, the Company drew $1.0incurred and expensed approximately $0.2 million of interest costs, which consisted of amortization of deferred financing costs. Also during the six months ended June 30, 2021 and 2020, the Company incurred and capitalized approximately $0.8 million and used$1.2 million, respectively, of interest expense related to the proceeds for working capital.
On April 17, 2017, the Company consummated the dispositionvariable interest entities which included amortization of Woodland West Marketplace, located in Arlington, Texas, for a sales pricedeferred financing costs of approximately $14.6 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$0.1 million and used$0.2 million, respectively, for each period.
As of both June 30, 2021 and December 31, 2020, interest expense payable was approximately $0.2 million, including an amount related to 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 pricevariable interest entities of approximately $9.2$0.1 million, in cash, $3.0 million of which was used to pay down the line of credit.for each period.
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.
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):2021.
|
| | | | | | | | | | | | | | | |
| | 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, 20172021 and 2016,2020, 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 an Amendedthe 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 the Company. Under the current SRP, as amended to date, the number of shares 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 Restateda total of $1.2 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted-average number of shares of the Company’s common stock outstanding during the prior calendar year. Share Redemption Program (the “SRP”). repurchases pursuant to 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 was subsequently amendedprovides 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 August 7, 2015a 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 request is withdrawn. The Company 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 August 10, 2016.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.
On October 5, 2016,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 pursuant to Section 3(a)the suspension of the SRP, an additional $0.5 million of funds available for thewhich offered redemption of sharesopportunities only in connection with thea stockholder’s death of a stockholder.
On August 2, 2017, the board of directors of the Company approved, pursuant to Section 3(a) of the SRP, an additional $1.0 million of funds available for the redemption of shares in connection with the death of a stockholder.
The following table summarizes share redemption activity during the three and nine months ended September 30, 2017 and 2016 (amounts in thousands, except shares):or
|
| | | | | | | | | | | | | | | |
| | 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)
qualifying disability. 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. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be.
The following table summarizes share redemption activity during the six months ended June 30, 2021 and 2020 (amounts in thousands, except shares):
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, |
| | | | | 2021 | | 2020 |
| Shares of common stock redeemed | | | | | 0 | | | 19,907 | |
| Purchase price | | | | | $ | 0 | | | $ | 117 | |
There were no share redemptions during the three months ended June 30, 2021 and 2020.
Cumulatively, through SeptemberJune 30, 2017,2021, 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.
The following tables set forthIn light of the quarterly distributions declaredCOVID-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’s common stockholders and Common Unit holders for the nine months ended SeptemberCompany. Dividend payments were not reinstated as of June 30, 2017, and the year ended December 31, 2016 (amounts in thousands, except per share amounts):2021.
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
11.10. 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 September 30, 2017. 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, 20172021 and 20162020 (amounts in thousands, except shares and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Numerator - basic and diluted | | | | | | | |
| Net income (loss) | $ | (1,059) | | | $ | (524) | | | $ | (1,930) | | | $ | (99) | |
| Net income (loss) attributable to non-controlling interests | (21) | | | (10) | | | (38) | | | (2) | |
| Net income (loss) attributable to common shares | $ | (1,038) | | | $ | (514) | | | $ | (1,892) | | | $ | (97) | |
| Denominator - basic and diluted | | | | | | | |
| Basic weighted average common shares | 10,739,729 | | | 10,739,729 | | | 10,739,729 | | | 10,749,464 | |
| | | | | | | |
Common Units (1) | 0 | | | 0 | | | 0 | | | 0 | |
| Diluted weighted average common shares | 10,739,729 | | | 10,739,729 | | | 10,739,729 | | | 10,749,464 | |
| Earnings (loss) per common share - basic and diluted | | | | | | | |
| Net earnings (loss) attributable to common shares | $ | (0.10) | | | $ | (0.05) | | | $ | (0.18) | | | $ | (0.01) | |
(1)The effect of 217,475 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.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| 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 | ) |
| Denominator - basic and diluted | | | | | | | |
| Basic weighted average common shares | 10,885,095 |
| | 11,007,864 |
| | 10,909,141 |
| | 11,017,654 |
|
Common Units (1) | — |
| | — |
| | — |
| | — |
|
| Diluted weighted average common shares | 10,885,095 |
| | 11,007,864 |
| | 10,909,141 |
| | 11,017,654 |
|
| Earnings (loss) per common share - basic and diluted | | | | | | | |
| Net earnings (loss) attributable to common shares | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | 0.70 |
| | $ | (0.14 | ) |
| |
(1) | The effect of 259,899 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.STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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, 2022. 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. Effective April 1, 2021, PUR SRT Advisors LLC, controls SRT Advisor, LLC. Previously, Glenborough controlled the Advisor.
