Broad Street Realty, Inc. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2022
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number 001-09043
BROAD STREET REALTY, INC.
(Exact name of registrant as specified in its charter)
Delaware |
36-3361229 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
7250 Woodmont Ave, Suite 350 Bethesda, Maryland |
20814 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (301) 828-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
None |
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N/A |
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant was $36,595,349, based on the closing sales price per share of $1.40 as reported on the OTC Markets, Inc.
The number of shares of the registrant’s common stock outstanding as of April 24, 2023 was 33,119,639.
BROAD STREET REALTY, INC.
TABLE OF CONTENTS
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4 |
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ITEM 1. |
4 |
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ITEM 1A. |
18 |
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ITEM 1B. |
36 |
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ITEM 2. |
36 |
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ITEM 3. |
36 |
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ITEM 4. |
36 |
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36 |
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ITEM 5. |
36 |
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ITEM 6. |
38 |
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ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
39 |
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ITEM 7A. |
54 |
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ITEM 8. |
55 |
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ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
97 |
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ITEM 9A. |
97 |
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ITEM 9B. |
98 |
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ITEM 9C. |
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
98 |
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99 |
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ITEM 10. |
99 |
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ITEM 11. |
102 |
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ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
106 |
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ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
107 |
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ITEM 14. |
111 |
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112 |
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ITEM 15. |
112 |
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ITEM 16. |
112 |
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119 |
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FORWARD-LOOKING STATEMENTS
We make statements in this Annual Report on Form 10‑K (this "report") that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These forward-looking statements include, without limitation, statements about our estimates, expectations, predictions and forecasts of our future business plans and financial and operating performance and/or results, as well as statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” "project," "seek," or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance, and our actual financial and operating results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such differences are described in the section entitled “Risk Factors” in this report and in other documents that we file from time to time with the Securities and Exchange Commission (the “SEC”), which factors include, without limitation, the following:
Given these uncertainties, undue reliance should not be placed on our forward-looking statements. We assume no duty or responsibility to publicly update or revise any forward-looking statement that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. We urge you to review the disclosures concerning risks in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and in other filings we make with the SEC from time to time.
Summary Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. These risks are discussed more fully in Item 1A. Risk Factors herein. These risks include, but are not limited to, the following:
2
3
PART I
Unless the context indicates otherwise, references to "Broad Street," "we," "the Company," "our," and "us" refer to Broad Street Realty, Inc., together with its consolidated subsidiaries, including Broad Street Operating Partnership, LP (the or our "Operating Partnership"), of which we are the sole member of the sole general partner.
ITEM 1. BUSINESS
Overview
We are focused on owning and managing essential grocery-anchored and mixed-use assets located in densely populated technology employment hubs and higher education centers within the Mid-Atlantic, Southeast and Colorado markets. As of December 31, 2022, we owned 17 properties. The properties in our portfolio are dispersed in sub-markets that we believe generally have high population densities, high traffic counts, good visibility and accessibility, which provide our tenants with attractive locations to serve the necessity-based needs of the surrounding communities. We intend to focus on acquiring additional strategically positioned properties in established and developing neighborhoods primarily leased to necessity-based tenants that meet the needs of the surrounding communities in our existing markets, as well as acquiring properties in new markets that meet our investment criteria, including the Southeastern United States. In addition, we provide commercial real estate brokerage services for our own portfolio and third-party office, industrial and retail operators and tenants.
The table below provides certain information regarding our retail portfolio as of December 31, 2022. For additional information, see "—Our Portfolio."
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As of |
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December 31, 2022 |
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Number of properties |
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17 |
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Number of states |
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5 |
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Total square feet (in thousands) |
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2,026 |
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Anchor spaces |
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1,104 |
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Inline spaces |
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922 |
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Leased % of rentable square feet (1): |
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Total portfolio |
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90.4 |
% |
Anchor spaces |
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96.3 |
% |
Inline spaces |
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83.4 |
% |
Occupied % of rentable square feet (1): |
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Total portfolio |
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84.0 |
% |
Anchor spaces |
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89.6 |
% |
Inline spaces |
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77.3 |
% |
Average remaining lease term (in years) (2) |
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5.3 |
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Annualized base rent per leased square feet (3) |
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$ |
13.76 |
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We are structured as an “Up-C” corporation with substantially all of our operations conducted through our Operating Partnership and its direct and indirect subsidiaries. As of December 31, 2022, we owned 85.3% of the Class A common units of limited partnership interest (“Common OP units”) in the Operating Partnership and Series A preferred units of limited partnership interest in the Operating Partnership (“Preferred OP units” and, together with the Common OP units, “OP units”), and we are the sole member of the sole general partner of the Operating Partnership. We began operating in our current structure on December 27, 2019 upon the completion of certain Mergers (as defined below) on such date, and we operate as a single reporting segment.
2022 Highlights
Below are some of our significant activities during 2022:
4
Impact of COVID-19
For information regarding the impact of COVID-19 on our business and measures we have taken in response, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19” and “Risk Factors—Risks Related to Our Business and Properties—The ongoing COVID-19 pandemic and measures intended to mitigate its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition."
2022 Acquisitions
On November 23, 2022, we acquired Lamar Station Plaza West and Midtown Row (collectively "November 2022 Acquisitions"). Lamont Station Plaza West was part of the previously announced series of mergers (collectively, the "Mergers") pursuant to which we previously acquired our other properties (other than Midtown Row). We also acquired the last parcel at Lamar Station Plaza that we did not already control. For additional information regarding the Mergers, see "Merger with MedAmerica Properties Inc." in Note 1 to our Consolidated Financial Statements included in this report.
Fortress Preferred Equity Investment
In connection with the November 2022 Acquisitions, the Company, the Operating Partnership and Broad Street Eagles JV LLC, a newly formed subsidiary of the Operating Partnership (the “Eagles Sub-OP”), entered into a Preferred Equity Investment Agreement with CF Flyer PE Investor LLC (the “Fortress Member”), an affiliate of Fortress Investment Group LLC ("Fortress"), pursuant to which the Fortress Member invested $80.0 million in the Eagles Sub-OP in exchange for a preferred membership interest (such interest, the “Fortress Preferred Interest” and such investment, the “Preferred Equity Investment”). In connection with the Preferred Equity Investment, the Operating Partnership and the Fortress Member entered into the Amended and Restated Limited Liability Company Agreement of the Eagles Sub-OP (the “Eagles Sub-OP Operating Agreement”), and the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East in November 2022, as well as Cromwell Field in December 2022. The subsidiaries of the Operating Partnership that indirectly own the following eight properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates: (i) Highlandtown, (ii) Spotswood and (iii) the six properties securing the Basis Term Loan (the “Portfolio Excluded Properties” and, collectively with Highlandtown and Spotswood the “Excluded Properties”). The outside dates for Highlandtown, the Portfolio Excluded Properties and Spotswood are May 6, 2023, June 30, 2023 and July 6, 2023, respectively.
5
For additional information regarding the Eagles Sub-OP and the Eagles Sub-OP Operating Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fortress Preferred Equity Investment.”
Our Portfolio
As of December 31, 2022, we owned 17 properties, of which 14 are located in the Mid-Atlantic region and three are located in Colorado, consisting of 2,026,431 total square feet of GLA for the retail properties. The following table provides additional information about the retail properties in our portfolio as of December 31, 2022.
Property Name |
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City/State |
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Year |
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GLA |
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Percent Leased (2) |
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Total Annualized Base Rent (3) |
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Annualized Base Rent per Leased SF (4) |
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Percentage of Total Annualized Base Rent |
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Anchor/ |
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Avondale Shops |
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Washington, D.C. |
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2010 |
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28,308 |
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100.0 |
% |
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$ |
658,078 |
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$ |
23.25 |
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2.6 |
% |
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Dollar Tree |
Brookhill Azalea Shopping Center |
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Richmond, VA |
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2012 |
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163,353 |
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84.8 |
% |
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1,506,584 |
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10.88 |
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6.0 |
% |
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Food Lion |
Coral Hills Shopping Center |
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Capitol Heights, MD |
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2012 |
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85,001 |
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100.0 |
% |
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1,448,701 |
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17.04 |
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5.7 |
% |
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Shoppers Food Warehouse |
Crestview Square Shopping Center |
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Landover Hills, MD |
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2012 |
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74,694 |
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100.0 |
% |
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1,468,731 |
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19.66 |
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5.8 |
% |
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Value Village |
Cromwell Field Shopping Center |
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Glen Burnie, MD |
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2020 |
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233,486 |
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89.8 |
% |
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2,023,075 |
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9.65 |
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8.0 |
% |
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Rose's |
Dekalb Plaza |
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East Norriton, PA |
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2017 |
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178,356 |
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97.8 |
% |
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2,030,265 |
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11.64 |
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8.0 |
% |
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Big Lots |
The Shops at Greenwood Village |
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Greenwood Village, CO |
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2019 |
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198,822 |
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97.3 |
% |
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3,260,639 |
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16.85 |
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12.9 |
% |
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United States Postal Service |
Highlandtown Village Shopping Center |
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Baltimore, MD |
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1987 |
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57,524 |
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100.0 |
% |
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1,066,249 |
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18.54 |
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4.2 |
% |
|
Hazlo Market |
Hollinswood Shopping Center |
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Baltimore, MD |
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2020 |
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112,648 |
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92.0 |
% |
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1,711,815 |
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16.52 |
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6.8 |
% |
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LA Mart |
Lamar Station Plaza East |
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Lakewood, CO |
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1984 |
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83,819 |
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41.2 |
% |
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526,248 |
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15.24 |
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2.1 |
% |
|
Hopebridge |
Lamar Station Plaza West |
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Lakewood, CO |
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2016 |
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186,705 |
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98.0 |
% |
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2,069,659 |
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11.31 |
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8.2 |
% |
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Casa Bonita |
Midtown Colonial |
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Williamsburg, VA |
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2018 |
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98,067 |
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85.7 |
% |
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998,599 |
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11.88 |
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4.0 |
% |
|
Food Lion |
Midtown Lamonticello |
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Williamsburg, VA |
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2019 |
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63,157 |
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|
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92.5 |
% |
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975,771 |
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16.69 |
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3.9 |
% |
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Earth Fare |
Midtown Row (Retail Portion) |
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Williamsburg, VA |
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2021 |
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63,436 |
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25.9 |
% |
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418,224 |
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|
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25.45 |
|
|
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1.7 |
% |
|
|
Spotswood Valley Square Shopping Center |
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Harrisonburg, VA |
|
|
1997 |
|
|
|
190,646 |
|
|
|
100.0 |
% |
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1,896,030 |
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|
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9.95 |
|
|
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7.5 |
% |
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Kroger |
Vista Shops at Golden Mile |
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Frederick, MD |
|
|
2009 |
|
|
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98,858 |
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|
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99.2 |
% |
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1,764,835 |
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18.00 |
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7.0 |
% |
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Aldi |
West Broad Commons Shopping Center |
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Richmond, VA |
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2017 |
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109,551 |
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|
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93.3 |
% |
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1,397,552 |
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13.67 |
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5.6 |
% |
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New Grand Mart |
Total/Weighted Average |
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2,026,431 |
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90.4 |
% |
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$ |
25,221,055 |
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$ |
13.76 |
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100.0 |
% |
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6
The following table provides information about the residential portion of Midtown Row as of December 31, 2022.
Property Name |
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City/State |
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Year Built |
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Primary University Served |
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Average Monthly Revenue/Bed (1) |
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# of Units |
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# of Beds |
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|
Percent Leased (2) |
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Midtown Row (Residential Portion) |
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Williamsburg, VA |
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2021 |
|
William and Mary |
|
$ |
1,087 |
|
|
|
240 |
|
|
|
620 |
|
|
|
100.0 |
% |
Tenant Diversification
The following table sets forth information about the 20 largest tenants in our retail portfolio, based upon annualized base rent, as of December 31, 2022.
Tenant Name |
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Number of Leased Stores |
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|
Total Leased |
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Percentage of |
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Total |
|
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Annualized Base Rent Per Sq. Ft. |
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|
Percentage |
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Planet Fitness (2) |
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4 |
|
|
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79,846 |
|
|
|
3.9 |
% |
|
|
1,033,074 |
|
|
$ |
12.94 |
|
|
|
4.1 |
% |
Dollar Tree |
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|
4 |
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|
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43,188 |
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|
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2.1 |
% |
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577,772 |
|
|
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13.38 |
|
|
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2.3 |
% |
Casa Bonita |
|
|
1 |
|
|
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54,916 |
|
|
|
2.7 |
% |
|
|
494,244 |
|
|
|
9.00 |
|
|
|
2.0 |
% |
Food Lion |
|
|
2 |
|
|
|
71,759 |
|
|
|
3.6 |
% |
|
|
491,604 |
|
|
|
6.85 |
|
|
|
1.9 |
% |
New Grand Mart |
|
|
1 |
|
|
|
39,386 |
|
|
|
1.9 |
% |
|
|
443,293 |
|
|
|
11.26 |
|
|
|
1.8 |
% |
Hazlo |
|
|
1 |
|
|
|
26,904 |
|
|
|
1.3 |
% |
|
|
409,027 |
|
|
|
15.20 |
|
|
|
1.6 |
% |
AutoZone |
|
|
1 |
|
|
|
52,706 |
|
|
|
2.6 |
% |
|
|
395,295 |
|
|
|
7.50 |
|
|
|
1.6 |
% |
Urban Air |
|
|
1 |
|
|
|
34,075 |
|
|
|
1.7 |
% |
|
|
381,640 |
|
|
|
11.20 |
|
|
|
1.5 |
% |
Earth Fare |
|
|
1 |
|
|
|
24,016 |
|
|
|
1.2 |
% |
|
|
360,240 |
|
|
|
15.00 |
|
|
|
1.4 |
% |
Dollar General |
|
|
3 |
|
|
|
34,673 |
|
|
|
1.7 |
% |
|
|
354,706 |
|
|
|
10.23 |
|
|
|
1.4 |
% |
Shoppers Food Warehouse |
|
|
1 |
|
|
|
34,251 |
|
|
|
1.7 |
% |
|
|
350,000 |
|
|
|
10.22 |
|
|
|
1.4 |
% |
Kroger |
|
|
1 |
|
|
|
49,319 |
|
|
|
2.4 |
% |
|
|
315,642 |
|
|
|
6.40 |
|
|
|
1.3 |
% |
LA Mart |
|
|
1 |
|
|
|
30,030 |
|
|
|
1.5 |
% |
|
|
302,683 |
|
|
|
10.08 |
|
|
|
1.2 |
% |
Arc Thrift Stores |
|
|
1 |
|
|
|
34,404 |
|
|
|
1.7 |
% |
|
|
292,434 |
|
|
|
8.50 |
|
|
|
1.2 |
% |
United States Post Office |
|
|
1 |
|
|
|
24,395 |
|
|
|
1.2 |
% |
|
|
285,064 |
|
|
|
11.69 |
|
|
|
1.1 |
% |
Value Village |
|
|
1 |
|
|
|
23,400 |
|
|
|
1.2 |
% |
|
|
263,250 |
|
|
|
11.25 |
|
|
|
1.0 |
% |
Celebree |
|
|
1 |
|
|
|
10,000 |
|
|
|
0.5 |
% |
|
|
262,500 |
|
|
|
26.25 |
|
|
|
1.0 |
% |
Crossroads Animal Referral & Emergency |
|
|
1 |
|
|
|
9,852 |
|
|
|
0.5 |
% |
|
|
253,242 |
|
|
|
25.70 |
|
|
|
1.0 |
% |
Big Lots |
|
|
1 |
|
|
|
32,788 |
|
|
|
1.6 |
% |
|
|
229,517 |
|
|
|
7.00 |
|
|
|
0.9 |
% |
QED Inc dba Galleria Lighting & Design |
|
|
1 |
|
|
|
13,520 |
|
|
|
0.7 |
% |
|
|
227,271 |
|
|
|
16.81 |
|
|
|
0.9 |
% |
Sub-total top twenty tenants |
|
|
29 |
|
|
|
723,428 |
|
|
|
35.7 |
% |
|
|
7,722,498 |
|
|
|
10.67 |
|
|
|
30.6 |
% |
Remaining tenants |
|
|
319 |
|
|
|
1,109,158 |
|
|
|
54.7 |
% |
|
|
17,498,557 |
|
|
|
15.78 |
|
|
|
69.4 |
% |
Sub-total Average all tenants |
|
|
348 |
|
|
|
1,832,586 |
|
|
|
90.4 |
% |
|
|
25,221,055 |
|
|
$ |
13.76 |
|
|
|
100.0 |
% |
Vacant space |
|
|
57 |
|
|
|
193,845 |
|
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|||
Total |
|
|
405 |
|
|
|
2,026,431 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|||
7
Lease Distribution
The following table sets forth information relating to the distribution of leases in our retail portfolio, based on GLA, as of December 31, 2022.
Square Feet Under Lease |
|
Number |
|
|
Leased GLA |
|
|
Percentage |
|
|
Total |
|
|
Annualized |
|
|
Percentage |
|
||||||
Less than 1,000 |
|
|
54 |
|
|
|
23,929 |
|
|
|
1.3 |
% |
|
$ |
1,059,143 |
|
|
$ |
44.26 |
|
|
|
4.2 |
% |
1,000 - 2,499 |
|
|
146 |
|
|
|
238,118 |
|
|
|
13.0 |
% |
|
|
5,048,987 |
|
|
|
21.20 |
|
|
|
20.0 |
% |
2,500 - 9,999 |
|
|
104 |
|
|
|
507,236 |
|
|
|
27.7 |
% |
|
|
8,775,543 |
|
|
|
17.30 |
|
|
|
34.8 |
% |
10,000 - 39,999 |
|
|
40 |
|
|
|
830,472 |
|
|
|
45.3 |
% |
|
|
8,932,201 |
|
|
|
10.76 |
|
|
|
35.4 |
% |
40,000 or Greater |
|
|
4 |
|
|
|
232,831 |
|
|
|
12.7 |
% |
|
|
1,405,181 |
|
|
|
6.04 |
|
|
|
5.6 |
% |
Total/Weighted Average |
|
|
348 |
|
|
|
1,832,586 |
|
|
|
100.0 |
% |
|
|
25,221,055 |
|
|
$ |
13.76 |
|
|
|
100.0 |
% |
Geographic Concentration
The following table sets forth information regarding the geographic concentration of our retail portfolio as of December 31, 2022.
Metropolitan |
|
MSA |
|
|
Number |
|
|
GLA |
|
|
Percentage |
|
|
Percent |
|
|
Total |
|
|
Annualized |
|
|
Percentage |
|
||||||||
Washington-Baltimore-Arlington |
|
|
6 |
|
|
|
7 |
|
|
|
690,519 |
|
|
|
34.1 |
% |
|
|
95.1 |
% |
|
$ |
10,141,483 |
|
|
$ |
15.44 |
|
|
|
40.2 |
% |
Richmond, VA |
|
|
44 |
|
|
|
3 |
|
|
|
272,904 |
|
|
|
13.4 |
% |
|
|
88.2 |
% |
|
|
2,904,136 |
|
|
|
12.06 |
|
|
|
11.5 |
% |
Virginia Beach-Norfolk-Newport News |
|
|
37 |
|
|
|
2 |
|
|
|
224,660 |
|
|
|
11.1 |
% |
|
|
70.7 |
% |
|
|
2,392,594 |
|
|
|
15.05 |
|
|
|
9.5 |
% |
Philadelphia-Camden- Wilmington |
|
|
7 |
|
|
|
1 |
|
|
|
178,356 |
|
|
|
8.8 |
% |
|
|
97.8 |
% |
|
|
2,030,265 |
|
|
|
11.64 |
|
|
|
8.1 |
% |
Denver-Aurora-Lakewood |
|
|
19 |
|
|
|
3 |
|
|
|
469,346 |
|
|
|
23.2 |
% |
|
|
87.6 |
% |
|
|
5,856,547 |
|
|
|
14.25 |
|
|
|
23.2 |
% |
Harrisonburg, VA |
|
|
303 |
|
|
|
1 |
|
|
|
190,646 |
|
|
|
9.4 |
% |
|
|
100.0 |
% |
|
|
1,896,030 |
|
|
|
9.95 |
|
|
|
7.5 |
% |
Total/Weighted Average |
|
|
|
|
|
17 |
|
|
|
2,026,431 |
|
|
|
100.0 |
% |
|
|
90.4 |
% |
|
$ |
25,221,055 |
|
|
$ |
13.76 |
|
|
|
100.0 |
% |
|
8
Lease Expirations
The following table sets forth a summary schedule of the lease expirations in our portfolio for retail leases in place as of December 31, 2022, for the ten calendar years from 2023 to 2032 and thereafter, assuming no exercise of renewal options or early termination rights.
Year of Lease Expirations |
|
Number of |
|
|
GLA of |
|
|
Percentage |
|
|
Total |
|
|
Annualized |
|
|
Percentage |
|
||||||
Month-To-Month (3) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
$ |
14,400 |
|
|
$ |
— |
|
|
|
0.1 |
% |
2023 (4) |
|
|
48 |
|
|
|
170,760 |
|
|
|
8.4 |
% |
|
|
2,535,609 |
|
|
|
14.85 |
|
|
|
10.1 |
% |
2024 |
|
|
56 |
|
|
|
153,658 |
|
|
|
7.6 |
% |
|
|
2,639,608 |
|
|
|
17.18 |
|
|
|
10.5 |
% |
2025 |
|
|
58 |
|
|
|
265,927 |
|
|
|
13.1 |
% |
|
|
3,708,647 |
|
|
|
13.95 |
|
|
|
14.7 |
% |
2026 |
|
|
43 |
|
|
|
180,418 |
|
|
|
8.9 |
% |
|
|
2,834,352 |
|
|
|
15.71 |
|
|
|
11.2 |
% |
2027 |
|
|
47 |
|
|
|
297,228 |
|
|
|
14.7 |
% |
|
|
3,662,087 |
|
|
|
12.32 |
|
|
|
14.5 |
% |
2028 |
|
|
32 |
|
|
|
232,053 |
|
|
|
11.4 |
% |
|
|
2,384,142 |
|
|
|
10.27 |
|
|
|
9.4 |
% |
2029 |
|
|
11 |
|
|
|
44,874 |
|
|
|
2.2 |
% |
|
|
796,275 |
|
|
|
17.74 |
|
|
|
3.2 |
% |
2030 |
|
|
14 |
|
|
|
140,657 |
|
|
|
6.9 |
% |
|
|
1,859,343 |
|
|
|
13.22 |
|
|
|
7.4 |
% |
2031 |
|
|
5 |
|
|
|
46,893 |
|
|
|
2.3 |
% |
|
|
690,514 |
|
|
|
14.73 |
|
|
|
2.7 |
% |
2032 |
|
|
17 |
|
|
|
132,843 |
|
|
|
6.6 |
% |
|
|
1,769,388 |
|
|
|
13.32 |
|
|
|
7.0 |
% |
Thereafter |
|
|
16 |
|
|
|
167,275 |
|
|
|
8.3 |
% |
|
|
2,326,690 |
|
|
|
13.91 |
|
|
|
9.2 |
% |
Vacant |
|
|
57 |
|
|
|
193,845 |
|
|
|
9.6 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total/Weighted Average |
|
|
405 |
|
|
|
2,026,431 |
|
|
|
100.0 |
% |
|
$ |
25,221,055 |
|
|
$ |
13.76 |
|
|
|
100.0 |
% |
Description of Properties
Avondale Shops, Washington D.C.
Avondale is a strip retail property located in the northeast region of Washington, D.C. at the signalized intersection of Michigan Avenue and Eastern Avenue. The property has 28,308 square feet of GLA and, as of December 31, 2022, was 100% leased and occupied by eight tenants and accounted for 2.6% of our total annualized base rent. The anchor tenant, Dollar Tree, represents approximately 25.1% of Avondale’s total annualized base rent as of December 31, 2022 and its lease expires in May 2027.
Brookhill Azalea Shopping Center, Richmond, Virginia
Brookhill is a retail center located on the border of the City of Richmond and its northern suburbs in close proximity to major transportation corridors Interstate 95, U.S. Route 1 and U.S. Route 301. The property is located adjacent to major retail demand drivers Walmart and CVS Pharmacy. The property has 163,353 square feet of GLA and, as of December 31, 2022, was 84.8% leased and occupied by 23 tenants and accounted for 6.0% of our total annualized base rent. The anchor tenant, Food Lion, represented 20.5% of Brookhill’s total annualized base rent as of December 31, 2022, and its lease expires in January 2025. Other notable national tenants include Dollar General and CitiTrends.
Coral Hills Shopping Center, Capitol Heights, Maryland
Coral Hills is a retail center located in the densely populated Capitol Heights neighborhood, which is blocks from the Washington, D.C. metro line and has excellent visibility along Marlboro Pike with large pylons. The property is anchored by Shoppers Food Warehouse and is adjacent to McDonalds and across the street from a CVS Pharmacy. The property has 85,001 square feet of GLA and, as of December 31, 2022, was 100.0% leased and occupied by 16 tenants and accounted for 5.7% of our total annualized base rent. Shoppers Food Warehouse represented 24.2% of Coral Hill’s total annualized base rent as of December 31, 2022, and its lease expires in February 2026. Other notable national tenants include Family Dollar and AutoZone.
Crestview Square Shopping Center, Landover Hills, Maryland
Crestview is located in a densely populated suburban market near the Hyattsville Arts District and University of Maryland College Park campus. The property is located less than a mile from major regional transportation corridors, including Interstate 295 and U.S. Route 50. The property has prominent pylon signage at the signalized intersection for Annapolis Road and Cooper Lane and is in close proximity to national retailers Walmart and McDonalds. The property has 74,694 square feet of GLA and, as of December 31, 2022, was 100.0% leased and occupied by 20 tenants and accounted for 5.8% of our total annualized base rent. The anchor tenant, Value Village, represented 17.9% of Crestview’s total annualized base rent as of December 31, 2022, and its lease expires in January 2030.
9
Cromwell Field Shopping Center, Glen Burnie, Maryland
Cromwell is a retail center located near Baltimore/Washington International Thurgood Marshall Airport and the MARC train and light rail station. The property has 233,486 square feet of GLA and, as of December 31, 2022, was 89.8% leased to 19 tenants and accounted for 8.0% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 65.2% as of December 31, 2022. The anchor tenant, Rose's, represented 9.9% of Cromwell's total annualized base rent as of December 31, 2022, and its lease expires in January 2028. In 2022, we signed a new 15-year lease for 52,706 square feet of GLA with Autozone.
Dekalb Plaza, East Norriton, Pennsylvania
Dekalb is a retail center located in a Philadelphia suburb. The property is located at a major signalized intersection of Dekalb Pike and West Germantown Pike and is positioned in close proximity to Walmart and T.J. Maxx and across the street from Suburban Community Hospital, part of the national Prime Healthcare system. The property has 178,356 square feet of GLA and, as of December 31, 2022, was 97.8% leased to 17 tenants and accounted for 8.0% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but had not commenced as of December 31, 2022, was 88.7% as of December 31, 2022. The two signed leases commenced at the beginning of 2023. The anchor tenant, Big Lots, represented 11.3% of Dekalb’s total annualized base rent as of December 31, 2022, and its lease expires in January 2025. Other notable tenants include Urban Air, Crunch Fitness, Goodwill and Celebree.
The following tables set forth certain information with respect to Dekalb Plaza as of December 31, 2022.
Significant Tenants
Tenant |
|
Lease Expiration |
|
Renewal Options |
|
Total Leased GLA |
|
|
% of Property GLA |
|
|
Annualized |
|
|
Annualized |
|
|
% of Property |
|
|||||
Urban Air |
|
10/31/2030 |
|
— |
|
|
34,075 |
|
|
|
19.1 |
% |
|
$ |
381,640 |
|
|
$ |
11.20 |
|
|
|
18.8 |
% |
Big Lots |
|
1/31/2025 |
|
2 x 5 year Term |
|
|
32,788 |
|
|
|
18.4 |
% |
|
|
229,516 |
|
|
|
7.00 |
|
|
|
11.3 |
% |
Goodwill |
|
10/31/2023 |
|
3 x 5 year Term |
|
|
25,460 |
|
|
|
14.3 |
% |
|
|
190,950 |
|
|
|
7.50 |
|
|
|
9.4 |
% |
Crunch Fitness |
|
12/31/2025 |
|
2 x 5 year Term |
|
|
25,320 |
|
|
|
14.2 |
% |
|
|
180,000 |
|
|
|
7.11 |
|
|
|
8.9 |
% |
Celebree |
|
11/30/2032 |
|
2 x 5 year Term |
|
|
10,000 |
|
|
|
5.6 |
% |
|
|
262,500 |
|
|
|
26.25 |
|
|
|
12.9 |
% |
Lease Expirations
Year of Lease Expirations |
|
Number of |
|
|
GLA of |
|
|
Percentage |
|
|
Total |
|
|
Annualized |
|
|
Percentage |
|
||||||
2023 (3) |
|
|
1 |
|
|
|
25,460 |
|
|
|
14.3 |
% |
|
|
190,950 |
|
|
|
7.50 |
|
|
|
9.4 |
% |
2024 |
|
|
3 |
|
|
|
11,600 |
|
|
|
6.5 |
% |
|
|
220,683 |
|
|
|
19.02 |
|
|
|
10.9 |
% |
2025 |
|
|
3 |
|
|
|
58,108 |
|
|
|
32.6 |
% |
|
|
431,516 |
|
|
|
7.43 |
|
|
|
21.2 |
% |
2026 |
|
|
1 |
|
|
|
750 |
|
|
|
0.4 |
% |
|
|
13,506 |
|
|
|
18.01 |
|
|
|
0.7 |
% |
2027 |
|
|
5 |
|
|
|
18,214 |
|
|
|
10.2 |
% |
|
|
326,035 |
|
|
|
17.90 |
|
|
|
16.1 |
% |
2028 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2029 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2030 |
|
|
1 |
|
|
|
34,075 |
|
|
|
19.1 |
% |
|
|
381,640 |
|
|
|
11.20 |
|
|
|
18.8 |
% |
2031 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2032 |
|
|
2 |
|
|
|
16,249 |
|
|
|
9.1 |
% |
|
|
203,436 |
|
|
|
12.52 |
|
|
|
10.0 |
% |
Thereafter |
|
|
1 |
|
|
|
10,000 |
|
|
|
5.6 |
% |
|
|
262,499 |
|
|
|
26.25 |
|
|
|
12.9 |
% |
Vacant |
|
|
2 |
|
|
|
3,900 |
|
|
|
2.2 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total/Weighted Average |
|
|
19 |
|
|
|
178,356 |
|
|
|
100.0 |
% |
|
$ |
2,030,265 |
|
|
$ |
11.64 |
|
|
|
100.0 |
% |
10
Percent Occupied and Base Rent
As of December 31, |
|
Percent Occupied (1) |
|
|
Average Annual Rent |
|
||
2022 |
|
|
88.7 |
% |
|
$ |
10.60 |
|
2021 |
|
|
81.7 |
% |
|
$ |
11.55 |
|
2020 |
|
|
81.5 |
% |
|
$ |
10.48 |
|
2019 |
|
|
81.5 |
% |
|
$ |
10.34 |
|
2018 |
|
|
83.8 |
% |
|
$ |
10.11 |
|
The Shops at Greenwood Village, Greenwood Village, Colorado
Greenwood Village is a retail center located in Greenwood Village, Colorado. The property is conveniently located off Interstate 25 and in close proximity to Denver Tech Center. The property has 198,822 square feet of GLA and, as of December 31, 2022, was 97.3% leased to 72 tenants and accounted for 12.9% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 93.2% as of December 31, 2022. The anchor tenant, the United States Postal Service, accounted for 8.7% of Greenwood Village's total annualized base rent as of December 31, 2022, and its lease expires in August 2026.