The Company is party to property management agreements with respect to each of its properties pursuant to which Glenborough was engaged to serve as property manager. Effective April 1, 2021, Glenborough and PUR SRT Advisor LLC entered into an agreement pursuant to which PUR SRT Advisor LLC would perform the duties required under and receive the benefits of the property management agreements, subject to Glenborough’s supervision. As a result, PUR SRT Advisor LLC is currently providing property management services to the Company and receiving the fees described below. The property management agreements expire August 10, 2021 and will automatically renew every year, unless expressly terminated.
On March 11, 2015,3, 2021, 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 intoobtained a $2.5 million working capital short-term loanStandby Loan Commitment (the “Bridge Loan”“Loan”) withfrom Glenborough Property Partners, LLC, an affiliate of the Advisor. The BridgeAdvisor prior to April 1, 2021. If the Company elects to act on the Standby Commitment, the Loan is scheduled to mature on March 31, 2018, at which point the outstanding balancewould have a term of the principal and all accrued and unpaid12 months with an interest will be due and payable. The Bridge loan incurs interest at an adjustable rate equal to the KeyBank prime rate. Interest isof 7.0% per annum, payable monthly in arrears.monthly. The Company haswould have the right to prepay or repay the Bridge Loan at any time in whole or in part at any time without premium or penalty. There are no other loan fees or financing coordination fees paid or payable in connection with this loan. DuringThe Loan would be secured by first deed of trust on Shops at Turkey Creek. As a result of the three months ended September 30, 2017,sale of Shops at Turkey Creek, refer to Note 3, “Real Estate Investments”, the Company incurred $1 thousand of interest expense related toLoan was not executed and as such, the Bridge Loan.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Standby Commitment expired.
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 | | Payable as of | | | Incurred | | Payable as of |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | September 30, | | December 31, | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | June 30, | | December 31, |
| Expensed | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | Expensed | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Acquisition fees | | $ | — |
| | $ | 46 |
| | $ | — |
| | $ | 104 |
| | $ | — |
| | $ | 80 |
| |
| | Legal leasing fees | | Legal leasing fees | | $ | 2 | | | $ | 0 | | | $ | 2 | | | $ | 0 | | | $ | 2 | | | $ | 0 | |
| Asset management fees | | 232 |
| | 227 |
| | 667 |
| | 673 |
| | — |
| | — |
| Asset management fees | | 148 | | | 156 | | | 302 | | | 324 | | | 49 | | | 0 | |
| Reimbursement of operating expenses | | 73 |
| | 49 |
| | 173 |
| | 146 |
| | — |
| | — |
| Reimbursement of operating expenses | | 0 | | | 6 | | | 0 | | | 12 | | | 0 | | | 0 | |
| Property management fees | | 81 |
| | 99 |
| | 280 |
| | 319 |
| | 37 |
| | 2 |
| Property management fees | | 15 | | | 15 | | | 35 | | | 36 | | | 6 | | | 9 | |
| Disposition fees | | — |
| | — |
| | 430 |
| | 115 |
| | — |
| | 29 |
| Disposition fees | | 50 | | | 0 | | | 50 | | | 157 | | | 0 | | | 0 | |
| | Total | | $ | 386 |
| | $ | 421 |
| | $ | 1,550 |
| | $ | 1,357 |
| | $ | 37 |
| | $ | 111 |
| Total | | $ | 215 | | | $ | 177 | | | $ | 389 | | | $ | 529 | | | $ | 57 | | | $ | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capitalized | | | | | | | | | | | | | Capitalized | | |
| Acquisition fees | | $ | — |
| | $ | — |
| | $ | 194 |
| | $ | 273 |
| | $ | — |
| | $ | — |
| Acquisition fees | | $ | 3 | | | $ | 3 | | | $ | 5 | | | $ | 9 | | | $ | 1 | | | $ | 0 | |
| Leasing fees | | 80 |
| | 49 |
| | 145 |
| | 152 |
| | — |
| | — |
| Leasing fees | | 0 | | | 61 | | | 20 | | | 100 | | | 15 | | | 0 | |
| Legal leasing fees | | 35 |
| | 12 |
| | 86 |
| | 45 |
| | — |
| | — |
| Legal leasing fees | | 0 | | | 20 | | | 10 | | | 27 | | | 3 | | | 0 | |
| Construction management fees | | 19 |
| | — |
| | 19 |
| | 2 |
| | — |
| | — |
| Construction management fees | | 3 | | | 62 | | | 35 | | | 128 | | | 34 | | | 2 | |
| Financing coordination fees | | 107 |
| | — |
| | 814 |
| | — |
| | — |
| | — |
| |
| | Total | | $ | 241 |
| | $ | 61 |
| | $ | 1,258 |
| | $ | 472 |
| | $ | — |
| | $ | — |
| Total | | $ | 6 | | | $ | 146 | | | $ | 70 | | | $ | 264 | | | $ | 53 | | | $ | 2 | |
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
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, 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 receivepays 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 twelve months, beginning on August 10, 2017.
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 receivethe Company pays 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 receivethe Company pays 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 receivein exchange the Company pays a fee equal to 5% of the hard costs for the project in question.