Highlandtown Village Shopping Center, Baltimore, Maryland
Highlandtown is a retail center located in Baltimore, Maryland. The property is located along a busy street with prominent visibility. The property has 57,524 of GLA and, as of December 31, 2022, was 100% leased to 16 tenants and accounted for 4.2% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 85.5% as of December 31, 2022. The anchor tenant, Hazlo Market, represented 38.4% of Highlandtown's total annualized base rent as of December 31, 2022. On January 20, 2023, Hazlo Market's lease was extended and now expires in May 2034.
Hollinswood Shopping Center, Baltimore, Maryland
Hollinswood is a retail center located in suburban Baltimore, Maryland. The property has 112,648 of GLA and, as of December 31, 2022, was 92.0% leased and occupied by 23 tenants and accounted for 6.8% of our total annualized base rent. The anchor tenant, LA Mart, represented 17.9% of Hollinswood’s total annualized base rent as of December 31, 2022, and its lease expires in October 2030. Other notable tenants include Planet Fitness, Advance Auto, Dollar General, Walgreens and a Royal Farms convenience and gas center.
The following tables set forth certain information with respect to Hollinswood Shopping Center as of December 31, 2022.
Significant Tenants
Tenant |
|
Lease Expiration |
|
Renewal Options |
|
Total Leased GLA |
|
|
% of Property GLA |
|
|
Annualized |
|
|
Annualized |
|
|
% of Property |
|
|||||
LA Mart |
|
10/31/2030 |
|
2 x 5 year Term |
|
|
25,224 |
|
|
|
22.4 |
% |
|
$ |
302,683 |
|
|
$ |
12.00 |
|
|
|
17.7 |
% |
Planet Fitness |
|
1/31/2031 |
|
2 x 5 year Term |
|
|
16,378 |
|
|
|
14.5 |
% |
|
|
196,534 |
|
|
|
12.00 |
|
|
|
11.5 |
% |
Dollar General |
|
7/31/2027 |
|
2 x 5 year Term |
|
|
13,527 |
|
|
|
12.0 |
% |
|
|
162,326 |
|
|
|
12.00 |
|
|
|
9.5 |
% |
11
Lease Expirations
Year of Lease Expirations |
|
Number of |
|
|
GLA of |
|
|
Percentage |
|
|
Total |
|
|
Annualized |
|
|
Percentage |
|
||||||
2023 |
|
|
1 |
|
|
|
2,880 |
|
|
|
2.6 |
% |
|
$ |
59,530 |
|
|
|
20.67 |
|
|
|
3.5 |
% |
2024 |
|
|
2 |
|
|
|
4,725 |
|
|
|
4.2 |
% |
|
|
103,836 |
|
|
|
21.98 |
|
|
|
6.1 |
% |
2025 |
|
|
2 |
|
|
|
3,188 |
|
|
|
2.8 |
% |
|
|
56,020 |
|
|
|
17.57 |
|
|
|
3.3 |
% |
2026 |
|
|
5 |
|
|
|
14,249 |
|
|
|
12.6 |
% |
|
|
254,326 |
|
|
|
17.85 |
|
|
|
14.9 |
% |
2027 |
|
|
3 |
|
|
|
16,664 |
|
|
|
14.8 |
% |
|
|
255,506 |
|
|
|
15.33 |
|
|
|
14.9 |
% |
2028 |
|
|
1 |
|
|
|
1,125 |
|
|
|
1.0 |
% |
|
|
29,919 |
|
|
|
27.00 |
|
|
|
1.7 |
% |
2029 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2030 |
|
|
4 |
|
|
|
38,875 |
|
|
|
34.5 |
% |
|
|
517,541 |
|
|
|
13.31 |
|
|
|
30.2 |
% |
2031 |
|
|
3 |
|
|
|
21,909 |
|
|
|
19.5 |
% |
|
|
304,138 |
|
|
|
13.88 |
|
|
|
17.8 |
% |
2032 |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
21,000 |
|
|
|
— |
|
|
|
1.2 |
% |
Thereafter |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
109,999 |
|
|
|
— |
|
|
|
6.4 |
% |
Vacant |
|
|
2 |
|
|
|
9,033 |
|
|
|
8.0 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total/Weighted Average |
|
|
25 |
|
|
|
112,648 |
|
|
|
100.0 |
% |
|
$ |
1,711,815 |
|
|
$ |
16.52 |
|
|
|
100.0 |
% |
Percent Occupied and Base Rent
As of December 31, |
|
Percent Occupied (1) |
|
|
Average Annual Rent |
|
||
2022 |
|
|
92.0 |
% |
|
$ |
16.31 |
|
2021 |
|
|
91.9 |
% |
|
$ |
16.21 |
|
2020 |
|
|
78.5 |
% |
|
$ |
16.40 |
|
2019 |
|
|
84.3 |
% |
|
$ |
15.31 |
|
2018 |
|
|
84.4 |
% |
|
$ |
15.18 |
|
Lamar Station Plaza East, Lakewood, Colorado
Lamar Station Plaza East is a retail center located adjacent to Lamar Station Plaza West in Lakewood, Colorado. On November 23, 2022, we acquired the last parcel at Lamar Station Plaza, which added 42,360 square feet. The property has 83,819 square feet of GLA and, as of December 31, 2022, was 41.2% leased to 13 tenants and accounted for 2.1% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 41.2% as of December 31, 2022. The anchor tenant, Hopebridge, accounted for 29.8% of Lamar Station Plaza East's total annualized base rent as of December 31, 2022, and its lease expires in March 2028.
Lamar Station Plaza West, Lakewood, Colorado
Lamar Station Plaza West is a retail center located adjacent to Lamar Station Plaza East in Lakewood, Colorado. The property has 186,705 square feet of GLA and, as of December 31, 2022, was 98.0% leased to 15 tenants and accounted for 8.2% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 96.7% as of December 31, 2022. The anchor tenant, Casa Bonita, accounted for 23.9% of Lamar Station Plaza West's total annualized base rent as of December 31, 2022, and its lease expires in October 2032. Other notable tenants include arc Thrift Stores, Ross Dress for Less, Inc. and Planet Fitness.
Midtown Colonial, Williamsburg, Virginia
Midtown Colonial is a retail center located in Williamsburg, Virginia. The property is part of the Midtown Row redevelopment, which created a mixed-use town center in Williamsburg, Virginia. The property is located adjacent to The College of William & Mary, within minutes of the campus center, and is situated at signalized intersections along Monticello Avenue. The property has 98,067 square feet of GLA and, as of December 31, 2022, was 85.7% leased to eight tenants and accounted for 4.0% of our total annualized base rent. The percent occupied, which excludes a lease that has been signed but not commenced, was 73.9% as of December 31, 2022. The signed lease commenced in the first quarter of 2023. The anchor tenant, Food Lion, accounted for 18.3% of Midtown Colonial’s total annualized base rent as of December 31, 2022 and its lease expires in November 2028.
12
Midtown Lamonticello, Williamsburg, Virginia
Midtown Lamonticello is a retail center located in Williamsburg, Virginia. The property is located directly across the street from The College of William & Mary, within minutes of the campus center. It is situated at a signalized intersection along Monticello Avenue that is shared with our Midtown Colonial property. The property has 63,157 square feet of GLA and, as of December 31, 2022, was 92.5% leased to 12 tenants and accounted for 3.9% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 90.6% as of December 31, 2022. The anchor tenant, Earth Fare, accounted for 36.9% of Midtown Lamonticello’s total annualized base rent as of December 31, 2022, and its lease expires in October 2031. Ace Hardware is another notable tenant.
Midtown Row, Williamsburg, Virginia
Midtown Row is a mixed-use property located in Williamsburg, Virginia. The property is a recently completed development and is located adjacent to the College of William and Mary. It is situated along Monticello Avenue, between Mt. Vernon Avenue and Richmond Road. The residential portion is comprised of 240 student housing units with 620 beds, which was 100% leased as of December 31, 2022. The retail portion has 63,436 square feet of GLA and, as of December 31, 2022, was 25.9% leased to nine tenants and accounted for 1.7% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 16.3% as of December 31, 2022.
The following tables set forth certain information with respect to the retail portion of Midtown Row as of December 31, 2022.
Significant Tenants
Tenant |
|
Lease Expiration |
|
Renewal Options |
|
Total Leased GLA |
|
|
% of Property GLA |
|
|
Annualized |
|
|
Annualized |
|
|
% of Property |
|
|||||
Super Chix |
|
7/31/2032 |
|
2 x 5 year Term |
|
|
3,195 |
|
|
|
5.0 |
% |
|
$ |
83,475 |
|
|
$ |
26.13 |
|
|
|
20.0 |
% |
California Tortilla |
|
9/30/2032 |
|
2 x 5 year Term |
|
|
2,368 |
|
|
|
3.7 |
% |
|
|
62,752 |
|
|
|
26.50 |
|
|
|
15.0 |
% |
Mezeh Grill |
|
1/31/2033 |
|
2 x 5 year Term |
|
|
2,071 |
|
|
|
3.3 |
% |
|
|
64,201 |
|
|
|
31.00 |
|
|
|
15.4 |
% |
Lease Expirations
Year of Lease Expirations |
|
Number of |
|
|
GLA of |
|
|
Percentage |
|
|
Total |
|
|
Annualized |
|
|
Percentage |
|
||||||
2023 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2024 |
|
|
1 |
|
|
|
1,336 |
|
|
|
2.1 |
% |
|
|
6,000 |
|
|
|
4.49 |
|
|
|
1.4 |
% |
2025 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2026 |
|
|
1 |
|
|
|
1,951 |
|
|
|
3.1 |
% |
|
|
49,751 |
|
|
|
25.50 |
|
|
|
11.9 |
% |
2027 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2028 |
|
|
1 |
|
|
|
1,969 |
|
|
|
3.1 |
% |
|
|
46,272 |
|
|
|
23.50 |
|
|
|
11.1 |
% |
2029 |
|
|
1 |
|
|
|
2,065 |
|
|
|
3.3 |
% |
|
|
61,950 |
|
|
|
30.00 |
|
|
|
14.8 |
% |
2030 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2031 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2032 |
|
|
3 |
|
|
|
6,207 |
|
|
|
9.7 |
% |
|
|
167,479 |
|
|
|
26.98 |
|
|
|
40.1 |
% |
Thereafter |
|
|
2 |
|
|
|
2,907 |
|
|
|
4.6 |
% |
|
|
86,772 |
|
|
|
29.85 |
|
|
|
20.7 |
% |
Vacant |
|
|
21 |
|
|
|
47,001 |
|
|
|
74.1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total/Weighted Average |
|
|
30 |
|
|
|
63,436 |
|
|
|
100.0 |
% |
|
$ |
418,224 |
|
|
$ |
25.45 |
|
|
|
100.0 |
% |
13
Percent Occupied and Base Rent
As of December 31, |
|
Percent Occupied (1) |
|
|
Average Annual Rent |
|
||
2022 |
|
|
16.3 |
% |
|
$ |
27.97 |
|
2021 |
|
|
6.2 |
% |
|
$ |
24.49 |
|
Spotswood Valley Square Shopping Center, Harrisonburg, Virginia
Spotswood is a retail center located in Harrisonburg, Virginia. The property is less than one mile from James Madison University. The property has 190,646 square feet of GLA and, as of December 31, 2022, was 100% leased and occupied by 25 tenants and accounted for 7.5% of our total annualized base rent. The anchor tenant, Kroger, accounted for 16.6% of Spotswood's total annualized base rent as of December 31, 2022, and its lease expires in October 2027. Other notable tenants include Planet Fitness, T.J. Maxx and Sentara.
Vista Shops at Golden Mile, Frederick, Maryland
Vista Shops is a retail center located in Frederick, Maryland. The property is accessible from the main retail thoroughfare West Patrick Street, also known as “The Golden Mile,” and in close proximity to Interstate 270. The property has 98,858 square feet of GLA and, as of December 31, 2022, was 99.2% leased and occupied by 22 tenants and accounted for 7.0% of our total annualized base rent. The anchor tenant, Aldi, has been on site for over 10 years. Aldi accounted for 12.2% of Vista Shops’ total annualized base rent as of December 31, 2022, and its lease expires in December 2023. We are currently in negotiations with Aldi regarding its lease at Vista Shops and expect the lease to be renewed. Other notable tenants include Planet Fitness, Dollar Tree and Care Veterinary Center, owned by Pathway Vet Alliance, which operates over 150 locations.
West Broad Commons Shopping Center, Richmond, Virginia
West Broad is a retail center located in the suburbs of Richmond, Virginia. The property is located at a signalized intersection along West Broad Street and in close proximity to Costco, McDonalds, Sam’s Club and Guitar Center. The property has 109,551 square feet of GLA and, as of December 31, 2022, was 93.3% leased to 16 tenants and accounted for 5.5% of our total annualized base rent. The percent occupied was 89.8% as of December 31, 2022. The anchor tenant, New Grand Mart, is a specialty grocery store with four locations in the metro Washington D.C. region and two in Richmond, Virginia. New Grand Mart accounted for 31.7% of West Broad’s total annualized base rent as of December 31, 2022, and its lease expires in December 2027.
Investment Criteria
When evaluating potential property acquisitions or development opportunities, we consider, among other things, the following:
Projected Risk and Returns: We evaluate the projected investment returns in relation to our cost of capital as well as the anticipated risk to achieve these returns, in order to provide our stockholders and OP unit holders with appropriate risk-adjusted rates of return.
Value Creation: We evaluate the projected value creation at each property through repositioning, refurbishing and redevelopment. Our goal is to create long-term value and achieve the projected returns we underwrite at each property.
Tenants and Tenant Mix: We assess the quality of tenants at each location including their sales performance and creditworthiness in order to provide our stockholders and OP unit holders with appropriate risk-adjusted rates of return. We evaluate each property to ensure a complementary mix of tenants that drive overall sales at each location.
Demographics: We assess certain demographic information at each property location, including daytime population, households, household incomes, education levels, population and income trends for the market, as well as local economic drivers.
Competition: We assess the competitive retail environment at each location, including GLA per capita for retail properties, competition for existing and potential tenants, the number of existing competing properties and the potential for additional competing properties through development or the repositioning or redevelopment of existing properties.
Access and Visibility: We evaluate each property’s accessibility from main thoroughfares and the potential for new, widened or realigned roadways within the property trade area, which may affect consumer accessibility and shopping patterns. We generally seek to acquire properties that have signalized ingress and egress, which we believe increases the ability of consumers to safely access our properties. We also assess the existing signage and the ability to renovate or add new signage to ensure appropriate sight lines for consumers to view the tenants at each of our property locations.
Owned Property Performance: In markets where we own retail properties, we assess the performance of those properties in order to evaluate the potential performance of to-be-acquired or developed properties. We seek to acquire or develop properties in our existing markets that are complementary to our existing properties.
14
Physical Condition: We assess the physical condition of each property in order to determine the useful remaining life, required capital expenditures and the property cost relative to replacement cost. We often seek to acquire properties at below replacement cost, which we believe allows us to reposition, refurbish or redevelop a property and command higher rents relative to the market and deliver attractive risk-adjusted returns for our stockholders.
Property Management and Brokerage Business
We manage or co-manage the properties in our portfolio and three other properties. We also lease all of our owned and managed properties but utilize third-party leasing companies to augment our staff on a limited basis. A third party manages the student-housing portion of Midtown Row. Our asset and property management teams directly oversee the properties in our portfolio and our third-party managed properties and seek to increase our operating cash flows through the success of our leasing, property management and asset management functions. Our property management functions include the oversight of all day-to-day operations of our properties as well as the coordination and oversight of tenant improvements and building services. Our internal leasing and management team identifies prospective tenants, assists in the negotiation of leases, provides statements as to the income and expenses applicable to each such property, monitors monthly lease payments, periodically verifies tenant payment of real estate taxes and insurance coverage and periodically inspects each such property and tenants’ sales records, where applicable.
We receive fees for any third-party property management, brokerage or leasing services. Our third-party brokerage business represents primarily commercial tenants for their office and retail real estate needs, either for lease transactions or purchase and sale transactions.
We intend to increase cash flows through cost efficient property operations and leasing strategies designed to capture market rental growth from the renewal of below-market leases at higher rates and/or recruitment of new quality tenants. We carefully monitor property expenses and manage how we incur and bill expenses to our tenants. We aggressively seek to renegotiate and extend any existing leases that are below market at market rates. Although we maintain ongoing dialogue with our tenants, we generally raise the issue of renewal at least 12 months prior to lease renewal often providing concessions for early renewal. We also aggressively pursue new tenants for any vacant space. As necessary, we may use third-party leasing agents in attracting tenants. Our use of third-party brokerage firms is based on their demonstrated track record and knowledge of the sub-markets in which our properties are located.
We define small tenants as those leasing less than 10,000 square feet and we have tailored our management and leasing approach to deal with the unique needs of these smaller tenants. As of December 31, 2022, of the 348 retail leases on our owned properties, 304 are leased to small tenants representing 42.0% of our retail portfolio leased GLA and 59.0% of our total annualized base rent. We believe that our ability to act quickly allows us to capture those tenants that are unable or unwilling to wait a substantial period of time for a lease to be approved. We are able to examine the credit of a potential tenant during the lease negotiation process and efficiently finalize the terms of the lease. Smaller tenants generally pay a premium per square foot to occupy smaller spaces. As of December 31, 2022, this base rent premium averaged 97.2% over what larger tenants in our portfolio pay on a weighted average per square foot basis.
Terms of Leases
We typically lease our retail properties to tenants on either a triple-net or modified gross basis. Our triple net leases provide that the tenant is generally responsible for reimbursing us for the cost of all maintenance and minor repairs, property taxes and insurance relating to its leased space and most other operating expenses. We perform common area maintenance, and the related cost is reimbursed by the tenant. Utilities and other premises-specific costs are typically paid directly by the tenant. Our modified gross leases provide that the tenant pays us a base rent and we are responsible for the payment of all property expenses. In our modified gross leases, we typically negotiate that a proportional share of increases in expenses such as real estate taxes, sales and use taxes, special assessments, utilities, insurance and building repairs, and other building operation and management costs that exceed a base rate, are reimbursed to us by the tenant. The leases for the retail properties in our portfolio have remaining lease terms that range from month-to-month to over 10 years, with a weighted average remaining lease term of 5.3 years as of December 31, 2022 based on GLA. Anchor tenant leases are typically for 10 to 20 years, with one or more renewal options available to the lessee upon expiration of the initial lease term. By contrast, smaller store leases are typically negotiated for five-year terms. The longer terms of major tenant leases serve to protect us against significant vacancies and to ensure the presence of strong tenants that draw consumers to our centers. The shorter terms of smaller store leases allow us under appropriate circumstances to adjust rental rates periodically and, where possible, upgrade or adjust the overall tenant mix.
The leases for the residential portion of Midtown Row typically follow standard forms customarily used between landlords and residents in the geographic area in which the property is located. Midtown Row is leased by the bed on an individual lease liability basis. Individual lease liability limits each resident's liability to his or her own rent without the liability of a roommate's rent. A parent or guardian is generally required to execute each lease as a guarantor unless the resident provides adequate proof of income or financial aid. Less than one percent of leases require security deposits, as a parent or guardian is generally required to execute each lease as a guarantor. We require a nonrefundable reservation fee at lease signing and the tenant pays rent on a monthly basis during the term of the lease. As landlord, we are directly responsible for all real estate taxes, sales and use taxes, special assessments, property-level utilities, insurance and building repairs, and other building operation and management costs. Certain utilities are consumed by the tenant which is included in the monthly installment payment. Our lease terms are generally 11.5 months with 12 equal payments. There are a limited number of nine-month leases with 10 equal payments. These leases typically correspond to the university's academic year.
15
Tenant Underwriting
For retail leases, we use a number of industry credit rating services to determine the creditworthiness of potential tenants and any personal guarantor or corporate guarantor of each potential tenant. In addition, we review the prospective tenants’ business plans and financial models. We have established leasing guidelines to use in evaluating prospective tenants and proposed lease terms and conditions. For existing tenants looking to extend with us, we look at their past payment record.
Competition
We believe that the market for retail properties and financially stable tenants has historically been extremely competitive and has become even more competitive as a result of the current retail environment. We compete with a number of other real estate investors, including domestic and foreign corporations and financial institutions, publicly traded and privately held real estate investment trusts ("REITs") and other real estate companies, private institutional investment funds, investment banking firms, life insurance companies and pension funds, some of which have greater financial resources than we do.
In operating and managing our properties, we compete for tenants based upon a number of factors including, but not limited to, location, rental rates, security, flexibility, expertise to design space to meet prospective tenants’ needs and the manner in which the property is operated, maintained and marketed. As leases at our properties expire, we may encounter significant competition to renew or re-lease space in light of the large number of competing properties within the markets in which we operate. As a result, we may be required to provide rent concessions, incur costs for tenant improvements and other inducements or we may not be able to timely lease vacant space, all of which would adversely impact our results of operations.
We also face competition when pursuing acquisition, development and redevelopment opportunities. Our competitors may be able to pay more for acquisitions, have more funds for development and redevelopment, may have private access to opportunities not available to us and otherwise be in a better position to acquire, develop or redevelop a commercial property. Competition may also have the effect of reducing the number of suitable acquisition, development or redevelopment opportunities available to us, increasing the price required to consummate an acquisition, development or redevelopment opportunity and generally reducing the demand for commercial space in our geographic markets. Similarly, should we decide to dispose of a property, we may compete with third-party sellers of similar types of commercial properties for suitable purchasers, which may result in our receiving lower net proceeds from a sale or in our not being able to dispose of such property at a time of our choosing.
Regulatory Matters
General
The properties in our portfolio are, and any properties we acquire in the future will be, subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of the properties in our portfolio has the necessary permits and approvals to operate our business.
Environmental Regulations
Under various federal, state and local environmental laws, ordinances and regulations, a current or former owner or operator of real property may be liable for the cost to remove or remediate hazardous or toxic substances, waste or petroleum products at, on, under, from or in such property. These costs could be substantial, and liability under these laws may attach whether or not the owner or operator knew of, or was responsible for, the presence of such contamination. Even if more than one person may have been responsible for the contamination, each liable party may be held entirely responsible for all of the clean-up costs incurred (i.e., the liability may be joint and several). In addition, third parties may sue the current or former owner or operator of a property for damages based on personal injury, natural resources or property damage and/or for other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of contamination on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to redevelop, sell or lease the property or borrow using the property as collateral. In addition, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants. We also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so.
Some of our properties may be adjacent to or near other properties used for industrial or commercial purposes or that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. Releases from these properties could impact our properties. In addition, certain of our properties are currently used, have been used and may be used in the future by others, including former owners or tenants of our properties, for commercial or industrial activities, e.g., gas stations and dry cleaners, that may release petroleum products or other hazardous or toxic substances at our properties or to surrounding properties.
We have previously obtained Phase I Environmental Site Assessments or similar environmental audits from an independent environmental consultant for all the properties in our portfolio and the properties under contract to be acquired. A Phase I Environmental Site Assessment is a written report that identifies existing or potential environmental conditions associated with a particular property.
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These environmental site assessments generally involve a review of records, interviews and visual inspection of the property; however, they have a limited scope (e.g., they do not include soil sampling or ground water analysis) and may not reveal all potential environmental liabilities. Further, material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances or regulations may impose additional material environmental liability beyond what was known at the time the site assessment was conducted. While environmental assessments conducted prior to acquiring our properties have not revealed, nor are we aware of, any environmental liability that we believe will have a material adverse effect on our operations, certain properties that we have acquired contain, or contained, uses that could have impacted our properties, including dry-cleaning establishments utilizing solvents or gas stations. Where we believed it was warranted, subsurface investigations or samplings of building materials were undertaken with respect to these and other properties. To date, the costs associated with these investigations and any subsequent remedial measures taken to address any identified impacts have not resulted in material costs. Prior to purchasing property in the future, we plan on conducting Phase I Environmental Site Assessments and other environmental investigations, if warranted.
Our properties and the tenants of our properties are subject to various federal, state and local environmental, health and safety laws, including laws governing the management of waste, underground and aboveground storage tanks, local fire safety requirements and local land use and zoning regulations. For example, some of our tenants handle regulated substances or waste as part of their operations on our properties. Noncompliance with these environmental, health and safety laws could subject us or our tenants to liability. These environmental liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with environmental, health and/or safety laws, including increasing liability for noncompliance or requiring significant unanticipated expenditures. We are not presently aware of any instances of material non-compliance with environmental, health and safety laws at our properties, and we believe that we have all permits and approvals necessary under current law to operate our properties.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain or may have contained asbestos-containing material (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment. We are not presently aware of any material liabilities related to building conditions, including any instances of material non-compliance with asbestos requirements or any material liabilities related to asbestos.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues, which could lead to liability for adverse health effects or property damage or costs for remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at our properties.
Americans with Disabilities Act of 1990
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is “readily achievable.” We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. Noncompliance with the ADA, however, could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Insurance
We believe that each of our properties is covered by adequate fire, flood, earthquake, wind (as deemed necessary or as required by our lenders) and property insurance, as well as commercial liability insurance. We also carry terrorism insurance at levels we believe are commercially reasonable. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of coverage and industry practice, and in the opinion of our management, the properties in our portfolio are adequately insured. Furthermore, we believe that our businesses and assets are likewise adequately insured against casualty loss and third-party liabilities. The cost of such insurance is passed through to tenants to the extent possible. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties that we acquire in the future, including the properties in our acquisition portfolio. We will not carry insurance for generally uninsured losses such as loss from riots, war or acts of God.
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Employees
We have a company-wide commitment to a set of core principles—Teamwork, Respect, Integrity, Balance, Accountability and Leadership, or TRIBAL. We believe our TRIBAL principles lead to greater employee retention, collaboration and efficiency, which increases our ability to provide high quality service to our tenants and deliver attractive risk-adjusted returns to our stockholders.
As of December 31, 2022, we have 47 employees, of which 42 are full time employees.
Corporate Information
Our principal executive office is located at 7250 Woodmont Avenue, Suite 350, Bethesda, Maryland 20814. The telephone number for our principal executive office is (301) 828-1200. We maintain a website located at broadstreetrealty.com. The information on, or accessible through, our website is not incorporated into and does not constitute a part of this report or any other report or document we file with or furnish to the SEC.
Available Information
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the SEC. You may obtain copies of these documents by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public free of charge through our website or by contacting our Corporate Secretary at the address set forth above under “—Corporate Information.”
Our Code of Business Conduct and Ethics, and the charters of our audit committee, compensation committee and nominating and corporate governance committee are all available in the Corporate Governance section of the Investor Relations section of our website. Any amendment to or waiver of our Code of Business Conduct and Ethics will be disclosed in the Corporate Governance section of the Investor Relations section of our website within four business days of the amendment or waiver.
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our stockholders. You should carefully consider the following risks in evaluating our Company and our business. The occurrence of any of the following risks could materially adversely impact our financial condition, results of operations, cash flows, the market price of shares of our common stock and our ability to, among other things, satisfy our debt service obligations and to make distributions to our stockholders, which in turn could cause our stockholders to lose all or a part of their investment. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements” included elsewhere in this report.
Risks Related to Our Business and Properties
We primarily rely upon external sources of capital to fund acquisitions, development opportunities and repayment of significant maturities of principal debt, and, if we encounter difficulties in obtaining capital, we may not be able to repay maturing obligations or make future investments necessary to grow our business.
We primarily rely upon external sources of capital, including debt and equity financing, to fund our capital needs, including acquisitions, development opportunities and repayment of debt maturities. We have encountered, and may continue to encounter, difficulties obtaining the necessary capital to finance future acquisitions and service and refinance our existing indebtedness, including approximately $28.6 million of debt that matures in 2023 and approximately $66.9 million of debt that matures in January 2024, subject to a one-year extension option that is subject to certain conditions. If we fail to refinance such indebtedness and contribute the applicable properties to the Eagles Sub-OP, it would be considered a Trigger Event under the Eagles Sub-OP Operating Agreement. See “—The Eagles Sub-OP Operating Agreement contains provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.” Our access to capital depends upon a number of factors over which we have little or no control, including general market conditions, the market’s perception of our current and potential future earnings and cash distributions, our current debt levels and the market price of the shares of our common stock, and our access to capital is currently constrained by our existing debt and the lack of an active trading market for our common stock. Economic, market and other disruptions worldwide, including in the bank lending, capital and other financial markets, could exacerbate the issues we have encountered obtaining financing.
We may not have access to capital in order to be able to refinance debt as it comes due, make debt service payments, acquire additional properties or pay dividends to our stockholders. In addition, although our common stock is quoted on the OTCQX Best Market (the "OTCQX"), an over-the-counter stock market, there is a very limited trading market for our common stock, and if a more active trading market is not developed and sustained, we will be limited in our ability to issue equity to fund our capital needs. If we cannot obtain capital from third-party sources, we may not be able to meet the capital and operating needs of our existing properties, satisfy our debt service obligations, acquire or develop properties when strategic opportunities exist, or make cash distributions to our stockholders.
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All of the properties in our portfolio are located in the greater Mid-Atlantic and Colorado regions. Adverse economic or regulatory developments in these areas could materially and adversely affect our business.
Fourteen of the 17 properties currently in our portfolio are located in the Mid-Atlantic region, including Maryland, Pennsylvania, Virginia and Washington, D.C., and three properties are located in the Denver, Colorado area. As a result of this geographic concentration, our business is dependent on the condition of the economy in these regions generally and the respective markets for retail real estate in particular, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. We cannot assure you that these markets will grow or that underlying real estate fundamentals will be favorable to owners and operators of retail properties. Our operations may also be adversely affected if competing properties are built in these markets. Moreover, submarkets within any of our target markets may be dependent upon a limited number of industries. Any adverse economic or real estate developments in our markets, or any decrease in demand for retail space resulting from the regulatory environment, business climate or fiscal problems, could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
We depend upon tenant leases for most of our revenue, and lease terminations and/or tenant defaults, particularly by one of our significant tenants, could materially and adversely affect the income produced by our properties, which could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
We depend primarily upon tenant leases for our revenue. Our ability to sustain our rental revenue depends on the financial stability of our tenants, any of whom may experience a change in its business at any time. The ability of our tenants to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their operations, and cash flows generated by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property.
If significant leases are terminated or defaulted upon, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. In addition, significant expenditures, such as mortgage payments, real estate taxes and insurance and maintenance costs, are generally fixed and do not decrease when revenues at the related property decrease.
The occurrence of any of the situations described above, particularly if it involves one of our anchor tenants, could seriously harm our operating performance and materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
We may be unable to collect balances due from tenants that file for bankruptcy protection, which could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
If a tenant files for bankruptcy, we may not be able to collect all pre-bankruptcy amounts owed by that party. In addition, a tenant that files for bankruptcy protection may terminate its lease with us, in which event we would have a general unsecured claim against such tenant that would likely be worth less than the full amount owed to us for the remainder of the lease term, which could adversely affect our financial condition, results of operations and cash flows.
We face significant competition from the College of William and Mary university-owned student housing.
Midtown Row is the first student housing property we have owned, and we can provide no assurance that its performance will replicate the past performance of our other properties. Midtown Row is in close proximity to the College of William and Mary. On-campus student housing traditionally has certain inherent advantages over off-campus student housing because of, among other factors, closer physical proximity to the university campus and integration of on-campus facilities into the academic community. Colleges and universities can generally avoid real estate taxes, while we are subject to full real estate tax rates. Also, colleges and universities may be able to borrow funds at lower interest rates than those available to us. As a result, the College of William and Mary may be able to offer more convenient and/or less expensive student housing than we can through Midtown Row, which may adversely affect our occupancy and rental rates.
We have a substantial amount of indebtedness outstanding, which could materially and adversely affect our financial condition, results of operations and ability to make distributions to our stockholders.
As of December 31, 2022, we had an aggregate of $349.5 million of outstanding indebtedness, including $4.2 million of preferred equity in BSV Highlandtown and BSV Spotswood that is classified as indebtedness on our balance sheet and $80.0 million of the Preferred Equity Investment that is classified as temporary equity on our balance sheet. We may also need to incur additional indebtedness in the future to repay or refinance other outstanding debt, to make acquisitions or for other purposes. If we incur additional debt, the related risks that we now face could intensify. Our substantial indebtedness could have material adverse consequences to us, including:
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If any one or more of these events were to occur, our financial condition, results of operations, cash flows and the market value of our common stock could be materially and adversely affected.
Secured debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.
Each property in our portfolio is subject to secured indebtedness. Mortgage and other secured debt obligations increase our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For example, we have three mortgage loans on three properties totaling approximately $28.6 million, which mature during 2023, and the $66.9 million Basis Term Loan, which is secured by mortgages on six properties and matures in January 2024, subject to a one-year extension option that is subject to certain conditions. We can provide no assurances that we will be able to refinance these loans on favorable terms, or at all, or exercise our extension option for the Basis Term Loan. If we are unable to refinance or extend the loans, the lenders will have the right to place their loans in default and ultimately foreclose on the properties. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. If any of our properties are foreclosed upon due to a default, it could materially and adversely affect our financial condition, results of operations, cash flows and cash available for distribution to our stockholders.
The Eagles Sub-OP Operating Agreement contains provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.
An entity affiliated with Fortress has substantial rights under the Eagles Sub-OP Operating Agreement. Under this agreement, the following require the approval of the Fortress Member:
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In connection with the Preferred Equity Investment, the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East. The subsidiaries of the Operating Partnership that indirectly own the Excluded Properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates.
Under the Eagles Sub-OP Operating Agreement, “Trigger Events” include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property owned by the Company or any of its subsidiaries; (ii) a Bankruptcy Event (as defined in the Eagles Sub-OP Operating Agreement) with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Eagles Sub-OP Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the Fortress Mezzanine Loan (as defined below) or the mortgage loans secured by properties owned directly or indirectly by the Eagles Sub-OP (including the Excluded Properties); (v) failure to meet the minimum Total Yield requirements under the Eagles Sub-OP Operating Agreement; (vi) failure to pay the Current Preferred Return (as defined below) (subject to a limited cure period) or failure to make distributions as required by the Eagles Sub-OP Operating Agreement; (vii) the occurrence of a Change of Control (as defined in the Eagles Sub-OP Operating Agreement); (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Mr. Jacoby (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of common stock and OP units, in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under certain other agreements related to the Preferred Equity Investment.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest by payment to the Fortress Member of the full Redemption Amount upon not less than 90 days prior written notice to the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
Under certain circumstances, including in the event of a Trigger Event or if a Qualified Public Offering (as defined in the Eagles Sub-OP Operating Agreement) has not occurred by November 22, 2027, the Fortress Member may remove the Operating Partnership as the managing member of the Eagles Sub-OP. If the Fortress Member removes the Operating Partnership and becomes the managing member of the Eagles Sub-OP, the Eagles Sub-OP Operating Agreement only requires the Fortress Member to act in a manner consistent with other institutional preferred equity investors that have exercised remedies to remove managing members. Moreover, in such a circumstance, the Eagles Sub-OP Operating Agreement specifically reserves the Fortress Member’s right to (i) sell any property to a third party buyer unaffiliated with the Fortress Member, (ii) take any action in connection with curing or reacting to a default under any mortgage loan and (iii) otherwise exercise its rights and remedies pursuant to the terms of the Eagles Sub-OP Operating Agreement. Accordingly, in the event the Fortress Member becomes the managing member of the Eagles Sub-OP, it may take actions that are not in the best interest of us and our stockholders.
The Fortress Member’s rights may significantly impede our ability to operate our business and manage our properties. Furthermore, these rights may prevent us from engaging in transactions, including change of control or financing transactions, that otherwise would be attractive to us. The foregoing could adversely affect our financial condition, results of operations and cash flows, the market value of our common stock and our ability to pay dividends to our common stockholders in the future. In addition, failure to comply with any of these covenants could cause a Trigger Event, which would result in the Fortress Member having certain rights, including the right to remove the Operating Partnership as the managing member of the Eagles Sub-OP, and, therefore, could have a material adverse effect on us.
The Basis Loan Agreement and the operating agreements of BSV Highlandtown and BSV Spotswood contain provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.
An entity affiliated with Basis Management Group, LLC (“Basis”) has substantial rights under the Basis Loan Agreement (as defined below), in particular, with respect to Coral Hills Shopping Center, Crestview Square Shopping Center, Dekalb Plaza, Midtown Colonial, Midtown Lamonticello and West Broad Commons Shopping Center, which secure the Basis Term Loan (as defined below). Similarly, Lamont Street Partners LLC (“Lamont Street”) has substantial rights under the operating agreements of BSV Highlandtown
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and BSV Spotswood. Under these agreements, the following are either prohibited or require the approval of Basis or Lamont Street, as applicable:
Under certain circumstances, including in the event that Lamont Street’s preferred interests are not redeemed on or prior to the redemption date, Lamont Street, as applicable, may remove the Operating Partnership as the manager of BSV Highlandtown and BSV Spotswood and their property-owning subsidiaries. In addition, if the debt service coverage ratio under the Basis Loan Agreement falls below 1.05x for two consecutive calendar quarters, the Basis Lender (as defined below) has the right to remove us as the manager of the six properties securing the Basis Term Loan. If the Basis Lender removed us as the manager of these properties, we would no longer manage the day-to-day operations of those properties.
The Basis Lender has the right to sweep the cash accounts of the property-owning entities that collect rental payments from the properties securing the Basis Term Loan if the debt service coverage ratio under the Basis Loan Agreement falls below 1.10x. If the Basis Lender exercises its right under the cash sweep provision, then our cash available for operations and other purposes would be significantly limited.
Basis’ and Lamont Street's rights may significantly impede our ability to operate our business and manage our properties. Furthermore, these rights may prevent us from engaging in transactions, including change of control or financing transactions, that otherwise would be attractive to us. The foregoing could adversely affect our financial condition, results of operations and cash flows, the market value of our common stock and our ability to pay dividends to our common stockholders in the future. In addition, failure to comply with any of these covenants, including the financial coverage ratios, could cause an event of default under or accelerate some or all of our indebtedness, which would have a material adverse effect on us.
Covenants in our debt agreements could adversely affect our financial condition, results of operations and cash flows and the trading price of our common stock.
In addition to the restrictions provided in the Basis Loan Agreement and the Eagles Sub-OP Operating Agreement described above, other documents evidencing indebtedness contain certain financial covenants and affirmative and restrictive covenants, including, among other things, with respect to insurance coverage and our ability to incur additional indebtedness. The Hollinswood mortgage, Vista Shops mortgage, Brookhill mortgage, Highlandtown mortgage, Cromwell mortgage, Lamar Station Plaza West mortgage, Midtown Row mortgage, Spotswood mortgage and Greenwood mortgage require us to maintain a debt service coverage ratio (as such terms are defined in the respective loan agreements) of at least 1.40x, 1.50x, 1.30x, 1.25x, 1.20x, 1.30x, 1.15x, 1.15x and 1.40x, respectively. These limitations may restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations and cash flows and the market value of our common stock. In addition, failure to comply with any of these covenants, including the financial coverage ratios, could cause an event of default under or accelerate some or all of our indebtedness, which would have a material adverse effect on us.
There are conditions that raise substantial doubt about our ability to continue as a going concern.
In accordance with the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management evaluates whether there are conditions or events that, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its assessment, management considered the Company’s current financial condition, liquidity sources and debt maturities, including the Basis Term Loan, which has an outstanding balance of approximately $66.9 million and matures on January 1, 2024, subject to a one-year extension option that is subject to certain conditions, and three mortgage loans on three properties totaling approximately $28.6 million, which mature during 2023. Management also considered the Lamont Street Preferred Interest (as defined below), which has an outstanding balance of $4.2 million as of December 31, 2022 and
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must be redeemed on or before September 30, 2023. The Lamont Street Redemption Date (as defined below) can be extended by us to September 30, 2024 and September 30, 2025, in each case subject to certain conditions. Management believes that we will meet the conditions necessary to exercise our extension options under the Basis Term Loan and the Lamont Street Preferred Interest prior to their maturity or redemption date, as applicable. Management also is in discussions with other lenders to refinance the Basis Term Loan, mortgage loans with 2023 maturities and the Lamont Street Preferred Interest with new loans, which management believes will be available on acceptable terms based on discussions with lenders and the loan-to-value ratios of the properties securing the loans. There can be no assurances, however, that we will be successful in exercising the extension options or refinancing the loans and the Lamont Street Preferred Interest prior to their maturities or redemption date, as applicable. If we are unable to extend or refinance the Basis Term Loan and the mortgage loans prior to their maturities, the lenders will have the right to place the loan in default and ultimately foreclose on the nine properties securing the loans. Moreover, if we are unable to extend or refinance the Lamont Street Preferred Interest prior to the redemption date, Lamont Street may remove the Operating Partnership as the manager of BSV Highlandtown and BSV Spotswood. In addition, if we fail to refinance the Basis Term Loan and the mortgage loans secured by Highlandtown Shopping Center and Spotswood Valley Square Shopping Center, redeem the Lamont Street Preferred Interest and contribute the applicable properties to the Eagles Sub-OP by the applicable outside dates, it would be considered a Trigger Event under the Eagles Sub-OP Operating Agreement. See “—The Eagles Sub-OP Operating Agreement contains provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.”
Although management believes that we will be able to extend or refinance our debt prior to maturity, including the Basis Term Loan, the mortgage loans maturing in 2023 and the Lamont Street Preferred Interest, it is not under our sole control to extend or refinance our debt, and therefore it is possible that we may be unable to extend or refinance such debt, which creates substantial doubt about our ability to continue as a going concern for a period of one year after the date of that the financial statements included in this report are issued, and our independent registered public accounting firm has included an explanatory paragraph regarding our ability to continue as a going concern in its report on our financial statements included in this report. Although the Basis Term Loan and Lamont Street Preferred Interest have extension options, the extension options are subject to certain conditions. If we are unable to exercise the extension options, we will be dependent on additional debt and/or equity financing to repay such obligations, which may not be available on acceptable terms or at all. If we are unable to raise needed funds on acceptable terms, we will not be able to repay our debt at maturity, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. The financial statements included in this report have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
There are inherent risks associated with real estate investments and with the real estate industry, each of which could have an adverse impact on our financial performance and the value of our properties.
By owning our common stock, you are subject to the risks associated with the ownership of real properties, including risks related to:
Any of these factors could adversely impact our financial performance and the value of our properties.
Our dependence on smaller businesses to rent our space could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
Many of our tenants are smaller businesses that generally do not have the financial strength or resources of larger corporate tenants. Smaller independent businesses generally experience a higher rate of failure than larger businesses. As a result of our dependence on these smaller businesses, we could experience a higher rate of tenant defaults, turnover and bankruptcies, which could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Our growth will depend in part upon our ability to acquire additional retail properties for our portfolio, and we may be unsuccessful in identifying and consummating attractive acquisitions or taking advantage of other investment opportunities, which would impede our growth and materially and adversely affect our ability to pay dividends to our stockholders.
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Our ability to expand through acquisitions is integral to our long-term business strategy and requires that we identify and consummate suitable acquisition or investment opportunities in retail properties for our portfolio that meet our investment criteria and are compatible with our growth strategy. Our ability to acquire retail properties on favorable terms, or at all, may be adversely affected by the following significant factors:
Our failure to identify and consummate attractive acquisitions or take advantage of other investment opportunities without substantial expense, delay or other operational or financial problems, would impede our growth and materially and adversely affect our ability to make distributions to our stockholders.
The terms of joint venture agreements or other joint ownership arrangements into which we may enter could impair our operating flexibility and subject us to risks not present in investments that do not involve co-ownership.
Until we have greater access to capital, we intend to make acquisitions through joint ventures, partnerships, co-tenancies or other syndicated or co-ownership arrangements entered into with affiliates or third parties. For example, as described above, Fortress has substantial rights under the Eagles Sub-OP Operating Agreement and Lamont Street has substantial rights under the respective operating agreements of BSV Highlandtown and BSV Spotswood. We may also enter into joint ventures to redevelop or develop properties. Such investments may involve risks not otherwise present when acquiring real estate directly, including the following:
If any of the foregoing were to occur, our financial condition, results of operations and cash available for distribution could be materially and adversely affected.
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Failure to succeed in new markets may limit our growth.
In the future, if appropriate opportunities arise and subject to capital availability, we may acquire properties that are outside of our existing markets. Entering into new markets exposes us to a variety of risks, including difficulty evaluating local market conditions and local economies, developing new business relationships in the area, competing with other companies that already have an established presence in the area, hiring and retaining key personnel, evaluating quality tenants in the area and a lack of familiarity with local governmental and permitting procedures. Furthermore, expansion into new markets may divert management time and other resources away from our existing markets. As a result, we may not be successful in expanding into new markets, which could adversely impact our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Many of our operating costs and expenses are fixed and will not decline if our revenues decline.
Our results of operations depend, in large part, on our level of revenues, operating costs and expenses. The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in revenue from the property. As a result, if revenues or cash flows decline, we may not be able to reduce our expenses to keep pace with the corresponding reductions in revenues. Many of the costs associated with real estate investments, such as real estate taxes, insurance, loan payments and maintenance, generally will not be reduced if a property is not fully occupied or other circumstances cause our revenues or cash flows to decrease, which could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Most of our costs, such as operating and general and administrative expenses, interest expense, and real estate acquisition costs, are subject to inflation.
In 2022, the consumer price index rose by approximately 7% over the previous year, which was the largest annual inflation surge in 40 years. The recent rise in inflation has been due to, among other things, the disruption in global supply chains, labor shortages, and resulting increasing consumer demand, many of which were exacerbated by the COVID-19 pandemic. A significant portion of our operating expenses are sensitive to inflation. Operating expenses include those for property-related contracted services such as janitorial and engineering services, utilities, repairs and maintenance, and insurance. Property taxes are also impacted by inflationary changes as taxes are regularly reassessed based on changes in the fair value of our properties.
Our operating expenses, with the exception of the residential portion of Midtown Row, are typically recoverable through our lease arrangements, which allow us to pass through substantially all expenses associated with property taxes, insurance, utilities, repairs and maintenance, and other operating expenses (including increases thereto) to our tenants. Our remaining leases are generally gross leases, which provide for recoveries of operating expenses above the operating expenses from the initial year within each lease. During inflationary periods, we expect to recover increases in operating expenses from our triple net leases and our gross leases. In addition, our leases for the residential portion of Midtown Row generally have lease terms of 11.5 months or nine months, which we believe reduces our exposure to the effects of inflation, although an extreme and sustained escalation in costs could have a negative impact on our residents and their ability to absorb rent increases. As a result, we do not believe that inflation would result in a significant adverse effect on our net operating income and operating cash flows at the property level. However, there is no guarantee that our tenants would be able to absorb these expense increases and be able to continue to pay us their portion of operating expenses, capital expenditures, and rent.
Our general and administrative expenses consist primarily of compensation costs, technology services, and professional service fees. Our employee compensation is reviewed annually and adjusted to reflect any merit increases; however, to maintain our ability to successfully compete for the best talent, rising inflation rates may require us to provide compensation increases beyond historical annual merit increases, which may unexpectedly or significantly increase our compensation costs. Similarly, technology services and professional service fees are also subject to the impact of inflation and expected to increase proportionately with increasing market prices for such services. Consequently, inflation is expected to increase our general and administrative expenses over time and may adversely impact our results of operations and operating cash flows.
Adverse conditions in the general retail environment could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
We are subject to factors that affect the retail sector generally, as well as the market for retail space. The retail environment and the market for retail space have been, and in the future could be, adversely affected by weakness in the national, regional and local economies such as the level of consumer spending and consumer confidence, the adverse financial condition of some large retail companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing competition from discount retailers, outlet malls, internet retailers and other online businesses. Increases in consumer spending via the internet may significantly affect our retail tenants’ ability to generate sales in their stores. New and enhanced technologies, including new digital technologies and new web services technologies, may increase competition for certain of our retail tenants. Our tenants may experience difficulties attracting customers to their stores even after the social-distancing measures are lifted.
Any of the foregoing factors could adversely affect the financial condition of our retail tenants and the willingness of retailers to lease space in our retail properties. In turn, these conditions could negatively affect market rents for retail space and could materially
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and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past led and may in the future lead to market-wide liquidity problems. On March 10, 2023 and March 12, 2023, the Federal Deposit Insurance Corporation (“FDIC”) took control and was appointed receiver of Silicon Valley Bank (“SVB”) and Signature Bank, respectively, after each bank was unable to continue its operations. We are unable to predict the extent or nature of the impacts of the failures of SVB and Signature Bank and related circumstances at this time. Similarly, we cannot predict the impact that the high market volatility and instability of the banking sector more broadly could have on economic activity and our business in particular. Disruptions and uncertainty in the banking sector may negatively impact our ability to refinance existing indebtedness and access additional financing for acquisitions, development of our properties and other purposes at reasonable terms or at all. The failure of other banks and financial institutions and measures taken, or not taken, by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations.
We have two lockbox accounts at Signature Bank that are used for tenant deposits at Midtown Row, which accounts have not had balances in excess of the FDIC insurance limit of $250,000. The funds in the accounts are swept daily with the required $5,000 remaining in each account. The majority of our cash and cash equivalents are held at major commercial banks, and our account balances may at times exceed the FDIC insurance limit. If the financial institutions with which we do business enter receivership or become insolvent in the future, there is no guarantee that the Department of the Treasury, the Federal Reserve or the FDIC will intercede to provide us and other depositors with access to balances in excess of the FDIC insurance limit, that we would be able to access our existing cash, cash equivalents and investments, that we would be able to maintain any required letters of credit or other credit support arrangements, or that we would be able to adequately fund our business for a prolonged period of time or at all, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, if any of our tenants are unable to access funds on deposit with such a financial institution or pursuant to lending arrangements with such a financial institution, such tenants’ ability to meet their obligations to us could be adversely affected, which, in turn, could have a material adverse effect on our business, results of operations and financial condition.
An epidemic, pandemic or other health crisis, including the ongoing COVID-19 pandemic, and measures intended to prevent the spread of such an event could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
We face risks related to an epidemic, pandemic or other health crisis, including the ongoing COVID-19 pandemic, which has impacted, and in the future could impact, the markets in which we operate and could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations. The impact of an epidemic, pandemic or other health crisis, including the COVID-19 pandemic, and measures intended to prevent the spread of such an event could materially and adversely affect our business in a number of ways. Our rental revenue and operating results depend significantly on the occupancy levels at our properties and the ability of our tenants to meet their rent obligations to us, which have been in certain cases, and could in the future be, adversely affected by, among other things, job losses, furloughs, store closures, lower incomes, uncertainty about the future as a result of an epidemic, pandemic or other health crisis and related governmental actions including eviction moratoriums, shelter-in-place orders, prohibitions on charging certain fees, and limitations on collection laws and rent increases, which have affected, and, if such restrictions are not lifted, or are reinstated, or new restrictions imposed, may continue to affect our ability to collect rent or enforce legal or contractual remedies for the failure to pay rent, which have negatively impacted, and may continue to negatively impact, our ability to remove tenants who are not paying rent and our ability to rent their space to new tenants. In addition, the federal government has in the past allocated, and may in the future allocate, funds to rent relief programs to be run by state and local authorities. In certain locations, the funds available may not be sufficient to pay all past due rent and reallocation of such funds may result in markets in which we operate not having access to the funds anticipated. Further, certain of our tenants with past due rent have not qualified, and may not in the future qualify, to participate in such programs. In addition, some of such programs have required, and programs in the future may require, the forgiveness of a portion of the past due rent or agreeing to other limitations that may adversely affect our business in order to participate or may only provide funds to pay a portion of the past due rent. It is uncertain how the rent relief programs will impact our business. An epidemic, pandemic or other health crisis, including the COVID-19 pandemic, or related impacts thereof also could adversely affect the businesses and financial conditions of our counterparties, including our joint venture partners and general contractors and their subcontractors, and their ability to satisfy their obligations to us and to complete transactions or projects with us as intended.
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Cybersecurity incidents or other technology disruptions could negatively impact our business, our relationships, and our reputation.
We use computers and computer networks in most aspects of our business operations. We also use mobile devices to communicate with our employees, suppliers, business partners, and tenants. These devices are used to transmit sensitive and confidential information, including financial and strategic information about us, employees, business partners, tenants and other individuals and organizations. Additionally, we utilize third-party service providers that host personally identifiable information and other confidential information of our employees, business partners, tenants and others. We also maintain confidential financial and business information regarding us and persons and entities with which we do business on our information technology systems. Cybersecurity incidents, including physical or electronic break-ins, computer viruses, malware, attacks by hackers, ransomware attacks, phishing attacks, supply chain attacks, breaches due to employee error or misconduct and other similar breaches can create system disruptions, shutdowns or unauthorized access to information maintained in our information technology systems and in the information technology systems of our third-party service providers. We expect cybersecurity incidents to occur in the future and we are constantly managing efforts to infiltrate and compromise our information technology systems and data. The theft, destruction, loss or release of sensitive and confidential information or operational downtime of the systems used to store and transmit our or our tenants’ confidential business information could result in disruptions to our business, negative publicity, brand damage, violation of privacy laws, financial liability, difficulty attracting and retaining tenants, loss of business partners and loss of business opportunities, any of which may materially and adversely affect our financial condition, results of operations, cash flow, cash available for distribution and ability to service our debt obligations. Although we carry cybersecurity insurance that is designed to protect us against certain losses related to cybersecurity incidents, that insurance coverage may not be sufficient or available to cover all expenses or other losses or all types of claims that may arise in connection with cybersecurity incidents. Furthermore, in the future, such insurance may not be available on commercially reasonable terms, or at all.
We face considerable competition in leasing our properties and may be unable to renew existing leases or re-lease retail space on terms similar to the existing leases, or we may expend significant capital in our efforts to re-lease retail space, which may adversely affect our operating results.
As of December 31, 2022, leases representing approximately 10.1% and 10.5% of our total annualized base rent are scheduled to expire by the end of 2023 and 2024, respectively, assuming no exercise of renewal options or early termination rights. In addition, approximately 9.6% of the square footage at our properties was available for rent as of December 31, 2022. We compete with many other entities engaged in real estate investment and leasing activities, including national, regional and local owners, operators, acquirers and developers. If our competitors offer retail space at rental rates below current market rates or below the rental rates that we currently charge our tenants, we may lose potential tenants. Even if our tenants renew their leases or we are able to re-lease the space, the terms and other costs of renewal or re-leasing, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. If we are unable to renew leases or re-lease space in a reasonable time, or if rental rates decline or tenant improvement costs increase, leasing commissions or other costs increase, our business, financial condition and results of operations, ability to make distributions and ability to satisfy our debt service obligations could be materially and adversely affected.
Our operating results are subject to risks inherent in the student housing industry, including a concentrated lease-up period.
Leases for the residential portion of Midtown Row are typically for terms of 11.5 months with 12 equal payments. There are a limited number of nine-month leases with 10 equal payments. The residential portion of Midtown Row must be entirely re-leased each year during a limited leasing season. We are therefore highly dependent on the effectiveness of our marketing and leasing efforts and personnel during leasing season, exposing us to significant leasing risk. If we are unable to lease a substantial portion of the residential portion of Midtown Row, or if the rental rates upon such leasing are significantly lower than expected rates, our cash flow from operations and our ability to make distributions and ability to satisfy our debt service obligations could be materially and adversely affected.
Certain of the leases at our properties contain, and leases for properties that we may acquire in the future may contain, “co-tenancy” or “go-dark” provisions, which, if triggered, may allow tenants to pay reduced rent, cease operations or terminate their leases, any of which could materially and adversely affect our performance or the value of the affected retail property.
Certain of the leases at our properties contain, and leases for properties that we may acquire in the future may contain, “co-tenancy” provisions that condition a tenant’s obligation to remain open, the amount of rent payable by the tenant or the tenant’s obligation to continue occupancy on certain conditions, including: (i) the presence of a certain anchor tenant or tenants, (ii) the continued operation of an anchor tenant’s store and (iii) minimum occupancy levels at the retail property. If a co-tenancy provision is triggered by a failure of any of these or other applicable conditions, a tenant could have the right to cease operations, to terminate its lease early or to reduce its rent. In periods of prolonged economic decline, there is a higher-than-normal risk that co-tenancy provisions will be triggered as there is a higher risk of tenants closing stores or terminating leases during these periods. In addition to these co-tenancy provisions, certain of the leases at our retail properties contain “go-dark” provisions that allow the tenant to cease operations while continuing to pay rent. This could result in decreased customer traffic at the affected retail property, thereby decreasing sales for our other tenants at that property, which may result in our other tenants being unable to pay their minimum rents or expense recovery
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charges. These provisions also may result in lower rental revenue generated under the applicable leases. To the extent co-tenancy or go-dark provisions in our retail leases result in lower revenue, tenants’ rights to terminate their leases early, or a reduction of their rent, our revenues and the value of the affected retail property could be materially and adversely affected.
Risks associated with redevelopment and development activities could materially adversely affect us.
We may determine in the future to redevelop or develop certain properties directly rather than acquiring existing operating properties that meet our investment criteria. Large-scale, ground-up redevelopment or development of retail or mixed-use properties presents additional risks for us, including risks that:
In addition, capital improvements on our existing properties may divert cash that may otherwise be available for property acquisitions, dividends to our stockholders or for other purposes. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of redevelopment and development activities once undertaken, any of which could have a material adverse effect on our business, results of operations and financial condition.
The illiquid nature of real estate investments could significantly impede our ability to respond to changing economic, financial and investment conditions, which could adversely affect our cash flows and results of operations.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. Accordingly, we cannot predict whether we will be able to sell any of our properties for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of our properties. We may be required to expend funds to correct defects or to make improvements before a property can be sold, and we cannot assure you that we will have funds available to correct those defects or to make those improvements. Our inability to dispose of assets at opportune times or on favorable terms could adversely affect our cash flows and results of operations.
Increases in interest rates could increase our interest expense and may adversely affect our cash flows, our ability to service our indebtedness and our ability to pay dividends to our stockholders.
As of December 31, 2022, we had approximately $111.4 million in floating-rate indebtedness, and we may enter into debt instruments with variable interest rates in the future. Increases in interest rates on variable rate debt will increase our interest expense, unless we make arrangements to hedge the risk of rising interest rates. However, as a result of rising interest rates, the cost of hedging transactions has increased significantly and may continue to increase. These increased costs could reduce our profitability, impair our ability to meet our debt obligations, increase the cost of financing or impair our ability to pay dividends to our stockholders. An increase in interest rates also could limit our ability to refinance existing debt upon maturity or cause us to pay higher rates upon refinancing.