Related-Party Fees Paid by the Unconsolidated Joint VenturesThe 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.
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 21, 2021, 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 $0.067.9% 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, 2017.2022.
SaleThe 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 condensedaccompanying 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, 2016,2020, as filed with the Securities and Exchange Commission, or SEC, on March 24, 2017,26, 2021, which we refer to herein as our “2016“2020 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 2016 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 20162020 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.development, one of which was substantially completed during the year ended December 31, 2020. 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 2021. The current term of the Advisory Agreement terminates on August 10, 2018. The9, 2022. Effective April 1, 2021, the Advisor merged with PUR SRT Advisors LLC, an affiliate of PUR Management LLC, which is an affiliate of Glenborough,L3 Capital, LLC. L3 Capital, LLC (together with its affiliates, “Glenborough”),is a privately held full-service real estate investment and management companyfirm focused on institutional quality, value-add, prime urban retail and mixed-use investment within first tier U.S. metropolitan markets. As a result of this transaction, PUR SRT Advisors LLC, controls SRT Advisor, LLC.
Impact of COVID-19
On March 11, 2020, the acquisition, managementWorld 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, card rooms, 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. In August 2020, California moved to a four-tier, color-coded system assigning every county to a tier based on its test positivity and adjusted case rate. San Francisco County, where a number of our properties are located, was assigned a “moderate” tier in September 2020, which allows for some indoor business operations to open with modifications. Los Angeles County remained in the “widespread” tier, requiring many non-essential indoors business operations to stay closed. On December 6, 2020, due to a significant rise in COVID-19 cases around the Thanksgiving holiday and beyond, as part of California’s mitigation measures, both Los Angeles and San Francisco counties went into a regional stay-at-home order. This order implemented restrictions requiring many non-essential indoor business operations to close or stay closed. This order was subsequently lifted effective January 28, 2021, with both counties remaining in the “widespread” tier. As of June 30, 2021, due to declining new cases and hospitalizations, the state of California lifted COVID-19 related restrictions.
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 have been experiencing hardships, as they were unable to operate at full capacity until the middle of June 2021.
We believe that the COVID-19 outbreak has and could continue to 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 commercialour tenants have requested rent deferral or rent abatement as a result of the pandemic. At the start of the pandemic and shelter-in-place orders, a majority of our tenants requested rent deferral or rent abatement due to the pandemic and government-mandated restrictions. These tenants initially
totaled 94% of the leased square footage in our wholly-owned properties. We reviewed these requests on a case-by-case basis and agreed to modifications to some of the tenant leases, and other leases were not modified. 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 or restrictions are lifted. If these tenants fail, finding replacement tenants may be costly and time-consuming.
Of the total leased square footage in our wholly-owned properties, 47% of the leases were either (i) not modified and the tenants were able to continue to make their payments or (ii) the leases were modified to provide for a short-term temporary rent deferral or abatement. The rent deferrals generally were one to two months and were to be repaid within 12 months. Any rent abatement was typically one to two months and in many cases also involved an extension of the tenant's lease. Another 28% of the leases in our wholly-owned properties were modified to provide ongoing rent relief to the tenant. These leases generally were with restaurants and salons that faced significant operating restrictions limiting their ability to be open, open indoors, or open with anything but a limited capacity. These lease modifications involved some combination of lease extensions, application of security deposits, temporary rent deferrals, partial rent forgiveness or abatement, and new percentage rent clauses to protect the landlord in the event sales returned to prior levels during the period of the lease modifications. These concessions lasted and will last in many cases through the first and second quarters of 2021 to allow these businesses to commit to new operating strategies and costs for a pandemic environment. The tenants making up the remaining 25% of our leased square footage requested lease concessions; however, we could not agree with these tenants on lease changes acceptable to both parties. As of June 30, 2021, one of these tenants was in default under its lease; however, we were temporarily unable to evict this tenant under state and local statutes and moratoria. We were working with this tenant to find replacement tenant and terminate their lease. In July 2021, the tenant terminated their lease and was replaced with a new tenant. The other tenant terminated their lease and was replaced with a new tenant during the three months ended June 30, 2021.
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:
•We are in constant communication with our tenants and have assisted 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 will be able to service our debts and pay for our ongoing general and administrative expenses for the foreseeable future. As of June 30, 2021, we have approximately $4.0 million in cash and cash equivalents. In addition, we had 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, prior to its sale on April 27, 2021, which provided us with $3.8 million in proceeds as additional liquidity, the Shops at Turkey Creek was unencumbered by debt and was available for financing to provide us funds, if needed. Refer to Note 3, “Real Estate Investments” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the sale of the Shops at Turkey Creek.
•The SRT Loan is secured by six of our core urban properties in Los Angeles and San Francisco. The SRT Loan does not have restrictive covenants and ongoing debt coverage ratios that could trigger a default caused by tenants not paying rent or seeking rent relief.
•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, 2021.