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Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
We have entered into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt and may enter into other hedging transactions in the future. Our hedging transactions include interest rate cap agreements and interest rate swap agreements. These agreements involve risks, such as the risk that (i) such arrangements would not be effective in reducing our exposure to interest rate changes, (ii) a court could rule that such agreements are not legally enforceable, (iii) hedging could actually increase our costs and reduce the overall returns on our investments, as interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates, (iv) counterparties to such arrangements would not perform, (v) we could incur significant costs associated with the settlement of the agreements, or (vi) the underlying transactions could fail to qualify as highly-effective cash flow hedges under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. Our failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
The phase-out of London Interbank Offered Rate ("LIBOR") could affect interest rates under our variable rate debt, interest rate swaps and interest rate cap agreements.
LIBOR is used as a reference rate in two of our mortgage loans and one interest rate swap agreement. On July 27, 2017, the United Kingdom's Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR ceased the publication of the one-week and two-month LIBOR settings immediately following the LIBOR publication on December 31, 2021. On November 30, 2020, the ICE Benchmark Administration Limited announced its plan to extend the date that the remaining U.S. LIBOR values would cease being computed and published from December 31, 2021 to June 30, 2023. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to U.S. dollar LIBOR in derivatives and other financial contracts. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. It is expected that new contracts will not reference LIBOR and will instead use SOFR or other alternative reference rates. At this time, we cannot predict the effect of any discontinuance, modification or other reforms to LIBOR or if SOFR, or another alternative reference rate, will attain market traction as a LIBOR replacement. As LIBOR phases out and ceases to exist, we will need to agree upon a benchmark replacement index with the lenders for debt using LIBOR as a reference rate, and as such the interest rate on any existing debt using LIBOR may change. The new rate may not be as favorable as those in effect prior to the LIBOR phase-out. Furthermore, the transition process may result in delays in funding, higher interest expense, additional expenses, and increased volatility in markets for instruments that currently rely on LIBOR, all of which could negatively impact our cash flow.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remedy these material weaknesses, we may not be able to accurately report our financial results, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As described under Item 9A—Controls and Procedures, we conducted our assessment of our internal control over financial reporting as is set forth in Item 308(a) of Regulation S-K promulgated under the Exchange Act, and Section 404 of the Sarbanes-Oxley Act as of December 31, 2022, the end of our last fiscal year. Our assessment noted that while remediation of the previously identified material weaknesses is in process, such remediation has not been completed nor have the remediated controls been in place for a sufficient amount of time to conclude as to their operating effectiveness. Consequently, the material weaknesses as noted previously remain at December 31, 2022 and our internal controls over financial reporting are ineffective.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Prior to the completion and as a result of the Mergers, we did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements. These material weaknesses contributed to additional material weaknesses within certain business processes and the information technology environment. See Item 9A “Controls and Procedures—Material Weaknesses.” Although these material weaknesses did not result in any material misstatement of our consolidated financial statements for the periods presented, they could lead to a material misstatement of account balances or disclosures.
The majority of the control improvement efforts have been completed as of December 31, 2022, with the remainder expected to be completed during the fiscal year ending December 31, 2023. While we believe that our efforts described under Item 9A “Controls and Procedures—Remediation Plan” will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. We cannot assure you that the measures we have taken to date, or that we may take in the future, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weaknesses in a timely manner, we will be unable to conclude that we maintain effective internal control over
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financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. The continued existence of material weaknesses in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, any of which could cause the value of our common stock to decline.
We face possible liability for environmental cleanup costs and damages for contamination related to properties we acquire, which could materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
Because we own real estate, we are subject to various federal, state and local environmental laws, ordinances and regulations. Under these laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including the release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real estate for personal injury or property damage associated with exposure to released hazardous substances. In addition, new or more stringent laws or stricter interpretations of existing laws could change the cost of compliance or liabilities and restrictions arising out of such laws. The cost of defending against these claims, complying with environmental regulatory requirements, conducting remediation of any contaminated property, or of paying personal injury claims could be substantial, which could materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders. In addition, the presence of hazardous substances on a property or the failure to meet environmental regulatory requirements may materially impair our ability to use, lease or sell a property, or to use the property as collateral for borrowing.
Uninsured losses relating to real estate and lender requirements to obtain insurance may materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
There are types of losses relating to real estate, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes and other natural disasters, pollution or environmental matters, for which we do not intend to obtain insurance unless we are required to do so by mortgage lenders. If any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for uninsured losses, we could suffer reduced earnings. In cases where we are required by mortgage lenders to obtain casualty loss insurance for catastrophic events or terrorism, such insurance may not be available, or may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our properties. Additionally, if we obtain such insurance, the costs associated with owning a property would increase. If any one of the events described above were to occur, it could have a material adverse effect on our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
Compliance with the ADA and fire, safety and other regulations may require us to make unexpected expenditures that adversely affect our business, financial condition, results of operations and ability to pay dividends to our stockholders.
Under the ADA all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons. Noncompliance with the ADA could result in the imposition of fines, an award of damages to private litigants and/or an order to correct any non-complying feature which could result in substantial capital expenditures. A number of additional U.S. federal, state and local laws may also require modifications to our properties, or restrict certain further renovations of such properties, with respect to access thereto by disabled persons. We have not conducted a detailed audit or investigation of all of our properties to determine our compliance, and we cannot predict the ultimate cost of compliance with the ADA or other legislation. If one or more of our properties is not in compliance with the ADA or other similar legislation, then we would be required to incur additional costs to bring such property into compliance, which could adversely affect our financial condition, results of operations and cash flows. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements, which could materially and adversely affect our business, financial condition, results of operations and ability to pay dividends to our stockholders.
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We are subject to risks from natural disasters, such as hurricanes and flooding, and the risks associated with the physical effects of climate change.
Natural disasters and severe weather such as flooding, earthquakes, tornadoes or hurricanes may result in significant damage to our properties. Fourteen of the 17 properties currently in our portfolio are located in the Mid-Atlantic region, parts of which historically have experienced heightened risk for natural disasters like hurricanes and flooding. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake) or destructive weather event (such as a tornado or hurricane) affecting a region may have a significant negative effect on our financial condition and results of operations. Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather.
All of the properties in our portfolio are located in the greater Mid-Atlantic and Colorado regions. Accordingly, we are also exposed to risks associated with inclement winter weather, including increased costs for the removal of snow and ice. Inclement weather also could increase the need for maintenance and repair of our properties.
Lastly, to the extent that climate change does occur, its physical effects could have a material adverse effect on our properties, operations and business. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity. These conditions could result in physical damage to our properties or declining demand for space in our buildings or the inability of us to operate the buildings at all in the areas affected by these conditions. Climate change also may have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy, and increasing the cost of snow removal or related costs at our properties. Proposed legislation and regulatory actions to address climate change could increase utility and other costs of operating our properties, which, if not offset by rising rental income, would reduce our net income. Should the impact of climate change be material in nature or occur for lengthy periods of time, our properties, operations or business would be adversely affected.
We may not be able to rebuild our properties to their existing specifications if we experience a substantial or comprehensive loss of such properties.
In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications. Further, reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. Environmental and legal restrictions could also restrict the rebuilding of our properties.
We depend on key personnel whose continued service is not guaranteed and each of whom would be difficult to replace.
Our success depends, to a significant extent, on the services of certain key personnel, particularly Michael Jacoby, our chairman and chief executive officer. Among the reasons that Mr. Jacoby is important to our continued success is that he has significant experience in acquiring, financing, owning, leasing, managing, developing and redeveloping commercial real estate properties. Our ability to acquire, manage, develop and redevelop and successfully integrate and operate retail properties, therefore, depends upon the significant relationships that Mr. Jacoby and other members of our senior management team have developed over many years. Although we have entered into employment agreements with Mr. Jacoby and Alexander Topchy, our chief financial officer, we cannot provide any assurance that they will remain employed by us. Our ability to retain our senior management team, or to attract and integrate suitable replacements should any member of the senior management team leave, is dependent upon the competitive nature of the employment market. The loss of services of one or more members of our senior management team, particularly Mr. Jacoby, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry personnel, which could adversely affect our business, financial condition and results of operations. Furthermore, the Basis Loan Agreement and Eagles Sub-OP Operating Agreement prohibits us from engaging in certain change of control transactions. It is deemed a change of control under the Basis Loan Agreement if Mr. Jacoby ceases to be our chairman and chief executive officer and ceases to be actively involved in our daily activities and operations if Basis or the Company does not approve a replacement of Mr. Jacoby within 90 days of him ceasing to serve in such roles. Although not classified as a change of control, the Eagles Sub-OP Operating Agreement has a similar restriction with respect to Mr. Jacoby’s position and involvement with the Company. If Mr. Jacoby were to no longer serve in his current roles, we could be declared in default under the Basis Loan Agreement, and it would constitute a Trigger Event under the Eagles Sub-OP Operating Agreement, which would result in Fortress having certain rights, including the right to remove the Operating Partnership as the managing member of the Eagles Sub-OP.
Risks Related to Our Common Stock
Our common stock has a very limited trading market, which limits your ability to resell shares of our common stock.
Although our common stock is quoted on the OTCQX, there is a very limited trading market for our common stock, which limits your ability to resell shares of our common stock. The OTCQX quotation platform is an inter-dealer market that is less regulated than the major securities markets. There can be no assurances that an active trading market for our common stock will develop or be
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sustained. Accordingly, there can be no assurance as to the ability of holders of shares of our common stock to sell their shares or the prices at which holders may be able to sell their shares.
In addition, all of the shares of our common stock that were issued in the Mergers were issued pursuant to exemptions from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder. Those shares may not be offered or sold unless the offer and sale is registered under, or exempt from the registration requirements of, the Securities Act, and we do not intend to register the offer and sale of those shares. Pursuant to Rule 144 under the Securities Act, those shares may be transferred without registration only if we satisfy the current public information requirement of Rule 144, which requires that we have filed all required periodic reports under the Exchange Act during the 12 months preceding such sale. If we do not satisfy the current public information requirement of Rule 144, shares of common stock issued in the Mergers that have been completed to date cannot be transferred pursuant to Rule 144 under the Securities Act.
The trading volume and market price of our common stock may fluctuate significantly, and you may have an illiquid investment.
Even if a trading market develops and is sustained for our common stock, the market price of our common stock may be volatile. In addition, the trading volume of our common stock may fluctuate and cause significant price variations to occur. It may be difficult for our stockholders to resell their shares in the amount or at prices or times that they find attractive, or at all. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future, including as a result of factors unrelated to our operating performance or prospects. In particular, the market price of our common stock could be subject to wide fluctuations in response to many factors, including, among others, the following:
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on us.
We have not established a minimum dividend, and there can be no assurance that we will be able to pay or maintain cash dividends on our common stock or that dividends will increase over time.
We have not established a minimum dividend payment level for our common stock and can provide no assurances regarding the payment of dividends in the future. Dividends will be authorized and determined by our board of directors in its sole and absolute discretion from time to time and will depend upon a number of factors, including:
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We bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover dividends to our stockholders at desirable levels or at all.
Common stock eligible for future sale could have an adverse effect on the market price of our common stock.
In connection with the acquisitions since 2019, we have issued 28,744,641 shares of common stock, 3,849,613 Common OP units and 1,842,917 Preferred OP units. Common OP units may be tendered by the holder for redemption in exchange for cash or, at our election, shares of common stock beginning on the first anniversary of issuance. Holders of Preferred OP units have the right to convert each Preferred OP unit into one Common OP unit plus a cash payment. On the date that the common stock is first listed on the New York Stock Exchange, the NYSE American or the Nasdaq Stock Market, each Preferred OP unit will automatically convert into one Common OP unit and the right to receive a cash payment. We have also issued (i) warrants to purchase 200,000 shares of common stock at an exercise price of $2.50 per share and (ii) warrants to purchase 3,060,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments.
Pursuant to Rule 144 under the Securities Act, the shares of common stock issued to non-affiliates will become freely transferable by the holders thereof six months after issuance, subject to us meeting the current public information requirement under Rule 144. Additionally, the holder of the Fortress Warrants (as defined below) has certain registration rights with respect to the shares of common stock issuable pursuant to the Fortress Warrants. In addition, from time to time we may issue additional shares of common stock or OP units in connection with the acquisition of properties, as compensation or otherwise, and we may grant registration rights in connection with such issuances.
We cannot predict the effect, if any, of future issuances and sales of our common stock and OP units, or the availability of shares for future sales, on the market price of the common stock. Issuances and sales of substantial amounts of our common stock, or upon the exchange of OP units, or the perception that such sales could occur, may materially and adversely affect the market price of our common stock.
Future issuances of debt securities or preferred stock, which would rank senior to our common stock upon liquidation, or future issuances of equity securities (including OP units), which would dilute our existing stockholders and may be senior to our common stock for purposes of making distributions, may materially and adversely affect the market price of our common stock and the value of OP units.
In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. If we incur additional debt in the future, our future interest costs could increase and adversely affect our liquidity and results of operations. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities (including OP units), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. Holders of Preferred OP units are entitled to monthly distributions, a portion of which will be paid in cash and a portion of which will accrue on and be added to the liquidation preference of the Preferred OP units each month. Such monthly distributions could eliminate or otherwise limit our ability to make dividends to our common stockholders. If we issue additional preferred stock, it would likely have a preference on dividend payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make dividends to our common stockholders. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
Increases in market interest rates may reduce demand for our common stock and result in a decline in the market price of our common stock.
The market price of our common stock may be influenced by the dividend yield on our common stock (i.e., the amount of our annual dividends, if any, as a percentage of the market price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently low compared to historical levels, may lead prospective purchasers of our common stock to expect a higher dividend yield, which we may not be able, or may choose not, to provide. Higher interest rates would also likely increase our borrowing costs and decrease our operating results and cash available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decline.
33
Risks Related to Our Organizational Structure
Messrs. Jacoby and Yockey own a substantial interest in our company on a fully diluted basis and may have the ability to exercise significant influence on our company.
As of April 24, 2023, Messrs. Jacoby and Yockey together owned approximately 17.6% of the outstanding shares of our common stock and 19.5% of the combined outstanding shares of common stock, Common OP units (which Common OP units may be tendered by the holder for redemption in exchange for cash or, at our election, shares of common stock beginning on the first anniversary of issuance) and Preferred OP units. In addition, Mr. Neal, a member of our board of directors, owned approximately 2.9% of the outstanding shares of our common stock as of April 24, 2023. Consequently, certain members of our management and our board of directors, whose economic, tax or business interests or goals may be different or inconsistent with ours, may be able to significantly influence the outcome of matters submitted for stockholder action, including the election of directors and the approval of significant corporate transactions, including business combinations, consolidations and mergers.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of OP units in the Operating Partnership, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the Operating Partnership or any partner thereof (including certain of our executive officers and directors), on the other hand. Our directors and officers have duties to our company under Delaware law in connection with their management of our company. At the same time, our wholly owned subsidiary, Broad Street OP GP, LLC, as the general partner of the Operating Partnership, has fiduciary duties and obligations to the Operating Partnership and its limited partners under Delaware law and the Agreement of Limited Partnership of the Operating Partnership (the “OP Partnership Agreement”) in connection with the management of the Operating Partnership. The general partner’s fiduciary duties and obligations as the general partner of the Operating Partnership may come into conflict with the duties of our directors and officers of the Company. Certain of our officers and directors are limited partners in the Operating Partnership.
Unless otherwise provided for in a partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The OP Partnership Agreement provides that, in the event of a conflict between the interests of the limited partners of the Operating Partnership, on the one hand, and the separate interests of our stockholders, on the other hand, the general partner, in its capacity as the general partner of the Operating Partnership, shall act in the interests of our stockholders and is under no obligation to consider the separate interests of the limited partners of the Operating Partnership in deciding whether to cause the Operating Partnership to take or not to take any actions. The OP Partnership Agreement further provides that any decisions or actions not taken by the general partner in accordance with the OP Partnership Agreement will not violate any duties, including the duty of loyalty that the general partner, in its capacity as the general partner of the Operating Partnership, owes to the Operating Partnership and its partners.
We are a holding company with no direct operations and, as such, we will rely on funds received from the Eagles Sub-OP and the Operating Partnership to pay any distributions to our stockholders, and the interests of our stockholders are structurally subordinated to all liabilities and obligations of the Eagles Sub-OP and the Operating Partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through the Eagles Sub-OP and the Operating Partnership. Apart from interests in the Operating Partnership, we do not have any material assets. As a result, we will rely on cash distributions from the Operating Partnership, which relies on cash distributions from the Eagles Sub-OP, to pay any distributions our board of directors may declare on shares of our common stock. We also rely on distributions from the Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from the Operating Partnership. In addition, because we are a holding company, claims of our stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Eagles Sub-OP, the Operating Partnership and their respective subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the Eagles Sub-OP, the Operating Partnership and their respective subsidiaries will be available to satisfy the claims of our stockholders only after all of our and the Eagles Sub-OP’s, the Operating Partnership’s and their respective subsidiaries’ liabilities and obligations have been paid in full.
Our board of directors may change its strategies, policies or procedures without the consent of stockholders, which may subject us to different and more significant risks in the future.
Our investment, financing, leverage and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by our board of directors in its sole discretion. These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without notice to or a vote of the stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those previously disclosed. Under these circumstances, we may be exposed to different and more significant risks in the future, which could have a material adverse effect on our business and growth. In addition, our board of directors may change our
34
policies with respect to conflicts of interest, provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our financial condition, results of operations, cash flows, trading price of our common stock and ability to satisfy our liquidity obligations and to make distributions to stockholders.
Certain provisions in the OP Partnership Agreement may delay or prevent unsolicited acquisitions of us.
Provisions in the OP Partnership Agreement may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change in our control, although some of our stockholders might consider such proposals, if made, desirable. These provisions include, among others:
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event that we take certain actions which are not in our stockholders’ best interests.
Our charter and bylaws obligate us to indemnify each present and former director or officer, and the OP Partnership Agreement requires us to indemnify the general partner of the Operating Partnership, to the maximum extent permitted by Delaware law, in the defense of any proceeding to which he, she or it is made, or threatened to be made, a party by reason of his, her or its service to us or the Operating Partnership. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. We have also entered into indemnification agreements with our executive officers and directors granting them express indemnification rights. As a result, we and our stockholders may have more limited rights against our directors and officers, than might otherwise exist absent the current provisions in our charter, bylaws and indemnification agreements or that might exist for other public companies.
Delaware law could make a merger or tender offer difficult, thereby depressing the trading price of our common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder (generally a stockholder, who together with affiliates and associates, owns 15% or more of our voting rights) for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our stockholders.
Our bylaws contain provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.
Our bylaws contain provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management and may prevent a change in control of us that is in the best interests of our stockholders. Our bylaws provide that a director may only be removed for cause upon the affirmative vote of holders of a majority of all the shares then outstanding. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control that is in the best interests of our stockholders.
Termination of the employment agreements with our executive officers could be costly and prevent a change in control.
The employment agreements that we entered into with Messrs. Jacoby and Topchy provide that, if their employment with us terminates under certain circumstances (including upon a change in our control), we may be required to pay them significant amounts of severance compensation, including accelerated vesting of equity awards, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control that might involve a premium paid for our common stock or otherwise be in the best interests of our stockholders.
We may pursue less vigorous enforcement of terms of certain agreements with members of our senior management and our affiliates because of our dependence on them and conflicts of interest.
Messrs. Jacoby and Yockey entered into a representation, warranty and indemnification agreement with the Company and the Operating Partnership, pursuant to which they have agreed to indemnify the Company and the Operating Partnership for certain breaches of the representations and warranties of certain parties to the merger agreements for a period of one year following the closing of the
35
Mergers. We may choose not to enforce, or to enforce less vigorously, our rights under this agreement because of our desire to maintain ongoing relationships with Messrs. Jacoby and Yockey, which could have a negative impact on stockholders.
Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.
In connection with the Mergers in which Common OP units were be issued as consideration, our Operating Partnership entered into tax protection agreements that provide that if we dispose of any interest in the contributed properties in a taxable transaction prior to the seventh anniversary of the completion of such Mergers, subject to certain exceptions, we will indemnify the investors for their tax liabilities attributable to the built-in gain that exists with respect to such property interests as of the time of such Mergers and the tax liabilities incurred as a result of such tax protection payment. In addition, we may enter into similar tax protection agreements in the future if we issue OP units in connection with the acquisition of properties. Therefore, although it may be in our best interests that we sell one of these properties, it may be economically prohibitive for us to do so because of these obligations.
Our tax protection agreements may require our Operating Partnership to maintain certain debt levels that otherwise would not be required to operate our business.
Under our tax protection agreements, our Operating Partnership is obligated to provide certain OP unit holders the opportunity to guarantee debt or enter into deficit restoration obligations, including upon a future repayment, retirement, refinancing or other reduction (other than scheduled amortization) of currently outstanding debt prior to the seventh anniversary of the completion of such Mergers. If we fail to make such opportunities available, we will be required to deliver to each such OP unit holder a cash payment intended to approximate the investor’s tax liability resulting from our failure to make such opportunities available to that OP unit holder and the tax liabilities incurred as a result of such tax protection payment. We agreed to these provisions in order to assist the investors in deferring the recognition of taxable gain as a result of and after such Mergers, and we may agree to similar provisions in the future if we issue OP units in connection with the acquisition of additional properties. These obligations may require us to maintain more or different indebtedness than we would otherwise require for our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The information set forth under “Our Portfolio” in Item 1 of this report is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTCQX under the symbol “BRST.” On March 31, 2023, there were 600 holders of record. Such information was obtained through our registrar and transfer agent. The quotations on the OTCQX are inter-dealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
Dividends
We do not have a history of paying cash dividends to holders of our common stock. In the future, we intend to make regular quarterly distributions to the holders of our common stock. However, we can provide no assurances as to the timing of dividends or as to the amount of dividends. Our ability to make distributions will depend upon our actual results of operations and earnings, economic conditions, restrictions in the Eagles Sub-OP Operating Agreement (as discussed below) and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including the revenue we receive
36
from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations to us and unanticipated expenditures. For more information regarding factors that could materially and adversely affect our actual results of operations and ability to make distributions to our stockholders, see Item 1.A “Risk Factors” included elsewhere in this report. Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and the capital requirements of our company. We may be required to fund distributions from working capital or borrow to provide funds for such distributions, or we may choose to make a portion of the required distributions in the form of a taxable stock dividend to preserve our cash balance or reduce our distributions. However, we currently have no intention to make distributions using shares of our common stock.
Furthermore, we anticipate that, at least initially, any distributions that we make will exceed our then current and then accumulated earnings and profits for the relevant taxable year, as determined for U.S. federal income tax purposes, due to non-cash expenses, primarily depreciation and amortization charges that we expect to incur. Therefore, all or a portion of these distributions may represent a return of capital for U.S. federal income tax purposes. The extent to which our distributions exceed our current and accumulated earnings and profits may vary substantially from year to year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. As a result, the gain (or loss) recognized on the sale of that common stock or upon our liquidation will be decreased (or increased) accordingly.
The Eagles Sub-OP Operating Agreement contains the following restrictions on the payment of dividends to holders of our common stock: (1) we cannot pay dividends on our common stock until January 2024 and (2) the amount of such dividends, if any, together with distributions on the OP units, will be limited to a 4.0% annual yield based on the average price of our common stock on the first trading day of each calendar month and based on the aggregate outstanding shares of common stock and OP units (other than Common OP units held by us).
Unregistered Sales of Equity Securities
On November 23, 2022, in connection with the acquisition of Midtown Row, the Operating Partnership issued an aggregate of 448,180 Common OP units and 1,842,917 Preferred OP units to the prior investors in entities that indirectly owned Midtown Row. The OP units were issued pursuant to exemptions from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder. Issuances of OP units were only to persons who qualify as “accredited investors” as defined under the Securities Act.
On November 23, 2022, in connection with the closing of the Merger whereby the Company acquired Lamar Station Plaza West (the “LSP Merger”), the Operating Partnership issued an aggregate of 573,529 Common OP units to the prior investors in the entity that owned Lamar Station Plaza West. The Common OP units were issued pursuant to exemptions from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder. Issuances of Common OP units were only to persons who qualify as “accredited investors” as defined under the Securities Act.
On November 23, 2022, in connection with the LSP Merger, the Company issued to Lamont Street warrants to purchase 500,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments (the “Lamont Street Warrants”). The Lamont Street Warrants were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder. Lamont Street qualifies as an “accredited investor” as defined under the Securities Act.
On November 23, 2022, in connection with the Preferred Equity Investment, the Company issued to the Fortress Member a warrant (the “Fortress Warrant”) to purchase 2,560,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments. The Fortress Warrant was issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder. The Fortress Member qualifies as an “accredited investor” as defined under the Securities Act.
Issuer Purchases of Equity Securities
From time to time, we could be deemed to have purchased shares as a result of shares withheld for tax purposes upon a stock compensation related vesting event. During the three months ended December 31, 2022, certain of our employees surrendered shares of common stock owned by them to satisfy their minimum statutory federal and state tax obligations associated with the vesting of restricted shares of common stock issued under our Amended and Restated 2020 Equity Incentive Plan (the "Plan"). The following table summarizes all of these repurchases during the three months ended December 31, 2022.
37
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares as Part of Publicly Announced Plans or Programs |
|
Maximum Number of Shares That May Yet be Purchased Under the Plan or Programs |
||
October 1 through October 31, 2022 |
|
|
— |
|
|
$ |
— |
|
|
N/A |
|
N/A |
November 1 through November 30, 2022 |
|
|
— |
|
|
$ |
— |
|
|
N/A |
|
N/A |
December 1 through December 31, 2022 |
|
|
4,203 |
|
|
$ |
1.20 |
|
|
N/A |
|
N/A |
Total |
|
|
4,203 |
|
|
|
|
|
|
|
|
|
ITEM 6. [RESERVED]
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section provides a discussion of our financial condition and comparative results of operations and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in this report. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the audited consolidated financial statements included in this report.
Overview
We are focused on owning and managing essential grocery-anchored and mixed-use assets located in densely populated technology employment hubs and higher education centers within the Mid-Atlantic, Southeast and Colorado markets. As of December 31, 2022, we owned 17 properties. The properties in our portfolio are dispersed in sub-markets that we believe generally have high population densities, high traffic counts, good visibility and accessibility, which provide our tenants with attractive locations to serve the necessity-based needs of the surrounding communities. As of December 31, 2022, the properties in our portfolio were 90.4% leased and 84.0% occupied. We are focused on acquiring additional strategically positioned properties in established and developing neighborhoods primarily leased to necessity-based tenants that meet the needs of the surrounding communities in our existing markets, as well as acquiring properties in new markets that meet our investment criteria, including the Southeastern United States. In addition, we provide commercial real estate brokerage services for our own portfolio and third-party office, industrial and retail operators and tenants.
The table below provides certain information regarding our retail portfolio as of December 31, 2022 and 2021.
|
|
As of |
|
|
As of |
|
||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Number of properties |
|
|
17 |
|
|
|
15 |
|
Number of states |
|
|
5 |
|
|
|
5 |
|
Total square feet (in thousands) |
|
|
2,026 |
|
|
|
1,737 |
|
Anchor spaces |
|
|
1,104 |
|
|
|
917 |
|
Inline spaces |
|
|
922 |
|
|
|
820 |
|
Leased % of rentable square feet (1): |
|
|
|
|
|
|
||
Total portfolio |
|
|
90.4 |
% |
|
|
88.1 |
% |
Anchor spaces |
|
|
96.3 |
% |
|
|
94.3 |
% |
Inline spaces |
|
|
83.4 |
% |
|
|
81.3 |
% |
Occupied % of rentable square feet: |
|
|
|
|
|
|
||
Total portfolio |
|
|
84.0 |
% |
|
|
84.7 |
% |
Anchor spaces |
|
|
89.6 |
% |
|
|
91.9 |
% |
Inline spaces |
|
|
77.3 |
% |
|
|
76.7 |
% |
Average remaining lease term (in years) (2) |
|
|
5.3 |
|
|
|
4.7 |
|
Annualized base rent per leased square feet (3) |
|
$ |
13.76 |
|
|
$ |
13.83 |
|
We are structured as an “Up-C” corporation with substantially all of our operations conducted through our Operating Partnership and its direct and indirect subsidiaries. As of December 31, 2022, we owned 85.3% of the OP units in our Operating Partnership, and we are the sole member of the sole general partner of our Operating Partnership.
Acquisitions
On November 23, 2022, we completed the acquisition of Midtown Row, a mixed-used property, and completed our final Merger whereby we acquired Lamar Station Plaza West. In connection with these acquisitions, we entered into the Eagles Sub-OP Operating Agreement and closed the related transactions. See “—Fortress Preferred Equity Investment” below.
During 2021, we closed four additional Mergers whereby we acquired Highlandtown Village Shopping Center, Cromwell Field Shopping Center, Spotswood Valley Square Shopping Center and The Shops at Greenwood Village on May 21, 2021, May 26, 2021, June 4, 2021, and October 6, 2021, respectively.
39
Impact of COVID-19
We continue to monitor and address risks related to the COVID-19 pandemic. Certain tenants experiencing economic difficulties during the pandemic have previously sought rent relief, which had been provided on a case-by-case basis primarily in the form of rent deferrals and, in more limited cases, in the form of rent abatements. Since April 2020, we have entered into lease modifications that deferred approximately $0.6 million and waived approximately $0.3 million of contractual revenue for rent that pertained to April 2020 through December 2021; we had no lease modification related to COVID-19 during 2022. Less than $0.1 million of the total deferred rent from all lease modifications since April 2020 remained outstanding as of December 31, 2022.
How We Derive Our Revenue
We derive a substantial majority of our revenue from rents received from our tenants at each of our properties. Our leases are generally triple net, pursuant to which the tenant is responsible for property expenses, including real estate taxes, insurance and maintenance, or modified gross, pursuant to which the tenant generally reimburses us for its proportional share of expenses. As of December 31, 2022, our portfolio (i) had annualized base rent of $25.2 million, (ii) had an annualized base rent per square foot of $13.76, (iii) was 90.4% leased (84.0% occupied) to a diversified group of tenants and (iv) had no tenant accounting for more than 4.0% of the total annualized base rent.
With the acquisition of Midtown Row, a mixed-use property, our income is also derived from student housing, which is leased by the bed on an individual lease liability basis. Individual lease liability limits each resident's liability to his or her own rent without the liability of a roommate's rent. A parent or guardian is generally required to execute each lease as a guarantor unless the resident provides adequate proof of income or financial aid. These leases typically correspond to the university's academic year. Midtown Row is comprised of 240 student housing units with 620 beds, and as of December 31, 2022, it was 100% leased.
We also operate a third-party property management and brokerage business unit. Our brokerage business primarily consists of representations of commercial tenants for their office and retail real estate needs, either for lease transactions or purchase and sale transactions.
Factors that May Impact Future Results of Operations
Rental Income
Growth in rental income will depend on our ability to acquire additional properties that meet our investment criteria and on filling vacancies and increasing rents on the properties in our portfolio. The amount of rental income generated by the properties in our portfolio depends on our ability to renew expiring leases or re-lease space upon the scheduled or unscheduled termination of leases, lease currently available space and maintain or increase rental rates at our properties. Our rental income in future periods could be adversely affected by local, regional or national economic conditions, an oversupply of or a reduction in demand for retail space, changes in market rental rates, our ability to provide adequate services and maintenance at our properties, and fluctuations in interest rates. In addition, economic downturns affecting our markets or downturns in our tenants’ businesses that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments to us could adversely affect our ability to maintain or increase rent and occupancy.
Scheduled Lease Expirations
Our ability to re-lease expiring space at rental rates equal to or greater than that of current rental rates will impact our results of operations. Our properties are marketed to smaller tenants that generally desire shorter-term leases. As of December 31, 2022, approximately 42.0% of our retail portfolio (based on leased GLA) was leased to tenants occupying less than 10,000 square feet. In addition, as of December 31, 2022, approximately 9.6% of our GLA was vacant and approximately 10.2% of our leases (based on total GLA) were month-to-month or scheduled to expire on or before December 31, 2023. See “Item 1 Business—Our Portfolio—Lease Expirations.” Although we maintain ongoing dialogue with our tenants, we generally raise the issue of renewal at least 12 months prior to lease renewal often providing concessions for early renewal. If our current tenants do not renew their leases or terminate their leases early, we may be unable to re-lease the space to new tenants on favorable terms or at all. Our vacancy trends will be impacted by new properties that we acquire, which may include properties with higher vacancy where we identified opportunities to increase occupancy.
Acquisitions
Over the long-term, we intend to grow our portfolio through the acquisition of additional strategically positioned properties in established and developing neighborhoods primarily leased to necessity-based tenants that meet the needs of the surrounding communities in our existing markets, as well as acquiring properties in new markets that meet our investment criteria, including the Southeastern United States. We have established relationships with a wide variety of market participants, including tenants, leasing agents, investment sales brokers, property owners and lenders, in our target markets and beyond and, over the long-term, we believe that we will have opportunities to acquire properties that meet our investment criteria at attractive prices.
General and Administrative Expenses
General and administrative expenses include employee compensation costs, professional fees, consulting and other general administrative expenses. We expect an increase in general and administrative expenses in the future related to stock issuances to
40
employees. We expect that our general and administrative expenses will rise in some measure as our portfolio grows but that such expenses as a percentage of our revenue will decrease over time due to efficiencies and economies of scale.
Capital Expenditures
We incur capital expenditures at our properties that vary in amount and frequency based on each property’s specific needs. We expect our capital expenditures will be for recurring maintenance to ensure our properties are in good working condition, including parking and roof repairs, façade maintenance and general upkeep. We also will incur capital expenditures related to repositioning and refurbishing properties where we have identified opportunities to improve our properties to increase occupancy, and we may incur capital expenditures related to redevelopment or development consistent with our business and growth strategies.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management considers accounting estimates or assumptions critical in either of the following cases:
Management believes the current assumptions used to make estimates in the preparation of the consolidated financial statements are appropriate and not likely to change in the future. However, actual experience could differ from the assumptions used to make estimates, resulting in changes that could have a material adverse effect on our consolidated results of operations, financial position and/or liquidity. These estimates will be made and evaluated on an ongoing basis using information that is available as well as various other assumptions believed to be reasonable under the circumstances. Management has discussed the determination and disclosures of these critical accounting policies with the audit committee of the board of directors.
The following presents information about our critical accounting policies including the material assumptions used to develop significant estimates. Certain of these critical accounting policies contain discussion of judgments and estimates that have not yet been required by management but that it believes may be reasonably required of it to make in the future. See Note 2 “Accounting Policies and Related Matters” to the consolidated financial statements for additional information on significant accounting policies and the effect of recent accounting pronouncements.
Principles of Consolidation
The consolidated financial statements include the accounts of our wholly owned subsidiaries, and all material intercompany transactions and balances are eliminated in consolidation. We consolidate entities in which we own less than 100% of the equity interest but have a controlling interest through a variable interest, voting rights or other means. For these entities, we record a noncontrolling interest representing the equity held by other parties.
From inception, we continually evaluate all of our transactions and investments to determine if they represent variable interests subject to the variable interest entity (“VIE”) consolidation model and then determine which business enterprise is the primary beneficiary of its operations. We make judgments about which entities are VIEs based on an assessment of whether (i) the equity investors as a group, if any, do not have a controlling financial interest or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. We consolidate investments in VIEs when we are determined to be the primary beneficiary. This evaluation is based on our ability to direct and influence the activities of a VIE that most significantly impact that entity’s economic performance.
For investments not subject to the variable interest entity consolidation model, we will evaluate the type of rights held by the limited partner(s) or other member(s), which may preclude consolidation in circumstances in which the sole general partner or managing member would otherwise consolidate the limited partnership. The assessment of limited partners’ or members’ rights and their impact on the presumption of control over a limited partnership or limited liability corporation by the sole general partner or managing member should be made when an investor becomes the sole general partner or managing member and should be reassessed if (i) there is a change to the terms or in the exercisability of the rights of the limited partners or members, (ii) the sole general partner or member increases or decreases its ownership in the limited partnership or corporation or (iii) there is an increase or decrease in the number of outstanding limited partnership or membership interests.
Our ability to assess correctly our influence or control over an entity at inception of our involvement or on a continuous basis when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. Subsequent evaluations of the primary beneficiary of a VIE may require the use of different assumptions that could lead to identification of a different primary beneficiary, resulting in a different consolidation conclusion than what was determined at inception of the arrangement.
41
Revenue Recognition
Leases of Real Estate Properties: At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. Currently, all of our lease arrangements are classified as operating leases. Rental revenue for operating leases is recognized on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If we determine that substantially all future lease payments are not probable of collection, we will account for these leases on a cash basis. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or by us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of the tenant improvements is subject to significant judgment. If our assessment of the owner of the tenant improvements for accounting purposes were different, the timing and amount of revenue recognized would be impacted.
A majority of our leases require tenants to make estimated payments to the Company to cover their proportional share of operating expenses, including, but not limited to, real estate taxes, property insurance, routine maintenance and repairs, utilities and property management expenses. We collect these estimated expenses and are reimbursed by tenants for any actual expense in excess of estimates or reimburse tenants if collected estimates exceed actual operating results. The reimbursements are recorded in rental income, and the expenses are recorded in property operating expenses, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and bear the credit risk.
We assess the probability of collecting substantially all payments under our leases based on several factors, including, among other things, payment history of the lessee, the financial strength of the lessee and any guarantors, historical operations and operating trends and current and future economic conditions and expectations of performance. If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental income and limit our rental income to the lesser of lease income on a straight-line basis plus variable rents when they become accruable or cash collected. If we change our conclusion regarding the probability of collecting rent payments required by a lessee, we may recognize an adjustment to rental income in the period we make a change to our prior conclusion.
Contractual rent increases of renewal options are often fixed at the time of the initial lease agreement which may result in tenants being able to exercise their renewal options at amounts that are less than the fair value of the rent at the date of the renewal. In addition to fixed base rents, certain rental income derived from our tenant leases is variable and may be dependent on percentage rent. Variable lease payments from percentage rents are earned by us in the event the tenant's gross sales exceed certain amounts. Terms of percentage rent are agreed upon in the tenant’s lease and will vary based on the tenant's sales.
Leasing Commissions: We earn leasing commissions as a result of providing strategic advice and connecting tenants to property owners in the leasing of retail space. We record commission revenue on real estate leases at the point in time when the performance obligation is satisfied, which is generally upon lease execution. Terms and conditions of a commission agreement may include, but are not limited to, execution of a signed lease agreement and future contingencies, including tenant’s occupancy, payment of a deposit or payment of first month’s rent (or a combination thereof).
Property and Asset Management Fees: We provide real estate management services for owners of properties, representing a series of daily performance obligations delivered over time. Pricing is generally in the form of a monthly management fee based upon a percentage of property-level cash receipts or some other variable metric.
When accounting for reimbursements of third-party expenses incurred on a client’s behalf, we determine whether we are acting as a principal or an agent in the arrangement. When we are acting as a principal, our revenue is reported on a gross basis and comprises the entire amount billed to the client and reported cost of services includes all expenses associated with the client. When we are acting as an agent, our fee is reported on a net basis as revenue for reimbursed amounts is netted against the related expenses.
Engineering Services: We provide engineering services to property owners on an as needed basis at the properties where we are the property or asset manager. We receive consideration at agreed upon fixed rates for the time incurred plus a reimbursement for costs incurred and revenue is recognized over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. We account for performance obligations using the right to invoice practical expedient. We apply the right to invoice practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contract. Under this practical expedient, we recognize revenue in an amount that corresponds directly with the value to the customer of performance completed to date and for which there is a right to invoice the customer.
Real Estate Investments
We evaluate each purchase transaction to determine whether the acquired assets and liabilities assumed meet the definition of a business and make estimates as part of our allocation of the purchase prices. For acquisitions accounted for as asset acquisitions, the purchase price, including transaction costs, is allocated to the various components of the acquisition based upon the relative fair value of each component. For acquisitions accounted for as business combinations, the purchase price is allocated at fair value of each component and transaction costs are expensed as incurred.
42
We assess the fair value of acquired assets and acquired liabilities in accordance with the ASC Topic 805 Business Combinations and allocate the purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market and economic conditions that may affect the property. The most significant components of our allocations are typically the allocation of fair value to land and buildings and in-place leases and other intangible assets. The estimates of the fair value of buildings will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired.
For any value assigned to in-place leases and other intangibles, including the assessment as to the existence of any above-or below-market leases, management makes its best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. These assumptions affect the amount of future revenue that we will recognize over the remaining lease term for the acquired in-place leases. The values of any identified above-or below-market leases are based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease, or for below-market leases including any bargain renewal option terms. Above-market lease values are recorded as a reduction of rental income over the lease term while below-market lease values are recorded as an increase to rental income over the lease term. The recorded values of in-place lease intangibles are recognized in amortization expense over the initial term of the respective leases.
Transaction costs related to asset acquisitions are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed business combinations are expensed as incurred.
Asset Impairment
Real estate asset impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses if there are triggering events including macroeconomic conditions, loss of an anchor tenant and the ability to re-tenant the space, significant and persistent delinquencies, unanticipated decreases in or sustained reductions of net operating income and government-mandated compliance with an adverse effect to the Company's cost basis or operating costs. If management concludes there are triggering events, we then assess the impairment of properties individually. Management analyzes recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the property. If the analysis indicates that the carrying value of a property is not recoverable from its estimated undiscounted future cash flows, an impairment loss is recognized. Impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property. In determining fair value, we use current appraisals or other third-party opinions of value and other estimates of fair value such as estimated discounted future cash flows. The determination of future cash flows requires significant estimates by management. In management’s estimate of cash flows, it considers factors such as expected future sale of an asset, capitalization rates, holding periods and the undiscounted future cash flow analysis. Subsequent changes in estimated cash flows could affect the determination of whether an impairment exists.
Income Taxes
We account for deferred income taxes using the asset and liability method and recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, we determine deferred tax assets and liabilities based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes us to change our judgment about expected future tax consequences of events, is included in the tax provision when such changes occur. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes us to change our judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The estimate of our tax liabilities relating to uncertain tax positions requires management to assess uncertainties and to make judgments about the application of complex tax laws and regulations. We recognize interest and penalties associated with uncertain tax positions as part of income tax expense.
Recently Issued Accounting Standards
See Note 2 “Accounting Policies and Related Matters” in the notes to the consolidated financial statements for information concerning recently issued accounting standards.
43
Results of Operations
This section provides a comparative discussion on our results of operations and should be read in conjunction with our consolidated financial statements, including the accompanying notes. See “Critical Accounting Policies and Estimates” for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.
Comparison of the year ended December 31, 2022 to the year ended December 31, 2021
|
|
For the year ended December 31, |
|
|
Change |
|
||||||||||
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rental income |
|
$ |
29,871 |
|
|
$ |
21,408 |
|
|
$ |
8,463 |
|
|
|
40 |
% |
Commissions |
|
|
2,523 |
|
|
|
2,836 |
|
|
|
(313 |
) |
|
|
(11 |
%) |
Management and other income |
|
|
557 |
|
|
|
1,105 |
|
|
|
(548 |
) |
|
|
(50 |
%) |
Total revenues |
|
|
32,951 |
|
|
|
25,349 |
|
|
|
7,602 |
|
|
|
30 |
% |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of services |
|
|
1,917 |
|
|
|
1,824 |
|
|
|
93 |
|
|
|
5 |
% |
Depreciation and amortization |
|
|
17,436 |
|
|
|
12,501 |
|
|
|
4,935 |
|
|
|
39 |
% |
Property operating |
|
|
8,672 |
|
|
|
5,694 |
|
|
|
2,978 |
|
|
|
52 |
% |
Bad debt expense |
|
|
235 |
|
|
|
34 |
|
|
|
201 |
|
|
|
591 |
% |
General and administrative |
|
|
13,513 |
|
|
|
11,360 |
|
|
|
2,153 |
|
|
|
19 |
% |
Total operating expenses |
|
|
41,773 |
|
|
|
31,413 |
|
|
|
10,360 |
|
|
|
33 |
% |
Operating loss |
|
|
(8,822 |
) |
|
|
(6,064 |
) |
|
|
(2,758 |
) |
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest and other income (expense) |
|
|
26 |
|
|
|
(33 |
) |
|
|
59 |
|
|
|
(179 |
%) |
Derivative fair value adjustment |
|
|
2,638 |
|
|
|
353 |
|
|
|
2,285 |
|
|
|
(647 |
%) |
Net loss on fair value change on debt held under the fair value option |
|
|
(3,151 |
) |
|
|
— |
|
|
|
(3,151 |
) |
|
N/A |
|
|
Interest expense |
|
|
(12,710 |
) |
|
|
(9,961 |
) |
|
|
(2,749 |
) |
|
|
28 |
% |
(Loss) gain on extinguishment of debt |
|
|
(59 |
) |
|
|
1,528 |
|
|
|
(1,587 |
) |
|
|
(104 |
%) |
Other expense |
|
|
(52 |
) |
|
|
(100 |
) |
|
|
48 |
|
|
|
(48 |
%) |
Total other expense |
|
|
(13,308 |
) |
|
|
(8,213 |
) |
|
|
(5,095 |
) |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax benefit |
|
|
5,857 |
|
|
|
3,533 |
|
|
|
2,324 |
|
|
|
66 |
% |
Net loss |
|
$ |
(16,273 |
) |
|
$ |
(10,744 |
) |
|
$ |
(5,529 |
) |
|
|
51 |
% |
Less: Preferred equity return on Fortress preferred equity |
|
|
(1,492 |
) |
|
|
— |
|
|
|
(1,492 |
) |
|
N/A |
|
|
Less: Preferred OP units return |
|
|
(48 |
) |
|
|
— |
|
|
|
(48 |
) |
|
N/A |
|
|
Plus: Net loss attributable to noncontrolling interest |
|
|
2,522 |
|
|
|
1,236 |
|
|
|
1,286 |
|
|
|
104 |
% |
Net loss attributable to common stockholders |
|
$ |
(15,291 |
) |
|
$ |
(9,508 |
) |
|
$ |
(5,783 |
) |
|
|
61 |
% |
Revenues for the year ended December 31, 2022 increased approximately $7.6 million, or 30%, compared to the year ended December 31, 2021, as a result of an approximately $8.5 million increase in rental income that was partially offset by an approximately $0.5 million decrease in management and other income and $0.3 million decrease in commissions. Rental income increased as a result of the impact of a full year of results from the acquisition of three properties in the second quarter and one property in the fourth quarter of 2021 and the acquisition of two properties in the fourth quarter of 2022. The decrease in management and other fees is mainly attributable to approximately $0.3 million of fees recognized in 2021 related to the properties acquired by the Company during 2021 and 2022. The decrease in commissions is mainly attributable to a lower transaction volume of leasing.
Total operating expenses for the year ended December 31, 2022 increased approximately $10.4 million, or 33%, compared to the year ended December 31, 2021, primarily from: (i) an increase in depreciation and amortization expense of approximately $4.9 million which is primarily related to six properties that were acquired during 2022 and 2021 (which comprise $5.3 million of the total increase in depreciation and amortization expense, partially offset by a $0.5 million decrease in amortization of in-place lease tangibles); (ii) an increase in property operating expenses of $3.0 million which is primarily related to the six properties acquired in 2022 and 2021 and (iii) an increase in general and administrative expenses of approximately $2.2 million mainly attributable to an increase in stock compensation expense of approximately $1.3 million, an increase in professional service fees of approximately $0.4 million, an increase in payroll and related expenses of approximately $0.2 million and an increase in board of director fees of approximately $0.2 million.
The gain on derivative fair value adjustment was approximately $2.6 million for the year ended December 31, 2022 compared to $0.4 million for the year ended December 31, 2021. The increase of approximately $2.3 million was primarily due to a $3.1 million change in fair value of the interest rate swaps the Company entered into on July 1, 2021 and December 27, 2019, partially offset by a $0.8 million change in fair value of the embedded derivative liability relating to the Preferred Equity Investment.
44
Net loss on fair value change on debt held under the fair value option reflects the change in fair value of the Fortress Mezzanine Loan for which we elected the fair value option.
Interest expense for the year ended December 31, 2022 increased approximately $2.7 million, or 28%, compared to the year ended December 31, 2021, primarily due to debt that was assumed or originated in connection with six properties that were acquired during 2022 and 2021 and additional net borrowings of approximately $71.6 million during 2022.
The gain on extinguishment of debt of approximately $1.5 million for the year ended December 31, 2021 is related to the forgiveness of unsecured loans totaling approximately $1.5 million granted pursuant to the Paycheck Protection Program (the “PPP Program”), which was established under the Coronavirus Aid, Relief, and Economic Security Act.
Income tax benefit increased approximately $2.3 million over the prior year, which is attributable to the properties generating additional tax losses of approximately $6.8 million compared to the prior year.
Preferred equity return on Fortress preferred equity reflects the portion of the distribution to the Fortress Member that is payable in cash and the portion that is accrued and added to the Preferred Equity Investment.
Preferred OP units return reflects the portion of the distribution to holders of the Preferred OP units that are payable in cash and the portion that are accrued and added to the liquidation preference of the Preferred OP units.
Net loss attributable to noncontrolling interest for the year ended December 31, 2022 increased approximately $1.3 million compared to the year ended December 31, 2021. The net loss attributable to noncontrolling interest reflects the proportionate share of the OP units held by outside investors in the operating results of the Operating Partnership from the completion of the Mergers and the acquisition of Midtown Row.
Non-GAAP Performance Measures
We present the non-GAAP performance measures set forth below. These measures should not be considered as an alternative to, or more meaningful than, net income (calculated in accordance with GAAP) or other GAAP financial measures, as an indicator of financial performance and are not alternatives to, or more meaningful than, cash flow from operating activities (calculated in accordance with GAAP) as a measure of liquidity. Non-GAAP performance measures have limitations as they do not include all items of income and expense that affect operations, and accordingly, should always be considered as supplemental financial results to those calculated in accordance with GAAP. Our computation of these non-GAAP performance measures may differ in certain respects from the methodology utilized by other real estate companies and, therefore, may not be comparable to similarly titled measures presented by other real estate companies. Investors are cautioned that items excluded from these non-GAAP performance measures are relevant to understanding and addressing financial performance.
Funds From Operations and Adjusted Funds from Operations
Funds from operations ("FFO") is a supplemental non-GAAP financial measure of real estate companies' operating performance. The National Association of Real Estate Investment Trusts ("Nareit") defines FFO as follows: net income (loss), computed in accordance with GAAP, excluding (i) depreciation and amortization related to real estate, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and losses from change in control, (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and (v) after adjustments for unconsolidated partnerships and joint ventures calculated to reflect FFO on the same basis.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Considering the nature of our business as a real estate owner and operator, we believe that FFO is useful to investors in measuring our operating and financial performance because the definition excludes items included in net income that do not relate to or are not indicative of our operating and financial performance, such as depreciation and amortization related to real estate, and items which can make periodic and peer analysis of operating and financial performance more difficult, such as gains and losses from the sale of certain real estate assets and impairment write-downs of certain real estate assets. Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating properties, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. Also, FFO should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
45
Adjusted FFO ("AFFO") is calculated by excluding the effect of certain items that do not reflect ongoing property operations, including stock-based compensation expense, deferred financing and debt issuance cost amortization, non-real estate depreciation and amortization, straight-line rent, non-cash interest expense and other non-comparable or non-operating items. Management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO.
AFFO is not intended to represent cash flow or liquidity for the period and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) is the most directly comparable GAAP financial measure to AFFO. Management believes that AFFO is a widely recognized measure of the operations of real estate companies, and presenting AFFO enables investors to assess our performance in comparison to other real estate companies. AFFO should not be considered as an alternative to net income/(loss) (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
Our reconciliation of net income (loss) to FFO and AFFO for the years ended December 31, 2022, and 2021 is as follows:
|
|
For the Year Ended December 31, |
|
|||||
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
||
Net loss |
|
$ |
(16,273 |
) |
|
$ |
(10,744 |
) |
Real estate depreciation and amortization |
|
|
17,259 |
|
|
|
12,462 |
|
Amortization of direct leasing costs |
|
|
44 |
|
|
|
8 |
|
FFO attributable to common shares and OP units |
|
|
1,030 |
|
|
|
1,726 |
|
Stock-based compensation expense |
|
|
1,937 |
|
|
|
643 |
|
Deferred financing and debt issuance cost amortization |
|
|
1,512 |
|
|
|
1,302 |
|
Intangibles amortization |
|
|
(387 |
) |
|
|
(448 |
) |
Non-real estate depreciation and amortization |
|
|
131 |
|
|
|
19 |
|
Non-cash interest expense |
|
|
253 |
|
|
|
— |
|
Recurring capital expenditures |
|
|
(981 |
) |
|
|
(280 |
) |
Straight-line rent revenue |
|
|
(945 |
) |
|
|
(512 |
) |
Minimum return on preferred interests |
|
|
(1,112 |
) |
|
|
(335 |
) |
Non cash fair value adjustment |
|
|
513 |
|
|
|
(353 |
) |
AFFO attributable to common shares and OP units |
|
$ |
1,951 |
|
|
$ |
1,762 |
|
|
|
|
|
|
|
|
||
Weighted average shares outstanding to common shares |
|
|
|
|
|
|
||
Diluted |
|
|
32,378,526 |
|
|
|
26,928,510 |
|
|
|
|
|
|
|
|
||
Net loss attributable to common stockholders per share |
|
|
|
|
|
|
||
Diluted (1) |
|
$ |
(0.47 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
||
Weighted average shares outstanding to common shares and OP units |
|
|
|
|
|
|
||
Diluted |
|
|
35,412,984 |
|
|
|
29,747,324 |
|
|
|
|
|
|
|
|
||
FFO per common share and OP unit |
|
|
|
|
|
|
||
Diluted (2) |
|
$ |
0.03 |
|
|
$ |
0.06 |
|
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay any outstanding borrowings, fund and maintain our assets and operations and other general business needs.
Our short-term liquidity requirements consist primarily of debt service requirements, operating expenses, recurring capital expenditures (such as repairs and maintenance of our properties), non-recurring capital expenditures (such as capital improvements and tenant improvements) and distributions on our Preferred OP units. Except as noted below, we expect to meet our short-term liquidity
46
requirements through cash on hand and cash reserves and additional secured and unsecured debt. As of December 31, 2022 and April 6, 2023, we had unrestricted cash and cash equivalents of approximately $12.4 million and $7.8 million, respectively, available for current liquidity needs and restricted cash of approximately $4.7 million and $5.6 million, respectively, which is available for debt service shortfall requirements, certain capital expenditures, real estate taxes and insurance.
We have three mortgage loans on three properties (Highlandtown Shopping Center, Vista Shops at Golden Mile and Spotswood Valley Square Shopping Center) totaling approximately $28.6 million that mature within the next twelve months. We project that we will not have sufficient cash available to pay off the mortgage loans upon maturity, and we are currently seeking to refinance the loans prior to maturity in May 2023, June 2023 and July 2023. There can be no assurances that we will be successful on the refinance of the mortgage loans on favorable terms or at all. If we are unable to refinance the mortgage loans, the lenders have the right to place the loans in default and ultimately foreclose on the properties. Under this circumstance, we would not have any further financial obligation to the lenders as the value of these properties are in excess of the outstanding loan balances.
The Lamont Street Preferred Interest has an outstanding balance of $4.2 million as of December 31, 2022 and must be redeemed on or before September 30, 2023. The Lamont Street Redemption Date can be extended by us to September 30, 2024 and September 30, 2025, in each case subject to certain conditions and approval by Lamont Street. There can be no assurance that we will be successful in exercising these extension options or refinancing the Lamont Street Preferred Interest prior to the Lamont Street Redemption Date. If we are unable to extend or refinance the Lamont Street Preferred Interest prior to the redemption date, Lamont Street may remove the Operating Partnership as the manager of BSV Highlandtown and BSV Spotswood.
In addition, the Basis Term Loan has an outstanding balance of approximately $66.9 million and matures on January 1, 2024, subject to the remaining one-year extension option that is subject to certain conditions and approval by the lender. Management is in discussions with other lenders to refinance the Basis Term Loan, which management believes will be available on acceptable terms based on discussions with lenders and the loan-to-value ratios of the properties securing the Basis Term Loan. There can be no assurances, however, that we will be successful in exercising the extension option or refinancing the Basis Term Loan prior to its maturity. If we are unable to extend or refinance the Basis Term Loan prior to maturity, the lender will have the right to place the loan in default and ultimately foreclose on the six properties securing the loan.
If we fail to refinance the Basis Term Loan and the mortgage loans secured by Highlandtown Shopping Center and Spotswood Valley Square Shopping Center, redeem the Lamont Street Preferred Interest and contribute the applicable properties by the applicable outside dates (as described below), it would be considered a Trigger Event under the Eagles Sub-OP Operating Agreement. See “—Fortress Preferred Equity Investment” below.
Although management believes that we will be able to extend or refinance our debt prior to maturity, including the Basis Term Loan and the Lamont Street Preferred Interest, this is not within our sole control and it is possible that we may be unable to extend or refinance such debt, which creates substantial doubt about our ability to continue as a going concern for a period of one year after the date that the financial statements included in this report are issued, and our independent registered public accounting firm has included an explanatory paragraph regarding our ability to continue as a going concern in its report on our financial statements included in this report. The financial statements included in this report have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Our long-term liquidity requirements are expected to consist primarily of funds necessary for the repayment of debt at or prior to maturity, capital improvements, development and/or redevelopment of properties and property acquisitions. We expect to meet our long-term liquidity requirements through net cash from operations, additional secured and unsecured debt and, subject to market conditions, the issuance of additional shares of common stock, preferred stock or OP units.
Our access to capital depends upon a number of factors over which we have little or no control, including general market conditions, the market’s perception of our current and potential future earnings and cash distributions, our current debt levels and the market price of the shares of our common stock. Although our common stock is quoted on the OTCQX, there is a very limited trading market for our common stock, and if a more active trading market is not developed and sustained, we will be limited in our ability to issue equity to fund our capital needs. If we cannot obtain capital from third-party sources, we may not be able to meet the capital and operating needs of our properties, satisfy our debt service obligations or pay dividends to our stockholders. Until we have greater access to capital, we will likely structure future acquisitions through joint ventures or other syndicated structures in which outside investors will contribute a majority of the capital and we will manage the assets.
As described below, under our existing debt agreements, we are subject to continuing covenants. As of December 31, 2022, we were in compliance with all of the covenants under our debt agreements. In the event of a default, the lenders could accelerate the timing of payments under the applicable debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition and results of operations.