•To further preserve cash and liquidity, we suspended our Amended and Restated Share Redemption Program (the “SRP”), such suspension was 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. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be. In addition, on March 27, 2020, the board of directors decided to suspend the payment of any dividend for the quarter 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, 2021.
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. Although vaccines for COVID-19 are being made available to the general public in the U.S. and around the world, it will take time for the vaccine to materially affect the spread of the virus and the outbreak could have a continued adverse impact on economic and market conditions.
Property Portfolio
As of SeptemberJune 30, 2017,2021, our wholly-owned property portfolio included 12six 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 425,00027,000 square feet of single- and multi-tenant, commercial retail space located in five states.one state. We purchased our properties for an aggregate purchase price of approximately $94.8$35.3 million. As of SeptemberJune 30, 2017 and December 31, 2016, there was2021 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% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately five5.1 years. As of December 31, 2020, approximately 79% of our portfolio was leased (based on rentable square footage as of December 31, 2020), with a weighted-average remaining lease term of approximately 6.3 years. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (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) |
| Property Name | | 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 |
|
| 400 Grove Street | | San Francisco, CA | | 2,000 |
| | 100 | % | | 60.00 |
| | n/a | | 6/14/2016 | | 2,890 |
| | — |
|
| 8 Octavia Street | | San Francisco, CA | | 3,640 |
| | 47 | % | | 32.00 |
| | n/a | | 6/14/2016 | | 2,740 |
| | — |
|
| Fulton Shops | | San Francisco, CA | | 3,758 |
| | 100 | % | | 55.91 |
| | n/a | | 7/27/2016 | | 4,595 |
| | — |
|
| 450 Hayes | | San Francisco, CA | | 3,724 |
| | 100 | % | | 89.82 |
| | n/a | | 12/22/2016 | | 8,020 |
| | — |
|
| 388 Fulton | | San Fancisco, CA | | 3,110 |
| | 100 | % | | 63.05 |
| | n/a | | 1/4/2017 | | 4,500 |
| | — |
|
| Silver Lake | | Los Angeles, CA | | 10,497 |
| | 100 | % | | 62.96 |
| | n/a | | 1/11/2017 | | 13,300 |
| | — |
|
| | | | | 156,380 |
| | | | | | | | | | $ | 58,870 |
| | $ | 5,525 |
|
| | | | | | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | | | Rentable Square
Feet | | Percent Leased (2) | | Effective Rent (3) (per Sq. Foot) | | | | Date
Acquired | | Original
Purchase
Price | | Debt (4) |
Property Name (1) | | Location | | | | | | | |
| Wholly-owned Real Estate Investments |
| | | | | | | | | | | | | | | | |
| 400 Grove Street | | San Francisco, CA | | 2,000 | | | 100 | % | | $ | 48.00 | | | | | 6/14/2016 | | $ | 2,890 | | | $ | 1,450 | |
| 8 Octavia Street | | San Francisco, CA | | 3,640 | | | 47 | % | | 63.41 | | | | | 6/14/2016 | | 2,740 | | | 1,500 | |
| Fulton Shops | | San Francisco, CA | | 3,758 | | | 84 | % | | 62.57 | | | | | 7/27/2016 | | 4,595 | | | 2,200 | |
| 450 Hayes | | San Francisco, CA | | 3,724 | | | 100 | % | | 96.50 | | | | | 12/22/2016 | | 7,567 | | | 3,650 | |
| 388 Fulton | | San Francisco, CA | | 3,110 | | | 100 | % | | 70.18 | | | | | 1/4/2017 | | 4,195 | | | 2,300 | |
| Silver Lake | | Los Angeles, CA | | 10,497 | | | 100 | % | | 70.86 | | | | | 1/11/2017 | | 13,300 | | | 6,900 | |
| | | | 26,729 | | | | | | | | | | | 35,287 | | | 18,000 | |
| Real Estate Investments owned through Joint Ventures |
| 3032 Wilshire Property | | Santa Monica, CA | | 11,771 | | | 45 | % | | 92.42 | | | | | 3/8/2016 | | 13,500 | | | 12,510 | |
| | | | 38,500 | | | | | | | | | | | $ | 48,787 | | | $ | 30,510 | |
| |
(1) | Square feet includes improvements made on ground leases at the property. |
| |
(2) | Percentage is based on leased rentable square feet of each property as of September 30, 2017. |
| |
(3) | Effective rent per square foot is calculated by dividing the annualized September 2017 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 September 30, 2017, and excludes reclassification of approximately $36 thousand deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 8. “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.” |
(1)List of properties does not include a residual parcel at Topaz Marketplace as of June 30, 2021.
(2)Percentage is based on leased rentable square feet of each property as of June 30, 2021.
(3)Effective rent per square foot is calculated by dividing the annualized June 30, 2021 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) Debt represents the outstanding balance as of June 30, 2021, and excludes reclassification of approximately $0.5 million deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 7. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report.
Properties Under Development
As of SeptemberJune 30, 2017,2021, 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 ownone property under development in Hollywood, California. This development project is still in the Los Angeles, California area that are expected to comprise 49,500 square feet upon completion.planning phase and construction has not commenced.
Investments in two unconsolidated joint ventures, which own, in aggregate, 8 retail centers, comprising an aggregate
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.
Results of Operations
Comparison of the three and ninesix months ended SeptemberJune 30, 2017,2021, versus the three and ninesix months ended SeptemberJune 30, 2016.2020.
The following table provides summary information about our results of operations for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 (amounts in thousands):
| | | | Three Months Ended
September 30, | | | | | | Three Months Ended
June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
| Rental revenue and reimbursements | $ | 2,219 |
| | $ | 2,647 |
| | $ | (428 | ) | | (16.2 | )% | Rental revenue and reimbursements | $ | 726 | | | $ | 654 | | | $ | 72 | | | 11.0 | % |
| Operating and maintenance expenses | 848 |
| | 949 |
| | (101 | ) | | (10.6 | )% | Operating and maintenance expenses | 772 | | | 359 | | | 413 | | | 115.0 | % |
| General and administrative expenses | 483 |
| | 623 |
| | (140 | ) | | (22.5 | )% | General and administrative expenses | 401 | | | 452 | | | (51) | | | (11.3) | % |
| Depreciation and amortization expenses | 653 |
| | 907 |
| | (254 | ) | | (28.0 | )% | Depreciation and amortization expenses | 719 | | | 301 | | | 418 | | | 138.9 | % |
| Transaction expense | — |
| | 165 |
| | (165 | ) | | (100.0 | )% | |
| | Interest expense | 449 |
| | 550 |
| | (101 | ) | | (18.4 | )% | Interest expense | 315 | | | 66 | | | 249 | | | 377.3 | % |
| Operating loss | (214 | ) | | (547 | ) | | 333 |
| | (60.9 | )% | Operating loss | (1,481) | | | (524) | | | (957) | | | 182.6 | % |
| Other income (loss), net | (19 | ) | | 16 |
| | (35 | ) | | (218.8 | )% | |
| Income taxes | 3 |
| | (19 | ) | | 22 |
| | (115.8 | )% | |
| Net income (loss) | $ | (230 | ) | | $ | (550 | ) | | $ | 320 |
| | (58.2 | )% | |
| Other income, net | | Other income, net | 422 | | | — | | | 422 | | | 100.0 | % |
| | Net loss | | Net loss | $ | (1,059) | | | $ | (524) | | | $ | (535) | | | 102.1 | % |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | | | Six Months Ended
June 30, | |
| | 2017 | | 2016 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
| Rental revenue and reimbursements | $ | 7,084 |
| | $ | 7,837 |
| | $ | (753 | ) | | (9.6 | )% | Rental revenue and reimbursements | $ | 1,441 | | | $ | 1,461 | | | $ | (20) | | | (1.4) | % |
| Operating and maintenance expenses | 2,554 |
| | 2,787 |
| | (233 | ) | | (8.4 | )% | Operating and maintenance expenses | 1,278 | | | 809 | | | 469 | | | 58.0 | % |
| General and administrative expenses | 1,478 |
| | 1,691 |
| | (213 | ) | | (12.6 | )% | General and administrative expenses | 811 | | | 859 | | | (48) | | | (5.6) | % |
| Depreciation and amortization expenses | 2,439 |
| | 2,628 |
| | (189 | ) | | (7.2 | )% | Depreciation and amortization expenses | 1,076 | | | 602 | | | 474 | | | 78.7 | % |
| Transaction expense | 85 |
| | 445 |
| | (360 | ) | | (80.9 | )% | |
| | Interest expense | 1,505 |
| | 1,660 |
| | (155 | ) | | (9.3 | )% | Interest expense | 628 | | | 237 | | | 391 | | | 165.0 | % |
| | Operating loss | (977 | ) | | (1,374 | ) | | 397 |
| | (28.9 | )% | Operating loss | (2,352) | | | (1,046) | | | (1,306) | | | 124.9 | % |
| Other income (loss), net | 9,027 |
| | (34 | ) | | 9,061 |
| | (26,650.0 | )% | |
| Income taxes | (99 | ) | | (153 | ) | | 54 |
| | (35.3 | )% | |
| Other income, net | | Other income, net | 422 | | | 947 | | | (525) | | | (55.4) | % |
| | Net income (loss) | $ | 7,951 |
| | $ | (1,561 | ) | | $ | 9,512 |
| | (609.4 | )% | Net income (loss) | $ | (1,930) | | | $ | (99) | | | $ | (1,831) | | | 1,849.5 | % |
Our results of operations for the three and ninesix months ended SeptemberJune 30, 2017,2021, are not necessarily indicative of those expected in future periods.