47
Consolidated Indebtedness and Preferred Equity
Indebtedness Summary
The following table sets forth certain information regarding our outstanding indebtedness as of December 31, 2022:
(dollars in thousands) |
|
Maturity Date |
|
Rate Type |
|
Interest |
|
Balance Outstanding at December 31, 2022 |
|
|
|
Basis Term Loan (net of discount of $79) |
|
January 1, 2024 |
|
Floating (2) |
|
6.125% |
(3) |
$ |
67,086 |
|
|
Hollinswood Shopping Center Loan |
|
December 1, 2024 |
|
LIBOR + 2.25% (4) |
|
4.06% |
|
|
12,760 |
|
|
Avondale Shops Loan |
|
June 1, 2025 |
|
Fixed |
|
4.00% |
|
|
2,985 |
|
|
Vista Shops at Golden Mile Loan (net of discount of $12) |
|
June 24, 2023 |
|
Fixed |
|
3.83% |
|
|
11,478 |
|
|
Brookhill Azalea Shopping Center Loan |
|
January 31, 2025 |
|
LIBOR + 2.75% |
|
7.14% |
|
|
8,762 |
|
|
Lamar Station Plaza West Loan (net of discount of $95) |
|
December 10, 2027 |
|
Fixed |
|
5.67% |
|
|
18,317 |
|
|
Lamont Street Preferred Interest (net of discount of $29) (5) |
|
September 30, 2023 |
|
Fixed |
|
13.50% |
|
|
4,241 |
|
|
Highlandtown Village Shopping Center Loan (net of discount of $14) |
|
May 6, 2023 |
|
Fixed |
|
4.13% |
|
|
5,241 |
|
|
Cromwell Field Shopping Center Loan (net of discount of $77) |
|
December 22, 2027 (6) |
|
Fixed (7) |
|
6.71% |
|
|
10,113 |
|
|
Midtown Row Loan (net of discount of $25) |
|
December 1, 2027 |
|
Fixed |
|
6.48% |
|
|
75,975 |
|
|
Midtown Row Mezzanine Loan |
|
December 1, 2027 |
|
Fixed |
|
12.00% |
|
|
17,895 |
|
(8) |
Spotswood Valley Square Shopping Center Loan (net of discount of $31) |
|
July 6, 2023 |
|
Fixed |
|
4.82% |
|
|
11,849 |
|
|
The Shops at Greenwood Village Loan (net of discount of $94) |
|
October 10, 2028 |
|
Prime - 0.35% (9) |
|
4.08% |
|
|
22,772 |
|
|
|
|
|
|
|
|
|
|
|
269,474 |
|
|
Unamortized deferred financing costs, net |
|
|
|
|
|
|
|
|
(1,858 |
) |
|
Total |
|
|
|
|
|
|
|
$ |
267,616 |
|
|
_____________________
48
The following table sets forth our scheduled principal repayments and maturities during each of the next five years and thereafter as of December 31, 2022:
(dollars in thousands) |
|
|
|
|
|
|
||
Year (1) |
|
Amount |
|
|
Percentage |
|
||
2023 |
|
$ |
34,318 |
|
|
|
12.8 |
% |
2024 |
|
|
81,129 |
|
|
|
30.4 |
% |
2025 |
|
|
11,910 |
|
|
|
4.4 |
% |
2026 |
|
|
2,063 |
|
|
|
0.8 |
% |
2027 |
|
|
117,960 |
|
|
|
44.2 |
% |
Thereafter |
|
|
19,772 |
|
|
|
7.4 |
% |
|
|
$ |
267,152 |
|
|
|
100.0 |
% |
_____________________
Basis Term Loan
In December 2019, six of our subsidiaries, as borrowers (collectively, the “Borrowers”), and Big Real Estate Finance I, LLC, a subsidiary of a real estate fund managed by Basis Management Group, LLC (“Basis”), as lender (the “Basis Lender”), entered into a loan agreement (the “Basis Loan Agreement”) pursuant to which the Basis Lender made a senior secured term loan of up to $66.9 million (the “Basis Term Loan”) to the Borrowers. Pursuant to the Basis Loan Agreement, the Basis Term Loan is secured by mortgages on the following properties: Coral Hills, Crestview, Dekalb, Midtown Colonial, Midtown Lamonticello and West Broad. The Basis Term Loan initial maturity was January 1, 2023, subject to two one-year extension options, subject to certain conditions. The Company exercised one of the one-year extension options and the maturity date was extended to January 1, 2024. On June 29, 2022, the Basis Loan Agreement was amended and restated to replace LIBOR with SOFR. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. The Borrowers had entered into an interest rate cap that effectively capped the prior-LIBOR rate at 3.50% per annum. On August 1, 2022, the interest rate cap was modified to cap the SOFR rate at 3.50%. The interest rate cap matured on January 1, 2023. On November 23, 2022, we entered into an interest rate cap agreement, effective January 1, 2023, to cap the SOFR interest rate at 4.65%. As of December 31, 2022, the interest rate of the Basis Term Loan was 6.125% and the outstanding balance was $66.9 million.
Certain of the Borrowers’ obligations under the Basis Loan Agreement are guaranteed by the Company and by Michael Z. Jacoby, the Company’s chairman and chief executive officer, and Thomas M. Yockey, a director of the Company. The Company has agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan.
The Basis Loan Agreement contains certain customary representations and warranties and affirmative negative and restrictive covenants, including certain property related covenants for the properties securing the Basis Term Loan, including a requirement that certain capital improvements be made. The Basis Lender has certain approval rights over amendments or renewals of material leases (as defined in the Basis Loan Agreement) and property management agreements for the properties securing the Basis Term Loan.
If (i) an event of default exists, (ii) the Company's subsidiary serving as the property manager (“BSR”) or any other subsidiary of the Company serving as property manager for one of the secured parties becomes bankrupt, insolvent or a debtor in an insolvency proceeding, or there is a change of control of BSR or such other subsidiary without approval by the Basis Lender, (iii) a default occurs under the applicable management agreement, or (iv) the property manager has engaged in fraud, willful misconduct, misappropriation of funds or is grossly negligent with regard to the applicable property, the Basis Lender may require a Borrower to replace BSR or such other subsidiary of the Company as the property manager and hire a third party manager approved by the Basis Lender to manage the applicable property.
The Borrowers are generally prohibited from selling the properties securing the Basis Term Loan and the Company is prohibited from transferring any interest in any of the Borrowers, in each case without consent from the Basis Lender. The Company is prohibited from engaging in transactions that would result in a Change in Control (as defined in the Basis Loan Agreement) of the Company. Under the Basis Loan Agreement, among other things, it is deemed a Change in Control if Michael Z. Jacoby ceases to be the chairman and chief executive officer of the Company and actively involved in the daily activities and operations of the Company and the Borrowers and a competent and experienced person is not approved by the Basis Lender to replace Mr. Jacoby within 90 days of him ceasing to serve in such roles.
The Basis Loan Agreement provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events and changes in control. If an event of default occurs and is continuing under the Basis Loan Agreement, the Basis Lender may, among other things, require the immediate payment of all amounts owed thereunder.
In addition, if there is a default by Mr. Jacoby under a certain personal loan as long as he has pledged OP units as collateral for such loan, and such default has not been waived or cured, then the Basis Lender will have the right to sweep the Borrowers’ cash account
49
in which they collect and retain rental payments from the properties securing the Basis Term Loan on a daily basis in order for the Basis Lender to create a cash reserve that will serve as collateral for the Basis Term Loan.
The Basis Loan Agreement includes a debt service coverage calculation based on the trailing twelve month's results which includes an adjustment for tenants that are more than one-month delinquent in paying rent. A debt service coverage ratio below 1.10x is a Cash Trap Trigger Event (as defined in the Basis Loan Agreement), which gives the Basis Lender the right to institute a cash management period until the trigger is cured. A debt service coverage ratio below 1.05x for two consecutive calendar quarters gives the Basis Lender the right to remove the Company as manager of the properties. The debt service coverage calculation for the twelve months ended December 31, 2022, was approximately 1.44x.
Basis Preferred Interest
In December 2019, the Operating Partnership and Big BSP Investments, LLC, a subsidiary of a real estate fund managed by Basis (the “Preferred Investor”), entered into an amended and restated operating agreement (the "Sub-OP Operating Agreement") of Broad Street BIG First OP, LLC a subsidiary of the Operating Partnership (the "Sub-OP"). Pursuant to the Sub-OP Operating Agreement, among other things, the Preferred Investor committed to make an investment of up to $10.7 million in the Sub-OP, of which $6.9 million had been funded, in exchange for a 1.0% membership interest in the Sub-OP designated as Class A units (the “Basis Preferred Interest”). On November 23, 2022, the Company redeemed the Basis Preferred Interest in full for approximately $8.5 million with a portion of proceeds from the Preferred Equity Investment.
MVB Loans
In December 2019, the Company, the Operating Partnership and BSR entered into a loan agreement (the “MVB Loan Agreement”) with MVB Bank, Inc. (“MVB”) with respect to a $6.5 million loan consisting of a $4.5 million term loan (the “MVB Term Loan”) and a $2.0 million revolving credit facility (the “MVB Revolver”). The MVB Term Loan had a maturity date of December 27, 2022 and the MVB Revolver had an original maturity date of December 27, 2020, which was extended to June 27, 2023. On March 22, 2022, we entered into agreements (the "MVB Amendments") that provided for a $2.0 million term loan (the "Second MVB Term Loan"). The Second MVB Term Loan had a maturity date of June 27, 2023. On November 23, 2022, the MVB Term Loan, the Second MVB Term Loan and the MVB Revolver were fully repaid for approximately $6.8 million with a portion of the proceeds from the Preferred Equity Investment.
Lamont Street Preferred Interest
In connection with the closing of the Highlandtown and Spotswood Mergers on May 21, 2021 and June 4, 2021, respectively, Lamont Street contributed an aggregate of $3.9 million in exchange for a 1.0% preferred membership interest (the “Lamont Street Preferred Interest”) in BSV Highlandtown Investors LLC (“BSV Highlandtown”) and BSV Spotswood Investors LLC (“BSV Spotswood”) designated as Class A units.
Lamont Street is entitled to a cumulative annual return of 13.5% (the "Lamont Street Class A Return"), of which 10.0% is paid current and 3.5% is accrued. Lamont Street's interests are to be redeemed on or before September 30, 2023 (the “Lamont Street Redemption Date”). The Lamont Street Redemption Date may be extended by us to September 30, 2024 and September 30, 2025, in each case subject to certain conditions, including the payment of a fee equal to 0.25% of Lamont Street's net invested capital for the first extension option and a fee of 0.50% of Lamont Street's net invested capital for the second extension option. If the redemption price is paid on or before the Lamont Street Redemption Date, then the redemption price will be equal to (a) all unreturned capital contributions made by Lamont Street, (b) all accrued but unpaid Lamont Street Class A Return and (c) all costs and other expenses incurred by Lamont Street in connection with the enforcement of its rights under the agreements. Additionally, at the Lamont Street Redemption Date, Lamont Street is entitled to (i) a redemption fee of 0.50% of the capital contributions returned and (ii) an amount equal to (a) the product of (i) the aggregate amount of capital contributions made and (ii) 0.26 less (b) the aggregate amount of Lamont Street Class A Return payments made to Lamont Street (the “Lamont Street Minimum Multiple Amount”). The Lamont Street Minimum Multiple Amount of approximately $1.0 million was recorded as interest expense in the consolidated statement of operations during the second quarter of 2021. As of December 31, 2022, the remaining Lamont Street Minimum Multiple Amount was approximately $0.3 million.
Our Operating Partnership serves as the managing member of BSV Highlandtown and BSV Spotswood. However, Lamont Street has approval rights over certain major decisions, including, but not limited to (i) the incurrence of new indebtedness or modification of existing indebtedness by BSV Highlandtown and BSV Spotswood, or their direct or indirect subsidiaries, (ii) capital expenditures over $100,000, (iii) any proposed change to a property directly or indirectly owned by BSV Highlandtown and BSV Spotswood, (iv) direct or indirect acquisitions of new properties by BSV Highlandtown or BSV Spotswood, (v) the sale or other disposition of any property directly or indirectly owned by BSV Highlandtown or BSV Spotswood, (vi) the issuance of additional membership interests in BSV Highlandtown and BSV Spotswood, (vii) any amendment to an existing material lease related to the properties and (viii) decisions regarding the dissolution, winding up or liquidation of BSV Highlandtown or BSV Spotswood or the filing of any bankruptcy petition by BSV Highlandtown and BSV Spotswood or their subsidiaries.
Under certain circumstances, including an event whereby Lamont Street's interests are not redeemed on or prior to the Lamont Street Redemption Date (as it may be extended), Lamont Street may remove our Operating Partnership as the manager of BSV Highlandtown and BSV Spotswood.
50
Other Mortgage Indebtedness
As of December 31, 2022 and 2021, we had approximately $180.3 million and $94.9 million, respectively, of outstanding mortgage indebtedness secured by individual properties. The Hollinswood mortgage, Vista Shops mortgage, Brookhill mortgage, Highlandtown mortgage, Cromwell mortgage, Spotswood mortgage, Greenwood Village mortgage, Lamar Station Plaza West mortgage and the Midtown Row mortgage require the Company to maintain a debt service coverage ratio (as such terms are defined in the respective loan agreements) as follows in the table below.
|
|
Minimum Debt Service Coverage |
Hollinswood Shopping Center |
|
1.40 to 1.00 |
Vista Shops at Golden Mile |
|
1.50 to 1.00 |
Brookhill Azalea Shopping Center |
|
1.30 to 1.00 |
Highlandtown Village Shopping Center |
|
1.25 to 1.00 |
Cromwell Field Shopping Center (1) |
|
1.20 to 1.00 |
Lamar Station Plaza West (2) |
|
1.30 to 1.00 |
Midtown Row (2) |
|
1.15 to 1.00 |
Spotswood Valley Square Shopping Center |
|
1.15 to 1.00 |
The Shops at Greenwood Village |
|
1.40 to 1.00 |
In connection with the closing of the Midtown Row acquisition in November 2022, we entered into a $76.0 million mortgage loan secured by the property, which bears interest of 6.48% and matures on December 1, 2027. Until December 1, 2025, payments made on the loan will be interest-only.
In December 2022, we refinanced the Lamar Station Plaza West mortgage loan. The new loan has a principal capacity of $19.0 million, of which $18.4 million was funded at closing. This loan matures in December 2027, and carries an interest rate of 5.67%. In addition, the Company refinanced the Cromwell Field Shopping Center mortgage loan. The new loan has a principal balance of $15.0 million, of which $10.2 million was funded at closing. This loan matures in December 2027 and carries an interest rate of 6.71%.
As of December 31, 2022, we were in compliance with all of the covenants under our debt agreements.
Fortress Mezzanine Loan
In connection with the acquisition of Midtown Row, we also entered into a $15.0 million mezzanine loan (the "Fortress Mezzanine Loan") secured by 100% of the membership interests in the entity that owns Midtown Row. The mezzanine loan matures on December 1, 2027. Pursuant to the mezzanine loan agreement, a portion of the interest on the Fortress Mezzanine Loan will be paid in cash (the "Current Interest") and a portion of the interest will be capitalized and added to the principal amount of the Fortress Mezzanine Loan each month (the "Capitalized Interest" and, together with the Current Interest, the "Mezzanine Loan Interest"). The initial Mezzanine Loan Interest rate is 12% per annum, comprised of a 5% Current Interest rate and a 7% Capitalized Interest rate. The Capitalized Interest rate increases each year by 1%. The Fortress Mezzanine Loan (including a prepayment penalty) will be due and payable in connection with a Qualified Public Offering. However, in connection with a Qualified Public Offering, the lender for the Fortress Mezzanine Loan has the right to convert all or a portion of the principal of the Fortress Mezzanine Loan and any prepayment penalty into shares of common stock at a price of $2.00 per share, subject to certain adjustments. The mezzanine loan agreement provides for cross-default in the event of a Trigger Event under the Eagles Sub-OP Operating Agreement or an event of default under the loan agreement for the Midtown Row mortgage.
Interest Rate Derivatives
We may use interest rate derivatives from time to time to manage our exposure to interest rate risks. On December 27, 2019, we entered into an interest rate cap agreement on the full $66.9 million Basis Term Loan to cap the previous variable LIBOR interest rate at 3.5%. On June 29, 2022, the Basis Loan Agreement was amended and restated to replace LIBOR with SOFR. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. On August 1, 2022, the interest rate cap for the Basis Term Loan was modified to cap the SOFR rate at 3.5%. This interest rate cap matured on January 1, 2023. On November 23, 2022, we entered into an interest rate cap agreement, effective January 1, 2023, on the full $66.9 million Basis Term Loan to cap the SOFR interest rate at 4.65%. As of December 31, 2022 and 2021, the interest rate of the Basis Term Loan was 6.125%.
We also entered into two interest rate swap agreements on the Hollinswood loan to fix the interest rate at 4.06%. The swap agreements are effective as of December 27, 2019 on the outstanding balance of $10.2 million and on July 1, 2021 for the additional availability of $3.0 million under the Hollinswood loan.
51
On October 6, 2021, we entered into an interest rate swap agreement on the Greenwood Village Loan to fix the interest rate at 4.082%. Since our derivative instruments are not designated as hedges nor do they meet the criteria for hedge accounting, the fair value is recognized in earnings.
For the year ended December 31, 2022, we recognized a $3.4 million gain as a component of "Derivative fair value adjustment" on the consolidated statement of operations.
Fortress Preferred Equity Investment
On November 22, 2022, the Company, the Operating Partnership and the Eagles Sub-OP entered into a Preferred Equity Investment Agreement with the Fortress Member pursuant to which the Fortress Member invested $80.0 million in the Eagles Sub-OP in exchange for the Fortress Preferred Interest. In connection with the Preferred Equity Investment, the Operating Partnership and the Fortress Member entered into the Eagles Sub-OP Operating Agreement, and the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East in November 2022, as well as Cromwell Field in December 2022. The subsidiaries of the Operating Partnership that indirectly own the following eight properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates: (i) Highlandtown, (ii) Spotswood and (iii) the Portfolio Excluded Properties. The outside dates for Highlandtown, the Portfolio Excluded Properties and Spotswood are May 6, 2023, June 30, 2023 and July 6, 2023, respectively.
Pursuant to the Eagles Sub-OP Operating Agreement, the Fortress Member is entitled to monthly distributions, a portion of which is paid in cash (the “Current Preferred Return”) and a portion that accrues on and is added to the Preferred Equity Investment each month (the “Capitalized Preferred Return” and, together with the Current Preferred Return, the “Preferred Return”). The initial Preferred Return is 12% per annum, comprised of a 5% Current Preferred Return and a 7% Capitalized Preferred Return, provided that, until the Portfolio Excluded Properties are contributed to the Eagles Sub-OP, the Capitalized Preferred Return is increased by 4.75%. The Capitalized Preferred Return increases each year by 1%. Commencing on November 22, 2027, the Preferred Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter. Upon (i) the occurrence of a Trigger Event, (ii) during a three-month period in which distributions on the Preferred Equity Investment are not made because such payments would cause a violation of Delaware law or (iii) if a Qualified Public Offering has not occurred on or prior to November 22, 2027, the entire Preferred Return shall accrue at the then-applicable Preferred Return plus 4% and shall be payable monthly in cash. As of December 31, 2022, the Capitalized Preferred Return was approximately $1.0 million and is reflected within Preferred equity investment in the consolidated balance sheets. For the year ended December 31, 2022, we recognized $0.4 million and $1.1 million of Current Preferred Return and Capitalized Preferred Return, respectively, as a reduction to additional paid-in capital in the consolidated statements of equity.
Upon the closing of a Qualified Public Offering, unless earlier redeemed, the Eagles Sub-OP must redeem the entire Fortress Preferred Interest by payment in cash to the Fortress Member of the full Redemption Amount (as defined below), provided that (i) the Eagles Sub-OP may elect, in its discretion, not to redeem $37.5 million of the Preferred Equity Investment and (ii) $25.0 million of the Preferred Equity Investment (less the amount of the Fortress Mezzanine Loan converted into common stock in connection with such Qualified Public Offering, if any) will be converted to shares of common stock at a price of $2.00 per share, subject to certain adjustments. The Operating Partnership may cause the Eagles Sub-OP to redeem the Fortress Preferred Interest in whole (but not in part), by payment in cash to the Fortress Member of the full Redemption Amount, as long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption. The “Redemption Amount” is equal to the sum of: (i) all outstanding loans advanced to the Eagles Sub-OP by the Fortress Member in accordance with the terms of the Eagles Sub-OP Operating Agreement, together with all accrued and unpaid return on such loans; (ii) the unredeemed balance of the Preferred Equity Investment; (iii) an amount equal to the greater of (x) all accrued and unpaid Preferred Return and (y) a 1.40x minimum multiple on the amount of all loans and capital contributions made by the Fortress Member to the Eagles Sub-OP in accordance with the terms of the Eagles Sub-OP Operating Agreement, which minimum multiple shall be reduced to 1.30x upon the consummation of a Qualified Public Offering; and (iv) all other payments, fees, costs and expenses due or payable to the Fortress Member under the Eagles Sub-OP Operating Agreement, including a $10.0 million exit fee unless the Redemption Amount is paid upon or following the completion of a Qualified Public Offering.
The Operating Partnership serves as the managing member of the Eagles Sub-OP. However, the Fortress Member has approval rights over certain Major Actions (as defined in the Eagles Sub-OP Operating Agreement), including, but not limited to (i) the adoption and approval of annual corporate and property budgets, (ii) the amendment, renewal, termination or modification of Material Contracts, leases over 5,000 square feet and certain loan documents, (iii) the liquidation, dissolution, or winding-up of the Eagles Sub-OP, the Company or any of its subsidiaries, (iv) taking actions of bankruptcy or failing to defend an involuntary bankruptcy action of the Eagles Sub-OP, the Company or any of its subsidiaries, (v) effecting any reorganization or recapitalization of the Eagles Sub-OP, the Company or any of its subsidiaries, (vi) declaring or paying distributions on any equity security of the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (vii) issuing any equity securities in the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (viii) conducting a merger or consolidation of the Eagles Sub-OP, the Company or the Operating Partnership or selling substantially all the assets of the Company and its subsidiaries or the Eagles Sub-OP and its subsidiaries, (ix) amending, terminating or otherwise modifying the loans secured by the properties indirectly owned by the Eagles Sub-OP, subject to certain exceptions, (x) incurring additional indebtedness or making prepayments on indebtedness, subject to certain exceptions; (xi)
52
acquiring any property outside the ordinary course of business of the Company and (xii) selling any property below the minimum release price for such property.
Under the Eagles Sub-OP Operating Agreement, “Trigger Events” include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property owned by the Company or any of its subsidiaries; (ii) a Bankruptcy Event with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Eagles Sub-OP Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the Fortress Mezzanine Loan or the mortgage loans secured by properties owned directly or indirectly by the Eagles Sub-OP (including the Excluded Properties); (v) failure to meet the minimum Total Yield requirements under the Eagles Sub-OP Operating Agreement; (vi) failure to pay the Current Preferred Return (subject to a limited cure period) or failure to make distributions as required by the Eagles Sub-OP Operating Agreement; (vii) the occurrence of a Change of Control; (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Mr. Jacoby (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of common stock and OP units, in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under certain other agreements related to the Preferred Equity Investment.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest by payment to the Fortress Member of the full Redemption Amount upon not less than 90 days prior written notice to the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
Under certain circumstances, including in the event of a Trigger Event or if a Qualified Public Offering has not occurred by November 22, 2027, the Fortress Member has the right (among other rights) to (i) remove the Operating Partnership as the managing member of the Eagles Sub-OP and to serve as the managing member until the Fortress Member is paid the Redemption Amount, (ii) cause the Eagles Sub-OP to sell one or more properties until the entire Fortress Preferred Interest has been redeemed for the Redemption Amount, (iii) cause the Eagles Sub-OP to use certain reserve accounts to pay the Fortress Member the full Redemption Amount, and (iv) terminate all property management and other service agreements with affiliates of the Company.
The obligations of the Operating Partnership under the Eagles Sub-OP are guaranteed by the Company. In addition, Messrs. Jacoby and Yockey guaranteed the full payment of the Redemption Amount in the event of a bankruptcy event of the Company or its subsidiaries without the consent of the Fortress Member or certain other events that interfere with the rights of the Fortress Member under certain other agreements related to the Preferred Equity Investment.
Cash Flows
The table below sets forth the sources and uses of cash reflected in our consolidated statements of cash flows for the years ended December 31, 2022 and 2021.
|
|
For the year ended December 31, |
|
|
|
|
||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Cash and cash equivalents and restricted cash at beginning of period |
|
$ |
11,024 |
|
|
$ |
9,983 |
|
|
$ |
1,041 |
|
Net cash used in operating activities |
|
|
(4,101 |
) |
|
|
(5,586 |
) |
|
|
1,485 |
|
Net cash used in investing activities |
|
|
(135,491 |
) |
|
|
(20,235 |
) |
|
|
(115,256 |
) |
Net cash provided by financing activities |
|
|
145,599 |
|
|
|
26,862 |
|
|
|
118,737 |
|
Cash and cash equivalents and restricted cash at end of period |
|
$ |
17,031 |
|
|
$ |
11,024 |
|
|
$ |
6,007 |
|
Operating Activities- Cash used in operating activities decreased by approximately $1.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Operating cash flows were primarily impacted by a net decrease in changes in operating assets and liabilities of approximately $1.0 million, of which approximately $2.8 million and $0.4 million is related to the net change in accounts payable and accrued liabilities and receivables due from related parties, respectively. This was partially offset by approximately $1.2 million and $0.9 million related to changes in other assets and accounts receivable, respectively.
Investing Activities- Cash used in investing activities during the year ended December 31, 2022 increased by approximately $114.8 million compared to the year ended December 31, 2021. During 2022, we acquired two properties and a real estate parcel which resulted in an increase in net cash outflow of approximately $112.1 million. In addition, we had an approximately $3.1 million increase in capital expenditures for real estate during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Financing Activities- Cash provided by financing activities for the year ended December 31, 2022 increased by approximately $118.7 million compared to the year ended December 31, 2021. The increase resulted primarily from an increase in net borrowings during 2022 under debt agreements, which includes (i) a $91.0 million increase related to the financing of the Midtown Row acquisition; (ii) an $80.0 million increase related to the Fortress Preferred Equity Investment; (iii) a net increase of $2.9 million related to the refinancing of Lamar Station Plaza West; (iv) a $7.8 million decrease related to the payoff of the Basis Preferred Interest; (v) a net $5.3 million decrease related to the payoff of the MVB Term Loan, MVB Second Term Loan and MVB Revolver; (vi) a net decrease of $3.7
53
million due to the refinancing of the Cromwell mortgage loan and payoff of the mezzanine loan; and (vii) a $3.5 million decrease related to the payoff of the Lamar Station Plaza East mortgage loan. The net increases in 2022 were offset by net borrowings during 2021, which included (i) a $23.5 million increase related to the Greenwood Village acquisition; (ii) a $3.9 million increase related to the Lamont Street Preferred Interest; (iii) a net increase of $2.8 million related to the refinancing of the Vista Shops mortgage loan; (iv) the $1.0 million Lamont Street Minimum Multiple; (v) the receipt of a second unsecured loan under the PPP Program in the amount of $0.8 million; and (vi) a $1.4 million decrease related to the payoff of the Cromwell land loan. Additionally, debt origination and discount fees increased by approximately $6.3 million during the year ended December 31, 2022 compared to the prior year.
Inflation
Inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and repair and maintenance costs. In addition, inflation could also impact our general and administrative expenses, the interest on our debt if variable or refinanced in a high-inflationary environment, our cost of capital, and our cost of development, redevelopment, maintenance or other operating activities. Substantially all of our leases provide for the recovery of increases in real estate taxes and operating expenses. In addition, substantially all of our leases provide for annual rent increases. We believe that inflationary increases may be offset in part by the contractual rent increases and expense escalations previously described. In addition, our leases for the residential portion of Midtown Row generally have lease terms of 11.5 months or nine months, which we believe reduces our exposure to the effects of inflation, although an extreme and sustained escalation in costs could have a negative impact on our residents and their ability to absorb rent increases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined in Item 10 of Regulation S-K, the Company is not required to provide this information.
54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Broad Street Realty, Inc.
Index to Consolidated Financial Statements
and Financial Statement Schedules
|
Page |
57 |
|
58 |
|
59 |
|
60 |
|
61 |
|
62 |
|
64 |
|
Consolidated Financial Statement Schedules |
|
95 |
55
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Broad Street Realty, Inc.
Bethesda, Maryland
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Broad Street Realty, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the years then ended, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has loans with varying debt maturities through January 2024 for which there can be no guarantee that the Company will be able to refinance or extend the maturity date of the loans. This condition raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Purchase Price Allocation
As described in Note 3 to the consolidated financial statements, during the year ended December 31, 2022 the Company completed two significant asset acquisitions for total consideration of $132.6 million. Management allocates the total consideration to the acquired assets and liabilities on a relative fair value basis at the acquisition date. As part of the purchase price allocation, management estimates the fair value of each component for asset acquisitions by using judgments regarding market-based assumptions used in the estimated
56
cash flow projections, including forecasts of future revenue and operating expense growth rates, market lease rates, comparable land values, lease-up periods, capitalization rates, and discount rates.
We identified the allocation of the purchase price related to the two asset acquisitions in 2022 as a critical audit matter. Management applies judgment in selecting market-based assumptions used in the estimated cash flow projections to value the acquired assets, including forecasts of future revenue and operating expense growth rates, market lease rates, comparable land values, lease-up periods, capitalization rates, and discount rates. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort, including the need for specialized knowledge and skill.
The primary procedures we performed to address this critical audit matter included:
Preferred Equity Investment Transaction
As described in Note 8 to the consolidated financial statements, on November 22, 2022, the Company, the Operating Partnership and Broad Street Eagles JV LLC entered into a Preferred Equity Investment Agreement with CF Flyer PE Investor LLC (the “Fortress Member”), pursuant to which the Fortress Member invested $80.0 million (the “Preferred Equity Investment”). The Preferred Equity Investment provides the investor with certain redemption features upon the occurrence of certain events. Broad Street Eagles JV LLC was a newly formed entity and therefore was evaluated under the variable interest entities model.
We identified the assessment of the accounting for the Preferred Equity Investment and the assessment of variable interest entities associated with this transaction as a critical audit matter, due to (i) the complexity in assessing the terms of the agreements and the impact of those terms on the overall accounting for the Preferred Equity Investment and (ii) the judgment in determining whether Broad Street Eagles JV LLC met the definition of a VIE and whether the Company is the primary beneficiary requiring consolidation of Broad Street Eagles JV LLC. Auditing the assessment of the accounting for the Preferred Equity Investment and the assessment of variable interest entities involved especially complex auditor judgment and increased audit effort, including the need for specialized knowledge and skill.
The primary procedures we performed to address this critical audit matter included:
/s/ BDO USA, LLP
We have served as the Company's auditor since 2018.