Revenue
The decreaseincrease in revenue during the three months ended SeptemberJune 30, 2017,2021, compared to the same period in 2016,2020, was primarily due to the salesexpiration of Pinehurst Square East in Januaryrent concessions provided to our tenants as a result of 2017 and Woodland West Marketplace in April 2017. The decreases werethe COVID-19 pandemic, partially offset by a full quarterthe sale of revenue from the acquisition of Fulton Shops in July 2016 and acquisitions of 450 Hayes in December 2016, and 388 Fulton and Silver Lakeat Turkey Creek. Revenue remained flat during the first quarter of 2017.
The decrease in revenue during the ninesix months ended SeptemberJune 30, 2017,2021, when 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 2017.2020.
Operating and maintenance expenses
Operating and maintenance expenses decreasedincreased during the three and six months ended SeptemberJune 30, 2017,2021, when compared to the same periodperiods in 20162020, primarily due to saleshigher appraisal costs and real estate-related professional services, as well as additional bad debt reserves. Additionally, placement of Pinehurst Square Eastthe Wilshire Property in January of 2017service in August 2020, contributed to the increase in operating and Woodland West Marketplace in April 2017.
The decreases were mostlymaintenance expenses. This was partially offset by acquisitionsthe sale of Fulton Shops in July 2016 and 450 Hayes in December 2016, and 388 Fulton and Silver Lake during the first quarter of 2017.
Operating 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.at Turkey Creek.
General and administrative expenses
General and administrative expenses decreased during the three and six months ended SeptemberJune 30, 2017,2021, when compared to the same periodperiods in 20162020, primarily due to decreasedlower legal fees.
General and administrative expenses decreased during the nine months ended September 30, 2017, compared to the same period in 2016 primarily due to decreased legal fees and decreased investor relations costs.
Depreciation and amortization expenses
Depreciation and amortization expenses decreasedincreased during the three and ninesix months ended SeptemberJune 30, 20172021, compared to the same periods in 2020, primarily due to the disposal of assets related to terminated leases.
Interest expense
Interest expense increased during the three and six months ended June 30, 2021, compared to the same period in 2016, primarily2020, due to the classificationplacement of Cochran Bypass, Florissant Marketplace, and Morningside Marketplace as held for sale during the third quarterWilshire Property in service. Capitalization of 2017.
Transactioninterest expense
There was no purchase or sale activity during the three months ended September 30, 2017, which resulted in lower transaction fees when compared related to the three months ended September 30, 2016.
The decreaseWilshire Property construction loan ceased in transaction fees during the nine months ended September 30, 2017, as compared to the same period in 2016 was primarily 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”) 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 classified as asset acquisitions and the related acquisition costs were capitalized.
Interest expense
Interest expense has decreased in 2017 over 2016 due to changes in debt balances as a result of property acquisitions and dispositions activities and the resulting fluctuations in debt balances from related proceeds and repayments of debt.August 2020.
Other income, (loss), net
Other income, net fromfor the three and six months ended SeptemberJune 30, 2017, primarily2021, consisted of equity in loss resulting from our investment in unconsolidated joint ventures.
a gain on sale of Shops at Turkey Creek of approximately $0.4 million. Other income, net fromfor the ninesix months ended SeptemberJune 30, 2017, primarily2020, consisted of approximately $9.1 million related to thea 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 reversalTopaz Marketplace 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.approximately $0.9 million.
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, 2017,2021, our cash and cash equivalents were approximately $3.6$4.0 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, 20172021 and December 31, 2016,2020, our borrowings excluding secured term loans balances which have been classified as held for sale, were approximately 89.2%92.7% and 105.2%90.1%, 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 | | 2021 | | 2020 | | $ Change |
| Net cash provided by (used in): | | | | | | Net cash provided by (used in): | | | | | |
| Operating activities | $ | 2,597 |
| | $ | 1,243 |
| | $ | 1,354 |
| Operating activities | $ | (555) | | | $ | (540) | | | $ | (15) | |
| Investing activities | 12,081 |
| | (31,569 | ) | | 43,650 |
| Investing activities | 2,705 | | | 4,737 | | | (2,032) | |
| Financing activities | (14,163 | ) | | 25,426 |
| | (39,589 | ) | Financing activities | — | | | (6,347) | | | 6,347 | |
| Net increase (decrease) in cash and cash equivalents | $ | 515 |
| | $ | (4,900 | ) | | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 2,150 | | | $ | (2,150) | | |
Cash Flows from Operating Activities
The increasechange in cash flows from operating activities was primarily due to a decrease in deposit balances resulting from the closing of the acquisitions of 388 Fulton and Silver Lakehigher operating loss during the first quarter of 2017.six months ended June 30, 2021 as compared to the same period in 2020.
Cash Flows from Investing Activities
The change in cashCash flows fromused by investing activities wasduring the six months ended June 30, 2021, primarily due to the netconsisted of approximately $3.8 million in proceeds from the dispositionsale of Pinehurst Square EastTurkey Creek and Woodland West Marketplacepartially offset by $0.9 million of additional investment in the Sunset and Gardner Joint Venture.