Potomac, Maryland
April 28, 2023
57
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Assets |
|
|
|
|
|
|
||
Real estate properties |
|
|
|
|
|
|
||
Land |
|
$ |
67,225 |
|
|
$ |
49,341 |
|
Building and improvements |
|
|
300,699 |
|
|
|
171,894 |
|
Intangible lease assets |
|
|
41,228 |
|
|
|
35,435 |
|
Construction in progress |
|
|
4,231 |
|
|
|
1,247 |
|
Furniture and equipment |
|
|
1,711 |
|
|
|
— |
|
Less accumulated depreciation and amortization |
|
|
(42,047 |
) |
|
|
(23,683 |
) |
Total real estate properties, net |
|
|
373,047 |
|
|
|
234,234 |
|
|
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
12,356 |
|
|
|
2,786 |
|
Restricted cash |
|
|
4,675 |
|
|
|
8,238 |
|
Tenant and accounts receivable, net of allowance of $165 and $75, respectively |
|
|
1,874 |
|
|
|
1,812 |
|
Other assets, net |
|
|
10,334 |
|
|
|
4,599 |
|
Total Assets |
|
$ |
402,286 |
|
|
$ |
251,669 |
|
|
|
|
|
|
|
|
||
Liabilities and Equity |
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
||
Mortgage and other indebtedness, net (includes $17,895 and $0, respectively, at fair value under the fair value option) |
|
$ |
267,616 |
|
|
$ |
178,982 |
|
Accounts payable and accrued liabilities |
|
|
15,411 |
|
|
|
11,384 |
|
Unamortized intangible lease liabilities, net |
|
|
1,553 |
|
|
|
2,729 |
|
Payables due to related parties |
|
|
44 |
|
|
|
626 |
|
Deferred tax liabilities, net |
|
|
3,968 |
|
|
|
8,964 |
|
Deferred revenue |
|
|
1,252 |
|
|
|
860 |
|
Total liabilities |
|
|
289,844 |
|
|
|
203,545 |
|
|
|
|
|
|
|
|
||
Commitments and contingencies |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Temporary Equity |
|
|
|
|
|
|
||
Redeemable noncontrolling Fortress preferred interest |
|
|
73,697 |
|
|
|
— |
|
|
|
|
|
|
|
|
||
Permanent Equity |
|
|
|
|
|
|
||
Preferred stock, $0.01 par value, 1,000,000 shares authorized: Series A preferred stock, 20,000 shares authorized, 500 shares issued and outstanding at December 31, 2022 and 2021, respectively |
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value, 50,000,000 shares authorized, |
|
|
323 |
|
|
|
319 |
|
Additional paid in capital |
|
|
72,097 |
|
|
|
70,022 |
|
Accumulated deficit |
|
|
(33,294 |
) |
|
|
(19,543 |
) |
Accumulated other comprehensive income |
|
|
56 |
|
|
|
— |
|
Total Broad Street Realty, Inc. stockholders' equity |
|
|
39,182 |
|
|
|
50,798 |
|
Noncontrolling interest |
|
|
(437 |
) |
|
|
(2,674 |
) |
Total permanent equity |
|
|
38,745 |
|
|
|
48,124 |
|
Total Liabilities, Temporary Equity and Permanent Equity |
|
$ |
402,286 |
|
|
$ |
251,669 |
|
The accompanying notes are an integral part of these consolidated financial statements.
58
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
|
|
For the Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenues |
|
|
|
|
|
|
||
Rental income |
|
$ |
29,871 |
|
|
$ |
21,408 |
|
Commissions |
|
|
2,523 |
|
|
|
2,836 |
|
Management and other income |
|
|
557 |
|
|
|
1,105 |
|
Total revenues |
|
|
32,951 |
|
|
|
25,349 |
|
Operating Expenses |
|
|
|
|
|
|
||
Cost of services |
|
|
1,917 |
|
|
|
1,824 |
|
Depreciation and amortization |
|
|
17,436 |
|
|
|
12,501 |
|
Property operating |
|
|
8,672 |
|
|
|
5,694 |
|
Bad debt expense |
|
|
235 |
|
|
|
34 |
|
General and administrative |
|
|
13,513 |
|
|
|
11,360 |
|
Total operating expenses |
|
|
41,773 |
|
|
|
31,413 |
|
Operating loss |
|
|
(8,822 |
) |
|
|
(6,064 |
) |
|
|
|
|
|
|
|
||
Other income (expense) |
|
|
|
|
|
|
||
Net interest and other income (expense) |
|
|
26 |
|
|
|
(33 |
) |
Derivative fair value adjustment |
|
|
2,638 |
|
|
|
353 |
|
Net loss on fair value change on debt held under the fair value option |
|
|
(3,151 |
) |
|
|
— |
|
Interest expense |
|
|
(12,710 |
) |
|
|
(9,961 |
) |
(Loss) gain on extinguishment of debt |
|
|
(59 |
) |
|
|
1,528 |
|
Other expense |
|
|
(52 |
) |
|
|
(100 |
) |
Total other expense |
|
|
(13,308 |
) |
|
|
(8,213 |
) |
|
|
|
|
|
|
|
||
Income tax benefit |
|
|
5,857 |
|
|
|
3,533 |
|
Net loss |
|
$ |
(16,273 |
) |
|
$ |
(10,744 |
) |
Less: Preferred equity return on Fortress preferred equity |
|
|
(1,492 |
) |
|
|
— |
|
Less: Preferred OP units return |
|
|
(48 |
) |
|
|
— |
|
Plus: Net loss attributable to noncontrolling interest |
|
|
2,522 |
|
|
|
1,236 |
|
Net loss attributable to common stockholders |
|
$ |
(15,291 |
) |
|
$ |
(9,508 |
) |
|
|
|
|
|
|
|
||
Net loss attributable to common stockholders per share |
|
|
|
|
|
|
||
Basic and diluted |
|
$ |
(0.47 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
||
Weighted average shares outstanding |
|
|
|
|
|
|
||
Basic and diluted |
|
|
32,378,526 |
|
|
|
26,928,510 |
|
The accompanying notes are an integral part of these consolidated financial statements.
59
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(in thousands)
|
|
For the Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net loss |
|
$ |
(16,273 |
) |
|
$ |
(10,744 |
) |
Other comprehensive income: |
|
|
|
|
|
|
||
Change in fair value due to credit risk on debt held under the fair value option |
|
|
56 |
|
|
|
— |
|
Total other comprehensive income |
|
|
56 |
|
|
|
— |
|
Comprehensive loss |
|
$ |
(16,217 |
) |
|
$ |
(10,744 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
60
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Equity
(in thousands, except share amounts)
|
|
Preferred Stock |
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Shares |
|
|
Par Value |
|
|
Shares |
|
|
Par Value |
|
|
Additional |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Income |
|
|
Non-controlling Interest |
|
|
Total Equity |
|
|||||||||
Balance at December 31, 2020 |
|
|
500 |
|
|
$ |
— |
|
|
|
22,624,679 |
|
|
$ |
225 |
|
|
$ |
54,622 |
|
|
$ |
(10,035 |
) |
|
$ |
— |
|
|
$ |
(1,328 |
) |
|
$ |
43,484 |
|
Issuance of Common Stock |
|
|
— |
|
|
|
— |
|
|
|
9,119,794 |
|
|
|
91 |
|
|
|
14,813 |
|
|
|
— |
|
|
|
— |
|
|
|
(110 |
) |
|
|
14,794 |
|
Grants of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
148,657 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
(7,785 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Shares surrendered for taxes upon vesting |
|
|
— |
|
|
|
— |
|
|
|
(11,917 |
) |
|
|
— |
|
|
|
(33 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(33 |
) |
Issuance of warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
639 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
642 |
|
Tax effect of change in ownership percentage of OP |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,508 |
) |
|
|
— |
|
|
|
(1,236 |
) |
|
|
(10,744 |
) |
Balance at December 31, 2021 |
|
|
500 |
|
|
|
— |
|
|
|
31,873,428 |
|
|
|
319 |
|
|
|
70,022 |
|
|
|
(19,543 |
) |
|
|
— |
|
|
|
(2,674 |
) |
|
|
48,124 |
|
Issuance of Common Stock |
|
|
— |
|
|
|
— |
|
|
|
96,170 |
|
|
|
2 |
|
|
|
294 |
|
|
|
— |
|
|
|
— |
|
|
|
(296 |
) |
|
|
— |
|
Grants of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
138,262 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeitures of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
(21,987 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Shares surrendered for taxes upon vesting |
|
|
— |
|
|
|
— |
|
|
|
(4,307 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Issuance of warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,397 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,397 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
175,408 |
|
|
|
2 |
|
|
|
1,935 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,937 |
|
Tax effect of change in ownership percentage of OP |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,006 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,006 |
) |
Issuance of common OP units |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
807 |
|
|
|
807 |
|
Issuance of preferred OP units |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,220 |
|
|
|
4,220 |
|
Preferred equity return on Fortress preferred equity investment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,492 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,492 |
) |
Preferred OP units return |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(48 |
) |
|
|
— |
|
|
|
— |
|
|
|
28 |
|
|
|
(20 |
) |
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56 |
|
|
|
— |
|
|
|
56 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13,751 |
) |
|
|
— |
|
|
|
(2,522 |
) |
|
|
(16,273 |
) |
Balance at December 31, 2022 |
|
|
500 |
|
|
$ |
— |
|
|
|
32,256,974 |
|
|
$ |
323 |
|
|
$ |
72,097 |
|
|
$ |
(33,294 |
) |
|
$ |
56 |
|
|
$ |
(437 |
) |
|
$ |
38,745 |
|
The accompanying notes are an integral part of these consolidated financial statements.
61
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
|
|
For the Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net loss |
|
$ |
(16,273 |
) |
|
$ |
(10,744 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
||
Deferred income tax benefit |
|
|
(5,857 |
) |
|
|
(3,533 |
) |
Depreciation and amortization |
|
|
18,559 |
|
|
|
13,343 |
|
Minimum return on basis preferred interest |
|
|
(1,112 |
) |
|
|
(335 |
) |
Loss (gain) on extinguishment of debt |
|
|
59 |
|
|
|
(1,528 |
) |
Straight-line rent receivable |
|
|
(945 |
) |
|
|
(512 |
) |
Straight-line rent liability |
|
|
(35 |
) |
|
|
(29 |
) |
Stock-based compensation |
|
|
1,937 |
|
|
|
642 |
|
Change in fair value of derivatives |
|
|
(2,638 |
) |
|
|
(353 |
) |
Change in fair value on debt held under the fair value option |
|
|
3,151 |
|
|
|
— |
|
Bad debt expense |
|
|
235 |
|
|
|
34 |
|
Write-off of pre-acquisition costs |
|
|
— |
|
|
|
73 |
|
Write-off of related party receivables |
|
|
8 |
|
|
|
— |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(110 |
) |
|
|
822 |
|
Other assets |
|
|
(838 |
) |
|
|
221 |
|
Receivables due from related parties |
|
|
201 |
|
|
|
(185 |
) |
Accounts payable and accrued liabilities |
|
|
(786 |
) |
|
|
(3,545 |
) |
Payables due to related parties |
|
|
6 |
|
|
|
(14 |
) |
Deferred revenues |
|
|
337 |
|
|
|
57 |
|
Net cash used in operating activities |
|
|
(4,101 |
) |
|
|
(5,586 |
) |
Cash flows from investing activities |
|
|
|
|
|
|
||
Acquisitions of real estate, net of cash and restricted cash received |
|
|
(129,534 |
) |
|
|
(16,945 |
) |
Capitalized pre-acquisition costs, net of refunds |
|
|
197 |
|
|
|
(196 |
) |
Capital expenditures for real estate |
|
|
(6,154 |
) |
|
|
(3,094 |
) |
Net cash used in investing activities |
|
|
(135,491 |
) |
|
|
(20,235 |
) |
Cash flows from financing activities |
|
|
|
|
|
|
||
Borrowings under debt agreements |
|
|
121,601 |
|
|
|
41,461 |
|
Preferred equity investment |
|
|
80,000 |
|
|
|
— |
|
Repayments under debt agreements |
|
|
(49,995 |
) |
|
|
(14,221 |
) |
Taxes remitted upon vesting of restricted stock |
|
|
(5 |
) |
|
|
(33 |
) |
Distributions to preferred noncontrolling interests |
|
|
(20 |
) |
|
|
— |
|
Preferred equity return on preferred equity investment |
|
|
(100 |
) |
|
|
— |
|
Debt and temporary equity origination and discount fees |
|
|
(7,382 |
) |
|
|
(1,123 |
) |
Proceeds from related parties |
|
|
1,917 |
|
|
|
1,301 |
|
Payments to related parties |
|
|
(417 |
) |
|
|
(523 |
) |
Net cash provided by financing activities |
|
|
145,599 |
|
|
|
26,862 |
|
Increase in cash, cash equivalents, and restricted cash |
|
|
6,007 |
|
|
|
1,041 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
11,024 |
|
|
|
9,983 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
17,031 |
|
|
$ |
11,024 |
|
The accompanying notes are an integral part of these consolidated financial statements.
62
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
|
|
For the Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Reconciliation of cash and cash equivalents and restricted cash: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
12,356 |
|
|
$ |
2,786 |
|
Restricted cash |
|
|
4,675 |
|
|
|
8,238 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
17,031 |
|
|
$ |
11,024 |
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
||
Interest paid |
|
$ |
11,297 |
|
|
$ |
8,473 |
|
Taxes paid (refunded), net |
|
|
32 |
|
|
|
(159 |
) |
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
||
Forgiveness of Paycheck Protection Program loan |
|
|
— |
|
|
|
1,530 |
|
Acquisition of real estate |
|
|
(20,884 |
) |
|
|
(46,406 |
) |
Common shares issued in Mergers |
|
|
— |
|
|
|
14,892 |
|
Common OP units issued in acquisitions |
|
|
807 |
|
|
|
— |
|
Preferred OP units issued in acquisition |
|
|
4,220 |
|
|
|
— |
|
Debt assumed in Mergers |
|
|
15,466 |
|
|
|
31,514 |
|
Warrants issued in acquisition |
|
|
391 |
|
|
|
— |
|
Warrants issued with Preferred Equity Investment and Mezzanine Loan |
|
|
2,006 |
|
|
|
— |
|
Capitalized Preferred Return |
|
|
(1,047 |
) |
|
|
— |
|
Accrued Current Preferred Return |
|
|
(445 |
) |
|
|
— |
|
Accrued acquisition costs |
|
|
46 |
|
|
|
870 |
|
Accrued offering costs |
|
|
— |
|
|
|
457 |
|
Accrued pre-acquisition costs |
|
|
2 |
|
|
|
4 |
|
Accrued capital expenditures for real estate |
|
|
1,254 |
|
|
|
229 |
|
The accompanying notes are an integral part of these consolidated financial statements.
63
Broad Street Realty, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 2022
Note 1 - Organization and Nature of Business
Broad Street Realty, Inc. (the “Company”) is focused on owning and managing essential grocery-anchored and mixed-use assets located in densely populated technology employment hubs and higher education centers within the Mid-Atlantic, Southeast, and Colorado markets. As of December 31, 2022, the Company had gross real estate assets of $410.1 million (gross real estate properties less gross real estate intangibles liabilities) in 17 real estate properties. In addition, the Company provides commercial real estate brokerage services for its own portfolio and third-party office, industrial and retail operators and tenants.
(in thousands) |
|
|
|
|
|
|
Property Name |
|
City/State |
|
Total Gross Real Estate Assets at December 31, 2022 |
|
|
Avondale Shops |
|
Washington, D.C. |
|
$ |
8,422 |
|
Brookhill Azalea Shopping Center |
|
Richmond, VA |
|
|
17,374 |
|
Cromwell Field Shopping Center |
|
Glen Burnie, MD |
|
|
18,229 |
|
Coral Hills Shopping Center |
|
Capitol Heights, MD |
|
|
16,502 |
|
Crestview Square Shopping Center |
|
Landover Hills, MD |
|
|
18,653 |
|
Dekalb Plaza |
|
East Norriton, PA |
|
|
27,200 |
|
The Shops at Greenwood Village |
|
Greenwood Village, CO |
|
|
32,011 |
|
Highlandtown Village Shopping Center |
|
Baltimore, MD |
|
|
7,349 |
|
Hollinswood Shopping Center |
|
Baltimore, MD |
|
|
24,910 |
|
Lamar Station Plaza East |
|
Lakewood, CO |
|
|
8,658 |
|
Lamar Station Plaza West |
|
Lakewood, CO |
|
|
22,834 |
|
Midtown Colonial |
|
Williamsburg, VA |
|
|
17,705 |
|
Midtown Lamonticello |
|
Williamsburg, VA |
|
|
16,043 |
|
Midtown Row |
|
Williamsburg, VA |
|
|
125,383 |
|
Spotswood Valley Square Shopping Center |
|
Harrisonburg, VA |
|
|
14,400 |
|
Vista Shops at Golden Mile |
|
Fredrick, MD |
|
|
14,693 |
|
West Broad Commons Shopping Center |
|
Richmond, VA |
|
|
19,736 |
|
|
|
|
|
$ |
410,102 |
|
The Company is structured as an “Up-C” corporation with substantially all of its operations conducted through Broad Street Operating Partnership, LP (the “Operating Partnership”) and its direct and indirect subsidiaries. As of December 31, 2022, the Company owned 85.3% of the Class A common units of limited partnership interest in its Operating Partnership (“Common OP units”) and Series A preferred units of limited partnership interest in its Operating Partnership (“Preferred OP units” and, together with the Common OP units, “OP units”) and is the sole member of the sole general partner of the Operating Partnership. The Company began operating in its current structure on December 27, 2019 upon the completion of the Initial Mergers (as defined below) and operates as a single reporting segment.
Merger with MedAmerica Properties Inc.
On May 28, 2019, MedAmerica Properties Inc. and certain of its subsidiaries (“MedAmerica”) entered into 19 separate agreements and plans of merger (collectively, the “Merger Agreements”) with each of Broad Street Realty, LLC (“BSR”), Broad Street Ventures, LLC (“BSV”) and each of the separate 17 separate entities (collectively with BSR and BSV, the “Broad Street Entities”) that owned the properties acquired by the Company in the Initial Mergers (as defined below) and the additional Mergers (as defined below). The Merger Agreements relate to a series of 19 mergers (“Mergers”) whereby BSR, BSV and each other Broad Street Entity became subsidiaries of the Company.
On December 27, 2019, the Company completed 11 of the Mergers (the “Initial Mergers”), including the Mergers with BSR and BSV and the Mergers with nine other Broad Street Entities. Upon completion of the Initial Mergers, MedAmerica’s name was changed to “Broad Street Realty, Inc.”
On December 31, 2019, the Company completed one additional Merger whereby it acquired Brookhill Azalea Shopping Center. On July 2, 2020, the Company closed one Merger whereby it acquired Lamar Station Plaza East. During 2021, the Company closed additional Mergers whereby it acquired Highlandtown Village Shopping Center, Cromwell Field Shopping Center, Spotswood Valley Square Shopping Center and The Shops at Greenwood Village on May 21, 2021, May 26, 2021, June 4, 2021, and October 6, 2021, respectively.
64
On November 23, 2022, the Company completed the last Merger whereby it acquired Lamar Station Plaza West. The Company terminated the merger agreement related to the Cypress Point property due to the performance of the property.
As consideration for the Mergers, the Company issued an aggregate 28,744,641 shares of common stock and 3,401,433 Common OP units to prior investors in the Broad Street Entities. In addition, certain prior investors in the Broad Street Entities received an aggregate of approximately $1.9 million in cash as a portion of the consideration for the Mergers.
Liquidity, Management’s Plans and Going Concern
The Company’s rental revenue and operating results depend significantly on the occupancy levels at its properties and the ability of its tenants to meet their rent and other obligations to the Company. The Company’s projected operating model reflects sufficient cash flow to cover its obligations over the next twelve months, except as noted below.
The Company’s financing is generally comprised of mortgage loans secured by the Company’s properties that typically mature within to five years of origination. The Company is currently in contact with lenders and brokers in the marketplace to restructure the Company’s debt.
Specifically, as of December 31, 2022, the Company has three mortgage loans on three properties with a combined principal balance outstanding of approximately $28.6 million that mature within twelve months of the date that these financial statements are issued. The Company projects that it will not have sufficient cash available to pay off the mortgage loans upon maturity and is currently seeking to refinance the loans prior to maturity in May 2023, June 2023 and July 2023. There can be no assurances that the Company will be successful in its efforts to refinance the mortgage loans on favorable terms or at all. If the Company is unable to refinance these mortgage loans, the lenders have the right to place the loans in default and ultimately foreclose on the properties. Under this circumstance, the Company would not have any further financial obligations to the lenders as the values of these properties are in excess of the outstanding loan balances.
The Lamont Street Preferred Interest (as defined below) has an outstanding balance of $4.2 million as of December 31, 2022 and must be redeemed on or before September 30, 2023. The Lamont Street Redemption Date (as defined below) can be extended by the Company to September 30, 2024 and September 30, 2025, in each case subject to certain conditions and approval by Lamont Street (as defined below). There can be no assurance that the Company will be successful in exercising these extension options or refinancing the Lamont Street Preferred Interest prior to the Lamont Street Redemption Date. If the Company is unable to extend or refinance the Lamont Street Preferred Interest prior to the redemption date, Lamont Street (as defined below) may remove the Operating Partnership as the manager of the BSV Highlandtown and BSV Spotswood (each as defined below).
In addition, the Basis Term Loan (as defined below), has an outstanding balance of $66.9 million and matures on January 1, 2024, subject to the remaining one-year extension option that is subject to certain conditions, including a material adverse change clause, and approval by the lender. The Company exercised one of the one-year extension options and is in discussions with other parties to refinance the Basis Term Loan with new loans or preferred equity. There can be no assurances, however, that the Company will be successful in exercising the remaining extension option or refinancing the Basis Term Loan prior to its maturity. If the Company is unable to extend or refinance the Basis Term Loan prior to maturity, the lender will have the right to place the loan in default and ultimately foreclose on the six properties securing the loan.
If the Company fails to refinance the Basis Term Loan and the mortgage loans secured by Highlandtown Shopping Center and Spotswood Valley Square Shopping Center, redeem the Lamont Street Preferred Interest and contribute the applicable properties by the applicable outside dates (as described below), it would be considered a Trigger Event (as defined below) under the Eagles Sub-OP Operating Agreement (as defined below). See Note 8 below.
Management is in discussions with various lenders to extend or refinance its debt prior to maturity, including the Basis Term Loan and the Lamont Street Preferred Interest. However, there is no assurance that the Company will be able to extend or refinance such debt, which creates substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date that these financial statements are issued. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
The Company's access to capital depends upon a number of factors over which the Company has little or no control, including general market conditions, the market's perception of the Company's current and potential future earnings and cash distributions, the Company's current debt levels and the market price of the shares of the Company's common stock. Although the Company's common stock is quoted on the OTCQX Best Market, an over-the-counter stock market, there is a very limited trading market for the Company's common stock, and if a more active trading market is not developed and sustained, the Company will be limited in its ability to issue equity to fund its capital needs. If the Company cannot obtain capital from third-party sources, the Company may not be able to meet the capital and operating needs of its properties, satisfy its debt service obligations or pay dividends to its stockholders.
Under the Company's debt agreements, the Company is subject to certain covenants. In the event of a default, the lenders could accelerate the timing of payments under the applicable debt obligations and the Company may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on the
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Company's liquidity, financial condition and results of operations. The Company was in compliance with all covenants under its debt agreements as of December 31, 2022.
Note 2 - Accounting Policies and Related Matters
Use of Estimates
The preparation of the consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the amounts of revenue and expense reported in the period. Significant estimates are made for the valuation of real estate and any related intangibles and fair value assessments with respect to purchase price allocations. Actual results may differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries and subsidiaries in which the Company has a controlling interest. All intercompany transactions and balances have been eliminated in consolidation. There are no material differences between the Company and the Operating Partnership as of December 31, 2022.
When the Company obtains an economic interest in an entity, management evaluates the entity to determine: (i) whether the entity is a variable interest entity (“VIE”), (ii) in the event that the entity is a VIE, whether the Company is the primary beneficiary of the entity, and (iii) in the event the entity is not a VIE, whether the Company otherwise has a controlling financial interest. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
The Company consolidates: (i) entities that are VIEs for which the Company is deemed to be the primary beneficiary and (ii) entities that are not VIEs which the Company controls. If the Company has an interest in a VIE but is not determined to be the primary beneficiary, the Company accounts for its interest under the equity method of accounting. Similarly, for those entities which are not VIEs and the Company does not have a controlling financial interest, the Company accounts for its interest under the equity method of accounting. The Company continually reconsiders its determination of whether an entity is a VIE and whether the Company qualifies as its primary beneficiary. The Company consolidates the Operating Partnership, the Sub-OP (as defined in Note 6 under the heading “—Basis Preferred Interest”), BSV Highlandtown (as defined in Note 6 under the heading “—Lamont Street Preferred Interest”), BSV Spotswood (as defined in Note 6 under the heading “—Lamont Street Preferred Interest”), and the Eagles Sub-OP (as defined in Note 8), VIEs in which the Company is considered the primary beneficiary.
Noncontrolling Interest
The portion of equity not owned by the Company in entities controlled by the Company, and thus consolidated, is presented as noncontrolling interest and classified as a component of consolidated equity, separate from total stockholders’ equity on the Company’s consolidated balance sheets. The amount recorded will be based on the noncontrolling interest holder’s initial investment in the consolidated entity, adjusted to reflect the noncontrolling interest holder’s share of earnings or losses in the consolidated entity, any distributions received or additional contributions made by the noncontrolling interest holder and conversion of OP units into common stock. The earnings or losses from the entity attributable to noncontrolling interests are reflected in “net income (loss) attributable to noncontrolling interest” in the consolidated statements of operations.
Segment Reporting
The Company owns, operates, develops and redevelops primarily grocery-anchored shopping centers, street retail-based properties and mixed-use assets. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single reportable segment.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The majority of the Company’s cash and cash equivalents are held at major commercial banks which at times may exceed the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses to date on invested cash. As of December 31, 2022, the Company had no cash equivalents.
Amounts included in restricted cash represents escrow deposits held for real estate taxes, property maintenance, insurance and other requirements at specific properties as required by lending institutions.
Revenue Recognition
The Company earns revenue from the following: Leases of Real Estate Properties, Leasing Commissions, Property and Asset Management, Engineering Services, Development Services, and Capital Transactions.
Leases of Real Estate Properties: At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses the terms and conditions to determine the proper lease classification. Currently, all of the Company’s lease arrangements are classified as operating leases. Rental revenue for operating leases is recognized on a straight-line basis over the lease
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term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If the Company determines that future lease payments are not probable of collection, the Company will account for these leases on a cash basis. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of the tenant improvements is subject to significant judgment. If the Company’s assessment of the owner of the tenant improvements for accounting purposes were different, the timing and amount of revenue recognized would be impacted.
A majority of the Company’s leases require tenants to make estimated payments to the Company to cover their proportional share of operating expenses, including, but not limited to, real estate taxes, property insurance, routine maintenance and repairs, utilities and property management expenses. The Company collects these estimated expenses and is reimbursed by tenants for any actual expense in excess of estimates or reimburses tenants if collected estimates exceed actual operating results. The reimbursements are recorded in rental income and the expenses are recorded in property-related expenses.
The Company adopted Accounting Standards Codification ("ASC") Topic 842, Leases effective January 1, 2019 under the modified retrospective approach and elected the optional transition method to apply the provisions of ASC 842 as of the effective date, rather than the earliest period presented. The Company elected the "package of practical expedients," which permits it not to reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. The Company made an accounting policy election to exempt short-term leases of 12 months or less from balance sheet recognition requirements associated with the new standard. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being material to the Company. The Company also elected the practical expedient for lessors to combine the lease and non-lease components (primarily impacts common area maintenance reimbursements).
Contractual rent increases of renewal options are often fixed at the time of the initial lease agreement which may result in tenants being able to exercise their renewal options at amounts that are less than the fair value of the rent at the date of the renewal. In addition to fixed base rents, certain rental income derived from the Company's tenant leases is variable and may be dependent on percentage rent. Variable lease payments from percentage rents are earned by the Company in the event the tenant's gross sales exceed certain amounts. Terms of percentage rent are agreed upon in the tenant’s lease and will vary based on the tenant's sales. Variable lease payments consisted of percentage rent and tenant expense reimbursements of operating expenses, common area maintenance expenses, real estate taxes and insurance of the respective properties amounted to $6.9 million and $4.9 million for the years ended December 31, 2022 and 2021, respectively. These amounts have been included in rental income on the consolidated statements of operations.
Leasing Commissions: The Company earns leasing commissions as a result of providing strategic advice and connecting tenants to property owners in the leasing of retail space. The Company records commission revenue on real estate leases at the point in time when the performance obligation is satisfied, which is generally upon lease execution. Terms and conditions of a commission agreement may include, but are not limited to, execution of a signed lease agreement and future contingencies, including tenant’s occupancy, payment of a deposit or payment of first month’s rent (or a combination thereof). The Company’s performance obligation will typically be satisfied upon execution of a lease and the portion of the commission that is contingent on a future event will likely be recognized if deemed not subject to significant reversal, based on the Company’s estimates and judgments. The Company accounts for leasing commissions under ASC Topic 606, Revenue from Contracts with Customers.
Property and Asset Management Fees: The Company provides real estate management services for owners of properties, representing a series of daily performance obligations delivered over time. Pricing is generally in the form of a monthly management fee based upon property-level cash receipts or some other variable metric.
When accounting for reimbursements of third-party expenses incurred on a client’s behalf, the Company determines whether it is acting as a principal or an agent in the arrangement. When the Company is acting as a principal, the Company’s revenue is reported on a gross basis and comprises the entire amount billed to the client and reported cost of services includes all expenses associated with the client. When the Company is acting as an agent, the Company’s fee is reported on a net basis as revenue for reimbursed amounts is netted against the related expenses. The control of the service before transfer to the customer is the focal point of the principal versus agent assessments. The Company is a principal if it controls the services before they are transferred to the client. The presentation of revenues and expenses pursuant to these arrangements under either a gross or net basis has no impact on net loss or cash flows. The Company accounts for property and asset management fees under ASC Topic 606, Revenue from Contracts with Customers.
Engineering Services: The Company provides engineering services to property owners on an as needed basis at the properties where the Company is the property or asset manager. The Company receives consideration at agreed upon fixed rates for the time incurred plus a reimbursement for costs incurred and revenue is recognized over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. The Company accounts for performance obligations using the right to invoice practical expedient. The Company applies the right to invoice practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contract. Under this practical expedient, the
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Company recognizes revenue in an amount that corresponds directly with the value to the customer of performance completed to date and for which there is a right to invoice the customer. Engineering services fees are included in Management and other income on the consolidated statements of operations. The Company accounts for engineering services under ASC Topic 606, Revenue from Contracts with Customers.