Cash flows provided by investing activities during the six months ended June 30, 2020 primarily consisted of approximately $32.4$9.9 million of proceeds from sale of Topaz Marketplace. These were partially offset by our aggregate $17.8additional $4.8 million acquisition of 388 Fulton and Silver Lake in January 2017. Cash flows from investing activities during the nine months ended September 30, 2016, consisted of our aggregate $28.5 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 result of the dispositions of Pinehurst Square East and Woodland West Marketplace.credit. This was partially offset by approximately $2.9 million from construction loan proceeds.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment of principal and interest on our outstanding indebtedness and distributions.indebtedness. To date, our cash needs for operations have been covered fromfunded by 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.
Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs could be affected by the effects of the COVID-19 pandemic. The full impact of the COVID-19 pandemic on our rental revenue and, as a result, future cash from operations cannot be determined at present. Prior to its sale on April 27, 2021, which provided us $3.8 million in additional liquidity as a result of the sales proceeds, the Shops at Turkey Creek remained unencumbered by debt and was available for financing to provide us funds, if needed. Refer to Note 3, “Real Estate Investments” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the sale of the Shops at Turkey Creek.
On March 3, 2021, we obtained a $2.5 million Standby Loan Commitment (the “Loan”) from Glenborough Property Partners, LLC, an affiliate of the Advisor. If we elect to act on the Standby Commitment, the Loan would have a term of 12 months with an interest rate of 7.0% per annum, payable monthly. We would have the right to prepay or repay the Loan in whole or in part at any time without penalty. There are no other loan fees or financing coordination fees paid or payable in connection with this loan. The Loan would be secured by first deed of trust on Shops at Turkey Creek. As a result of the sale of Shops at Turkey Creek mentioned above, the Loan was not executed and as such, the Standby Commitment expired.
We believe that our cash on hand, along with other potential aforementioned sources of liquidity that we may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that we will be successful with its plan.
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,Los Angeles. 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, pricesubject 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 June 30, 2021, the SRT Loan had a principal balance of approximately $19.2 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, $18.4 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 January 11, 2017,the SRT Loan, we drew $11.0 million and used 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 loan related to Woodland West Marketplace.
On February 28, 2017, we drew $0.6 million and used the proceeds to paymust comply with certain costs for the refinancing of our line of credit.
On March 29, 2017, we drew $1.0 million and used the proceeds for working capital.
On April 17, 2017, we consummated the disposition of Woodland West Marketplace, located in Arlington, Texas, for a sales price of approximately $14.6 million in cash, $13.7 million of which was used to pay down our line of credit.
On June 28, 2017, 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 investmatters contained in the Wilshire Joint Venture.
On April 4, 2016, we consummatedloan 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 dispositioncreation 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 millionliens, and used the majority of the proceeds to acquire 8 Octavia and 400 Grove.
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 Developmenttransactions with affiliates.
In connection with the SRT Loan, we executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the San Francisco assets.
Loans Secured by Properties
On May 7, 2019, we refinanced and repaid our investment infinancing with Loan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of June 30, 2021, the Wilshire Joint VentureConstruction Loan had a principal balance of approximately $12.5 million, with future funding available 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 (with a floor of 2.467%) 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 extendWilshire Property. 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.
Loans Secured by Properties Under Development
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 had an interest rate of 6.9% per annum. The original Sunset & Gardner Loan agreement matured 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. On July 31, 2020, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. The new maturity date is March 7, 2018.October 31, 2021. The loanSunset & Gardner Loan is secured by among other things, a lienfirst Deed of Trust on the Wilshire development project and other collateral as definedSunset & Gardner Property.
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, we have consolidated borrowingspayoff, Shops at Turkey Creek was released from the line of $10.7 million (the “Gelson’s Loan”). The Gelson’s Loan bears interest at a rate of 9.5% per annum,credit.
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 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 on 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.
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, 20172021 and 2016,2020, 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 Ninth Amendment to the Advisory Agreement entered into August 5, 2021.
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.
The following tables set forthIn light of the quarterly distributions declaredCOVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, our board of directors decided to our common stockholders and common unit holderssuspend the payment of any dividend for the nine months ended Septemberquarters 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, 2017, and the year ended December 31, 2016 (amounts in thousands, except per share amounts):2021.
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| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
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
June 30, | | Six Months Ended
June 30, |
| FFO | | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | | $ | (1,059) | | | $ | (524) | | | $ | (1,930) | | | $ | (99) | |
| Adjustments: | | | | | | | | |
| | | | | | | | |
| Gain on disposal of assets | | (422) | | | — | | | (422) | | | (947) | |
| | | | | | | | |
| Depreciation of real estate | | 448 | | | 241 | | | 758 | | | 481 | |
| Amortization of in-place leases and leasing costs | | 271 | | | 60 | | | 318 | | | 121 | |
| | | | | | | | |
FFO attributable to common shares and Common Units (1) | | $ | (762) | | | $ | (223) | | | $ | (1,276) | | | $ | (444) | |
| | | | | | | | |
FFO per share and Common Unit (1) | | $ | (0.07) | | | $ | (0.02) | | | $ | (0.12) | | | $ | (0.04) | |
| | | | | | | | |
Weighted average common shares and units outstanding (1) | | 10,957,204 | | | 10,957,204 | | | 10,957,204 | | | 10,966,939 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | Nine Months Ended September 30, |
| FFO | | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) (1) | | $ | (230 | ) | | $ | (550 | ) | | $ | 7,951 |
| | $ | (1,561 | ) |
| Adjustments: | | | | | | | | |
| Gain on disposal of assets | | — |
| | — |
| | (9,131 | ) | | (614 | ) |
| Adjustment to reflect FFO of unconsolidated joint ventures | | 97 |
| | 184 |
| | 309 |
| | 360 |
|
| Depreciation of real estate | | 503 |
| | 680 |
| | 1,725 |
| | 1,962 |
|
| Amortization of in-place leases and other intangibles | | 150 |
| | 227 |
| | 714 |
| | 666 |
|
| FFO attributable to common shares and Common Units | | $ | 520 |
| | $ | 541 |
| | $ | 1,568 |
| | $ | 813 |
|
| | | | | | | | | |
| FFO per share and Common Unit | | $ | 0.05 |
| | $ | 0.05 |
| | $ | 0.14 |
| | $ | 0.07 |
|
| | | | | | | | | |
| Weighted average common shares and units outstanding | | 11,290,377 |
| | 11,430,172 |
| | 11,325,712 |
| | 11,445,981 |
|
| |
(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 our investments in joint ventures and are described in Note 4. “Investments in Unconsolidated Joint Ventures” in the notes to the interim unaudited condensed consolidated financial statements in this Quarterly 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, and 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, we have provided carve-out guarantees in connection with our two unconsolidated joint ventures; in connection with those carve-out guarantees we have certain rights of recovery from our joint venture partners.
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 20162020 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:
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| |
| 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 21, 2021, 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 $0.067.9% 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, 2017.2022.
We evaluate subsequent events up until the date the condensed consolidated financial statements are issued.
Sale of Held for Sale Properties
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, 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.
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, 2017,2021, 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$3.8 million for redemptions sought upon a stockholder’s death and a total of $1.0$1.2 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 termsIn 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, are consistentwhich 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 termsSEC, served as such required notice and therefore the suspension of the share redemption program that was in effect immediately prior to January 15, 2013.
On October 5, 2016, ourSRP became effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made until the board of directors approved, pursuantapproves the resumption of the SRP. During the suspension, we will continue to Section 3(a) of SRP, an additional $0.5 million of funds available foraccept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the redemption of shares in connection with the death of a stockholder.
On August 2, 2017, our board of directors approved, pursuanthas elected to Section 3(a)lift the suspension and provided the terms and conditions for any continuation of the SRP, an additional $1.0 million of funds available for the redemption of shares in connection with the death of a stockholder.
SRP.
During the nine monthsquarter ended SeptemberJune 30, 2017,2021, we redeemed shares as follows:
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| 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 has2021, 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, 2021.
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, 2017,2021, 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.
|
| | | | | | | |
| Strategic Realty Trust, Inc. |
| |
| By: | /s/ Andrew Batinovich |
| | Andrew Batinovich |
| | Chief Executive Officer, Corporate Secretary and Director
(Principal Executive Officer)
|
| | |
| By: | /s/ Terri GarnickRyan Hess |
| | Terri GarnickRyan Hess |
| | 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, 20172021 (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 |
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| | Articles of Amendment, dated August 22, 2013 | | | | 8-K | | 8/26/2013 |
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| | Articles Supplementary, dated November 1, 2013 | | | | 8-K | | 11/4/2013 |
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| | Articles Supplementary, dated January 22, 2014 | | | | 8-K | | 1/28/2014 |
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| | Third Amended and Restated Bylaws of Strategic Realty Trust, Inc. | | | | 8-K | | 1/28/2014 |
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| | | | | | Incorporated by Reference | | |
Exhibit No. | | Description | | Filed
Herewith
| | Form/File No. | | Filing Date |
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| | Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc. | | | | S-11/
No. 333-154975
| | 7/10/2009 |
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| | Articles of Amendment, dated August 22, 2013 | | | | 8-K | | 8/26/2013 |
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| | Articles Supplementary, dated November 1, 2013 | | | | 8-K | | 11/4/2013 |
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| | Articles Supplementary, dated January 22, 2014 | | | | 8-K | | 1/28/2014 |
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| | Third Amended and Restated Bylaws of Strategic Realty Trust, Inc. | | | | 8-K | | 1/28/2014 |
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| | The Purchase and Sale Agreement by and between TNP SRT Portfolio II, LLC and Baseline Property, LLC, dated September 14, 2017.
| | X | | | | |
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| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | 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) | | | | | | |