Development Services: The Company provides construction-related services ranging from general contracting to project management for owners and occupiers of real estate. Depending on the terms of the engagement, the Company’s performance obligation is either to arrange for the completion of a project or to assume responsibility for completing a project on behalf of a client. The Company’s obligations to clients are satisfied over time due to the continuous transfer of control of the underlying asset. Therefore, the Company recognizes revenue over time, generally using input measures (e.g., to-date costs incurred relative to total estimated costs at completion). Typically, the Company is entitled to consideration at distinct milestones over the term of an engagement. The Company may receive variable consideration which can include, but is not limited to, a fee paid upon return of an investor’s original investment in a project. The Company assesses variable consideration on a contract-by-contract basis, and when appropriate, recognizes revenue based on its assessment of the outcome and historical results. The Company recognizes revenue related to variable consideration if it is deemed probable there will not be a significant reversal in the future. Development services fees are included in management and other fee income on the consolidated statements of operations. The Company accounts for development services under ASC Topic 606, Revenue from Contracts with Customers.
Capital Transactions: The Company provides brokerage and other services for capital transactions, such as real estate sales, real estate acquisitions or other financing. The Company’s performance obligation is to facilitate the execution of capital transactions, and the Company is generally entitled to the full consideration at the point in time upon which its performance obligation is satisfied, at which time the Company recognizes revenue. Capital transaction fees are included in management and other fee income on the consolidated statements of operations.
Contract Assets and Contract Liabilities
Contract assets include amounts recognized as revenue for which the Company is not yet entitled to payment for reasons other than the passage of time, but that do not constrain revenue recognition. As of December 31, 2022 and 2021, the Company did not have any contract assets.
Contract liabilities include advance payments related to performance obligations that have not yet been satisfied and are included in deferred revenue on its consolidated balance sheets. The Company recognizes the contract liability as revenue once it has transferred control of service to the customer and all revenue recognition criteria are met. As of December 31, 2022 and 2021, the Company had approximately $0.2 million of contract liabilities and de minimis contract liabilities, respectively.
Accounts Receivable Under Contracts with Customers
The Company records accounts receivable for its unconditional rights to consideration arising from its performance under contracts with customers. Additionally, the Company records other receivables, included in Other assets, net on the consolidated balance sheets, which represents commission advances to employees. Further, the Company records receivables from affiliated properties. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates our allowance for doubtful accounts for specific accounts and other receivable balances based on historical collection trends, the age of the outstanding accounts and other receivables and existing economic conditions associated with the receivables. Past-due accounts receivable balances are written off to bad debt expense when the Company’s internal collection efforts have been unsuccessful or the advance has been forgiven. As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between its transfer of a promised service to a customer and when the customer pays for that service will be one year or less. The Company does not typically include extended payment terms in its contracts with customers. As of December 31, 2022 and 2021, the Company had approximately $2.1 million and $0.9 million, respectively, of accounts receivable under contracts with customers. At December 31, 2021, the Company recorded an allowance of $0.1 million against the receivable. There was no allowance at December 31, 2022.
Tenant and Other Receivables and Lease Inducements
Tenant receivables relate to the amounts currently owed to the Company under the terms of the Company’s lease agreements and is included in Tenant and accounts receivable, net of allowance on the consolidated balance sheets. Straight-line rent receivables relate to the difference between the rental revenue recognized on a straight-line basis and the amounts currently due to the Company according to the contractual agreement. This is included in Other assets, net on the consolidated balance sheets. Lease inducements result from value provided by the Company to the lessee, at the inception, modification or renewal of the lease, and are amortized as a reduction of rental income over the non-cancellable lease term.
The Company assesses the probability of collecting substantially all payments under the Company’s leases based on several factors, including, among other things, payment history of the lessee, the financial strength of the lessee and any guarantors, historical operations and operating trends and current and future economic conditions and expectations of performance. If the Company’s evaluation of these factors indicates it is probable that the Company will be unable to collect substantially all rents, the Company
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recognizes a charge to rental income and recognizes income when cash is collected. If the Company changes its conclusion regarding the probability of collecting rent payments required by a lessee, the Company may recognize an adjustment to rental income in the period the Company makes a change to its prior conclusion.
Allocation of Purchase Price of Acquired Real Estate
As part of the purchase price allocation process of acquisitions, management estimates the fair value of each component for asset acquisitions and business combinations by using judgments regarding market-based assumptions used in the estimated cash flow projections, including forecasts of future revenue and operating expense growth rates, market lease rates, comparable land values, lease-up periods, capitalization rates, discount rates and calculation and analysis of the income tax positions related to the purchase price allocation. We assess the relative fair value of acquired assets and acquired liabilities in accordance with the Financial Accounting Standards Board (the “FASB”) ASC Topic 805 Business Combinations and allocate the purchase price based on these assessments. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market and economic conditions that may affect the property.
The Company records above-market and below-market lease values, if any, which are based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding acquired leases, measured over a period equal to the remaining non-cancelable term of the lease, or, for below-market acquired leases, including any bargain renewal option terms. The Company amortizes any resulting capitalized above-market lease values as a reduction of rental income over the lease term. The Company amortizes any resulting capitalized below-market lease values as an increase to rental income over the lease term. As of December 31, 2022 and 2021, the Company had above-market leases with a gross value of approximately $5.2 million and $4.8 million, respectively, included in intangible lease assets on the consolidated balance sheets and below-market lease liabilities with a gross value of approximately $5.0 million and $4.8 million, respectively, included in unamortized intangible lease liabilities, net on the consolidated balance sheets.
In-place lease intangibles are valued considering factors such as an estimate of carrying costs during the expected lease-up periods and estimates of lost rental revenue during the expected lease-up periods based on evaluation of current market demand. The Company amortizes the value of in-place leases to amortization expense over the initial term of the respective leases. If a lease is terminated, the unamortized portion of the in-place lease value is charged to amortization expense. As of December 31, 2022 and 2021, the Company had in-place leases with a gross value of approximately $36.1 million and $30.6 million, respectively, included in intangible lease assets on the consolidated balance sheets.
Depreciation and amortization of real estate assets and liabilities is provided for on a straight-line basis over the estimated useful lives of the assets:
Building |
12.5 to 49 years |
Improvements |
5 to 15 years |
Lease intangibles and tenant improvements |
Less than 1 month to 19 years |
Furniture and equipment |
3 to 7 years |
Asset Impairment- Real Estate Properties
Real estate asset impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the property are less than its carrying amount. Management assesses if there are triggering events including macroeconomic conditions, loss of an anchor tenant, changes in occupancy, and the ability to re-tenant the space, nature or real estate properties, significant and persistent delinquencies, operating and collections performance compared to historical data and government-mandated compliance with an adverse effect to the Company's cost basis or operating costs. If management concludes triggering events are present for any property, management then assesses the recoverability of the individual property’s carrying value. Management analyzes recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the property. If the analysis indicates that the carrying value of a property is not recoverable from its estimated undiscounted future cash flows, an impairment loss is recognized. Impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used and carrying amount over the fair value less cost to sell in instances where management has determined that the Company will dispose of the property and the criteria are met for the property to be classified as held-for-sale. In determining the fair value, the Company uses current appraisals or other third-party opinions of value and other estimates of fair value such as estimated discounted future cash flows. The determination of future cash flows requires significant estimates by management. In management’s estimate of cash flows, it considers factors such as expected future sale of an asset, capitalization rates, holding periods and estimated net operating income. Subsequent changes in estimated cash flows could affect the determination of whether an impairment exists. In 2022 and 2021, the Company did not record any impairment and no properties were reclassified as held for sale at December 31, 2022 and 2021.
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Earnings Per Share
Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined based on the weighted average common number of shares outstanding during the period combined with the incremental average common shares that would have been outstanding assuming the conversion of all potentially dilutive common shares into common shares as of the earliest date possible.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability method and recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under this method, the Company determines deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes the Company to change its judgment about expected future tax consequences of events, is included in the tax provision when such change occurs. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes the Company to change its judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The estimate of the Company’s tax liabilities relating to uncertain tax positions requires management to assess uncertainties and to make judgments about the application of complex tax laws and regulations. The Company recognizes interest and penalties associated with uncertain tax positions as part of income tax expense. Generally, for federal and state purposes, the Company's 2019 through 2022 tax years remain open for examination by tax authorities.
Deferred Costs
Costs incurred prior to the completion of offerings of stock or other capital instruments that directly relate to the offering are deferred and netted against proceeds received from the offering. Following the issuance, these offering costs are reclassified to the equity section of the balance sheet as a reduction of proceeds raised. Additionally, deferred costs include costs incurred prior to the completion of asset acquisitions which, upon completion of the acquisition, are allocated to the various components of the acquisition based upon the relative fair value of each component. The Company will also incur costs relating to any new financing. These costs are deferred and netted against the proceeds.
The Company incurs leasing commission costs relating to new leases. Leasing commission costs over $5,000 are deferred and amortized over the life of the lease as depreciation and amortization on the Company's consolidated statements of operations.
Stock-Based Compensation
The fair value of stock-based awards is calculated on the date of grant. Stock based compensation for restricted stock awards is measured based on the closing stock price of the Company’s common stock on the date of grant. We recognize compensation expense for awards with performance conditions based on an estimate of shares expected to vest using the closing price of the Company’s common stock as of the grant date. The Company amortizes the stock-based compensation expense on a straight-line basis over the period that the awards are expected to vest, net of any forfeitures. Forfeitures of stock-based awards are recognized as they occur.
Fair Value Measurement and the Fair Value Option ("FVO")
Fair value is defined as the price that would be received from selling an asset, or paid in transferring a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.
A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
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If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or 3 even though there may be some significant inputs that are readily observable. Valuation techniques used by the Company include the use of third-party valuations and internal valuations, which may include discounted cash flow models. For the years ended December 31, 2022 and 2021, the Company has recorded all acquisitions based on estimated fair values. The fair values were obtained from third-party appraisals based on comparable properties (using the market approach, which involved Level 3 inputs in the fair value hierarchy).
The Company may choose to elect the FVO for certain eligible financial instruments, such as the Fortress Mezzanine Loan (as defined below), in order to simplify the accounting treatment. Items for which the FVO has been elected are presented at fair value in the consolidated balance sheets and any change in fair value unrelated to credit risk is recorded in net gains (losses) on debt in the consolidated statements of operations. Changes in fair value related to credit risk is recognized in other comprehensive income.
Derivatives
In the normal course of business, the Company is subject to risk from adverse fluctuations in interest rates. The Company has chosen to manage this risk through the use of derivative financial instruments, primarily interest rate swaps and interest rate caps. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes. The Company’s objective in managing exposure to interest risk is to limit the impact of interest rate changes on cash flows.
The Company recognizes all derivative instruments as assets or liabilities at their fair value in the consolidated balance sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For the years ended December 31, 2022 and 2021, the Company recognized $2.6 million and $0.4 million, respectively, as a component of "Derivative fair value adjustment" on the consolidated statements of operations.
Accounting Guidance
Adoption of Accounting Standards
In December 2019, FASB issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principals in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application. The Company adopted this guidance on January 1, 2021. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. Reference rate reform has not had a material impact on any of the Company's existing contracts. The Company will assess future changes in its contracts and the impact of electing to apply the optional practical expedients and exceptions provided by Topic 848 as they occur, but the Company expects their application will not have a material effect on its consolidated financial statements.
In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 740-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, that simplifies the accounting for convertible instruments and simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. The guidance also provides clarifications to improve the consistency of earnings per share calculations and requires new disclosures regarding convertible instruments. The Company early adopted this guidance on January 1, 2021. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In October 2021, FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers, to recognize and measure contract asset and liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. This guidance is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2023, with early adoption permitted. The Company early adopted this guidance on January 1, 2022. The adoption of this guidance did not impact the Company's consolidated financial statements and related disclosures as it currently treats its property acquisitions as asset acquisitions.
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Issued Accounting Standards Not Yet Adopted
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The standard also requires additional disclosures related to significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. Operating lease receivables are excluded from the scope of this guidance. The amended guidance is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2023. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements and related disclosures.
In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, which eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the Current Expected Credit Losses model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. The ASU also requires a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This ASU is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2023. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements and related disclosures.
Note 3 – Real Estate
2022 Real Estate Acquisitions
On November 23, 2022, the Company completed the acquisition of the mixed-use property known as Midtown Row. As consideration for Midtown Row, the Company paid $118.7 million in cash and the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units. The cash portion of the purchase price was funded with proceeds generated from a $76.0 million mortgage loan secured by the property, a $15.0 million mezzanine loan and $28.4 million from the Fortress Preferred Equity Investment (as defined below). The Company incurred approximately $1.4 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition.
In addition, on November 23, 2022, the Company completed the Merger to acquire Lamar Station Plaza West. Total consideration for the property included the issuance of 573,529 Common OP units and the repayment of approximately $7.8 million bonds and loans held by Lamont Street Partners, LLC (“Lamont Street”). In connection with the Merger, the Company incurred approximately $0.3 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition. The Company also assumed the $15.5 million mortgage loan secured by the property and issued Lamont Street warrants to purchase 500,000 shares of the Company's common stock.
The following table provides additional information regarding total consideration for the properties acquired during 2022.
(in thousands) |
|
|
|
|
Cash paid to prior owners using Preferred Equity Investment |
|
$ |
28,426 |
|
Cash paid to prior owners |
|
|
450 |
|
Fair value of Common OP units issued |
|
|
807 |
|
Fair value of Preferred OP units issued |
|
|
4,220 |
|
Fair value of warrants issued |
|
|
391 |
|
Prior owner debt paid off at closing using Preferred Equity Investment |
|
|
7,759 |
|
Cash paid to prior owners using net proceeds from mortgage and mezzanine debt |
|
|
89,750 |
|
Transaction costs |
|
|
1,750 |
|
Cash acquired in acquisition |
|
|
(943 |
) |
Total Cost of Acquisition |
|
$ |
132,610 |
|
72
The following table reflects the relative fair value of assets acquired and liabilities assumed related to the properties acquired during 2022.
(in thousands) |
|
|
|
|
Land |
|
$ |
16,734 |
|
Building |
|
|
116,908 |
|
Building and site improvements |
|
|
6,459 |
|
Intangible lease assets |
|
|
5,939 |
|
Furniture and equipment |
|
|
1,681 |
|
Total real estate assets acquired |
|
|
147,721 |
|
Other assets |
|
|
3,645 |
|
Total assets acquired |
|
|
151,366 |
|
Accounts payable and accrued liabilities |
|
|
(3,077 |
) |
Intangible lease liabilities |
|
|
(213 |
) |
Assumed mortgage indebtedness |
|
|
(15,466 |
) |
Total liabilities assumed |
|
|
(18,756 |
) |
Assets acquired net of liabilities assumed |
|
$ |
132,610 |
|
On February 8, 2022, the Company entered into a purchase and sale agreement (the “Initial Colfax Agreement”) to acquire a parcel for a purchase price of $2.5 million in cash. On July 1, 2022, the Initial Colfax Agreement automatically terminated in accordance with its terms as a result of the closing not occurring by June 30, 2022. In connection with the termination of the Initial Colfax Agreement, the Company forfeited its $0.3 million deposit. During the year ended December 31, 2022, the Company recognized approximately $0.3 million of real estate related acquisition costs within general and administrative in its consolidated statements of operations related to the forfeiture of the deposit.
On September 29, 2022, the Company entered into a second purchase and sale agreement (the “Second Colfax Agreement”) to acquire the above land parcel for $2.3 million in cash (the “Colfax Parcel Acquisition”). Pursuant to the Second Colfax Agreement, the Company made a deposit of $0.1 million in October 2022. On November 23, 2022, the Company completed the Colfax Parcel Acquisition and recorded approximately $0.1 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition.
2021 Real Estate Acquisitions
On May 21, 2021, the Company completed the Merger to acquire Highlandtown Village Shopping Center. Total consideration for the property included the issuance of 1,749,008 shares of common stock and approximately $0.2 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition. The Company assumed approximately $5.5 million of indebtedness secured by the property.
On May 26, 2021, the Company completed the Merger to acquire Cromwell Field Shopping Center. Total consideration for the property included the issuance of 2,092,657 shares of common stock, the payment of approximately $0.5 million in cash to the prior investors, and approximately $0.4 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition. The Company assumed approximately $13.65 million of indebtedness secured by the property. The Company previously acquired the fee-simple interest in the land that the Cromwell Field Shopping Center is located on under a leasehold interest. The Company terminated the ground lease upon completion of the Merger.
On June 4, 2021, the Company completed the Merger to acquire Spotswood Valley Square Shopping Center. Total consideration for the property included the issuance of 2,489,497 shares of common stock, the payment of approximately $0.4 million in cash to the prior investors, and approximately $0.3 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition. The Company assumed approximately $12.4 million of mortgage secured by the property.
On October 6, 2021, the Company completed the Merger to acquire The Shops at Greenwood Village. Total consideration for the property included the issuance of 2,752,568 shares of common stock, the repayment/redemption of approximately $20.2 million of the prior owner's debt and preferred equity, the payment of approximately $0.1 million in cash to the prior investors, and approximately $0.4 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition. The Company entered into a $23.5 million mortgage loan secured by the property in connection with the Merger.
The following table provides additional information regarding the total consideration for the properties acquired during 2021.
73
(in thousands) |
|
|
|
|
Cash paid to prior owners |
|
$ |
961 |
|
Value of common shares issued |
|
|
14,892 |
|
Prior owner debt and preferred equity paid off at closing |
|
|
20,649 |
|
Settlement of notes payable owed to properties |
|
|
(700 |
) |
Transaction costs |
|
|
1,323 |
|
Cash acquired in acquisitions |
|
|
(1,743 |
) |
Total Cost of Acquisitions |
|
$ |
35,382 |
|
The following table reflects the relative fair value of assets acquired and liabilities assumed related to the properties acquired by the Company during 2021.
(in thousands) |
|
|
|
|
Land |
|
$ |
10,884 |
|
Building |
|
|
33,889 |
|
Building and site improvements |
|
|
10,001 |
|
Intangible lease assets |
|
|
14,816 |
|
Total real estate assets acquired |
|
|
69,590 |
|
Other assets |
|
|
3,977 |
|
Total assets acquired |
|
|
73,567 |
|
Accounts payable and accrued expenses |
|
|
(4,674 |
) |
Intangible lease liabilities |
|
|
(1,502 |
) |
Deferred tax liabilities |
|
|
(495 |
) |
Assumed mortgage and other indebtedness |
|
|
(31,514 |
) |
Total liabilities assumed |
|
|
(38,185 |
) |
Assets acquired net of liabilities assumed |
|
$ |
35,382 |
|
Note 4 – Intangibles
The following is a summary of the carrying amount of the Company’s intangible assets and liabilities as of December 31, 2022 and 2021.
(in thousands) |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Assets: |
|
|
|
|
|
|
||
Above-market leases |
|
$ |
5,150 |
|
|
$ |
4,792 |
|
Above-market leases accumulated amortization |
|
|
(2,199 |
) |
|
|
(1,210 |
) |
In-place leases |
|
|
36,078 |
|
|
|
30,643 |
|
In-place leases accumulated amortization |
|
|
(18,251 |
) |
|
|
(10,368 |
) |
Total net real estate intangible assets |
|
$ |
20,778 |
|
|
$ |
23,857 |
|
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
||
Below-market leases |
|
|
4,992 |
|
|
|
4,792 |
|
Below-market leases accumulated amortization |
|
|
(3,439 |
) |
|
|
(2,063 |
) |
Total net real estate intangible liabilities |
|
$ |
1,553 |
|
|
$ |
2,729 |
|
For the years ended December 31, 2022 and 2021, the Company recognized amortization related to in-place leases of approximately $7.9 million and $5.5 million, respectively, and net amortization related to above-market leases and below-market leases for each of the years ended December 31, 2022 and 2021 of approximately $(0.4) million in its consolidated statements of operations.
The following table represents expected amortization of existing real estate intangible assets and liabilities as of December 31, 2022.
74
(in thousands) |
Amortization of |
|
|
Amortization of |
|
|
Amortization of |
|
|
Total amortization, net |
|
||||
2023 |
$ |
6,980 |
|
|
$ |
923 |
|
|
$ |
(708 |
) |
|
$ |
7,195 |
|
2024 |
|
3,636 |
|
|
|
703 |
|
|
|
(457 |
) |
|
|
3,882 |
|
2025 |
|
2,507 |
|
|
|
541 |
|
|
|
(200 |
) |
|
|
2,848 |
|
2026 |
|
1,751 |
|
|
|
313 |
|
|
|
(115 |
) |
|
|
1,949 |
|
2027 |
|
1,175 |
|
|
|
215 |
|
|
|
(58 |
) |
|
|
1,332 |
|
Thereafter |
|
1,778 |
|
|
|
256 |
|
|
|
(15 |
) |
|
|
2,019 |
|
Total |
$ |
17,827 |
|
|
$ |
2,951 |
|
|
$ |
(1,553 |
) |
|
$ |
19,225 |
|
The Company amortizes the value of in-place leases to amortization expense, the value of above-market leases as a reduction of rental income and the value of below-market leases as an increase to rental income over the initial term of the respective leases.
As of December 31, 2022, the weighted average remaining amortization period of in-place lease intangibles, above-market lease intangible assets and below-market lease intangibles is approximately 3.1 years, 3.8 years and 1.7 years, respectively.
Note 5 - Other Assets
Items included in other assets, net on the Company’s consolidated balance sheets as of December 31, 2022 and 2021 are detailed in the table below.
(in thousands) |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Prepaid assets and deposits |
|
$ |
1,722 |
|
|
$ |
1,619 |
|
Leasing commission costs |
|
|
805 |
|
|
|
89 |
|
|
|
695 |
|
|
|
852 |
|
|
Straight-line rent receivable |
|
|
2,343 |
|
|
|
1,398 |
|
Pre-acquisition costs |
|
|
8 |
|
|
|
280 |
|
Other receivables, net of allowance of $0 and $75 |
|
|
101 |
|
|
|
82 |
|
Corporate property, net |
|
|
64 |
|
|
|
68 |
|
Receivables from related parties |
|
|
1,170 |
|
|
|
208 |
|
|
|
3,426 |
|
|
|
3 |
|
|
Total |
|
$ |
10,334 |
|
|
$ |
4,599 |
|
Receivables due from related parties as of December 31, 2022 and 2021, respectively, are described further in Note 16 “Related Party Transactions.”
75
Note 6 – Mortgage and Other Indebtedness
The table below details the Company’s debt balance as of December 31, 2022 and 2021:
(dollars in thousands) |
|
Maturity Date |
|
Rate Type |
|
Interest Rate (1) |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Basis Term Loan (net of discount of $79 and $373, respectively) |
|
January 1, 2024 |
|
Floating (2) |
|
6.125% |
|
$ |
67,086 |
|
(3) |
$ |
66,811 |
|
Basis Preferred Interest (net of discount of $0 and $75, respectively) (4) |
|
January 1, 2023 (5) |
|
Fixed |
|
14.00% (6) |
|
|
— |
|
|
|
8,560 |
|
MVB Term Loan |
|
June 27, 2023 (7) |
|
Fixed |
|
6.75% |
|
|
— |
|
|
|
3,934 |
|
MVB Revolver |
|
June 27, 2023 (7) |
|
Floating (8) |
|
7.75% |
|
|
— |
|
|
|
1,404 |
|
Hollinswood Shopping Center Loan |
|
December 1, 2024 |
|
LIBOR + 2.25% (9) |
|
4.06% |
|
|
12,760 |
|
|
|
13,070 |
|
Avondale Shops Loan |
|
June 1, 2025 |
|
Fixed |
|
4.00% |
|
|
2,985 |
|
|
|
3,097 |
|
Vista Shops at Golden Mile Loan (net of discount of $12 and $39, respectively) (10) |
|
June 24, 2023 |
|
Fixed |
|
3.83% |
|
|
11,478 |
|
|
|
11,661 |
|
Brookhill Azalea Shopping Center Loan |
|
January 31, 2025 |
|
LIBOR + 2.75% |
|
7.14% |
|
|
8,762 |
|
|
|
9,034 |
|
Lamar Station Plaza East Loan (net of discount of $0 and $8, respectively) |
|
October 17, 2022 (11) |
|
WSJ Prime (12) |
|
6.14% |
|
|
— |
|
|
|
3,507 |
|
Lamar Station Plaza West Loan (net of discount of $95 and $0, respectively) |
|
December 10, 2027 |
|
Fixed |
|
5.67% |
|
|
18,317 |
|
|
|
— |
|
Lamont Street Preferred Interest (net of discount of $29 and $67, respectively) (13) |
|
September 30, 2023 |
|
Fixed |
|
13.50% |
|
|
4,241 |
|
|
|
4,498 |
|
Highlandtown Village Shopping Center Loan (net of discount of $14 and $46, respectively) |
|
May 6, 2023 |
|
Fixed |
|
4.13% |
|
|
5,241 |
|
|
|
5,364 |
|
Cromwell Field Shopping Center Loan (net of discount of $77 and $144, respectively) |
|
December 22, 2027 (14) |
|
Fixed (15) |
|
6.71% |
|
|
10,113 |
|
|
|
12,249 |
|
Cromwell Field Shopping Center Mezzanine Loan (net of discount of $0 and $18, respectively) |
|
December 31, 2022 (14), (16) |
|
Fixed |
|
10.00% |
|
|
— |
|
|
|
1,512 |
|
Midtown Row Loan (net of discount of $25 and $0, respectively) |
|
December 1, 2027 |
|
Fixed |
|
6.48% |
|
|
75,975 |
|
|
|
— |
|
Midtown Row Mezzanine Loan |
|
December 1, 2027 |
|
Fixed |
|
12.00% |
|
|
17,895 |
|
(17) |
|
— |
|
Spotswood Valley Square Shopping Center Loan (net of discount of $31 and $94, respectively) |
|
July 6, 2023 |
|
Fixed |
|
4.82% |
|
|
11,849 |
|
|
|
12,100 |
|
The Shops at Greenwood Village (net of discount of $94 and $114, respectively) |
|
October 10, 2028 |
|
Prime - 0.35% (18) |
|
4.08% |
|
|
22,772 |
|
|
|
23,296 |
|
|
|
|
|
|
|
|
|
$ |
269,474 |
|
|
$ |
180,097 |
|
Unamortized deferred financing costs, net |
|
|
|
|
|
|
|
|
(1,858 |
) |
|
|
(1,115 |
) |
Total Mortgage and Other Indebtedness |
|
|
|
|
|
|
|
$ |
267,616 |
|
|
$ |
178,982 |
|
76
Basis Term Loan
In December 2019, six of the Company’s subsidiaries, as borrowers (collectively, the “Borrowers”), and Big Real Estate Finance I, LLC, a subsidiary of a real estate fund managed by Basis Management Group, LLC (“Basis”), as lender (the “Basis Lender”), entered into a loan agreement (the “Basis Loan Agreement”) pursuant to which the Basis Lender made a senior secured term loan of up to $66.9 million (the “Basis Term Loan”) to the Borrowers. Pursuant to the Basis Loan Agreement, the Basis Term Loan is secured by mortgages on the following properties: Coral Hills, Crestview, Dekalb, Midtown Colonial, Midtown Lamonticello and West Broad. The Basis Term Loan initial maturity was January 1, 2023, subject to two one-year extension options, subject to certain conditions. The Company exercised one of the one-year extension options and the maturity date was extended to January 1, 2024. The Basis Loan Agreement was amended and restated on June 29, 2022 to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”). The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. The Borrowers entered into an interest rate cap that effectively capped the prior-LIBOR rate at 3.50% per annum. On August 1, 2022, the interest rate cap was modified to cap the SOFR rate at 3.50%. The interest rate cap matured on January 1, 2023. On November 23, 2022, the Company entered into an interest rate cap agreement, effective January 1, 2023, to cap the SOFR interest rate at 4.65%. As of December 31, 2022, the interest rate of the Basis Term Loan was 6.125% and the outstanding balance was $66.9 million.
Certain of the Borrowers’ obligations under the Basis Loan Agreement are guaranteed by the Company and by Michael Z. Jacoby, the Company’s chairman and chief executive officer, and Thomas M. Yockey, a director of the Company. The Company has agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan.
The Basis Loan Agreement contains certain customary representations and warranties and affirmative negative and restrictive covenants, including certain property related covenants for the properties securing the Basis Term Loan, including a requirement that certain capital improvements be made. The Basis Lender has certain approval rights over amendments or renewals of material leases (as defined in the Basis Loan Agreement) and property management agreements for the properties securing the Basis Term Loan.
If (i) an event of default exists, (ii) BSR or any other subsidiary of the Company serving as property manager for one of the secured parties becomes bankrupt, insolvent or a debtor in an insolvency proceeding, or there is a change of control of BSR or such other subsidiary without approval by the Basis Lender, (iii) a default occurs under the applicable management agreement, or (iv) the property manager has engaged in fraud, willful misconduct, misappropriation of funds or is grossly negligent with regard to the applicable property, the Basis Lender may require a Borrower to replace BSR or such other subsidiary of the Company as the property manager and hire a third party manager approved by the Basis Lender to manage the applicable property.
The Borrowers are generally prohibited from selling the properties securing the Basis Term Loan and the Company is prohibited from transferring any interest in any of the Borrowers, in each case without consent from the Basis Lender. The Company is prohibited from engaging in transactions that would result in a Change in Control (as defined in the Basis Loan Agreement) of the Company. Under the Basis Loan Agreement, among other things, it is deemed a Change in Control if Michael Z. Jacoby ceases to be the chairman and chief executive officer of the Company and actively involved in the daily activities and operations of the Company and the Borrowers
77
and a competent and experienced person is not approved by the Basis Lender to replace Mr. Jacoby within 90 days of him ceasing to serve in such roles.
The Basis Loan Agreement provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events and changes in control. If an event of default occurs and is continuing under the Basis Loan Agreement, the Basis Lender may, among other things, require the immediate payment of all amounts owed thereunder.
In addition, if there is a default by Mr. Jacoby under a certain personal loan as long as he has pledged OP units as collateral for such loan, and such default has not been waived or cured, then the Basis Lender will have the right to sweep the Borrowers’ cash account in which they collect and retain rental payments from the properties securing the Basis Term Loan on a daily basis in order for the Basis Lender to create a cash reserve that will serve as collateral for the Basis Term Loan.
The Basis Loan Agreement includes a debt service coverage calculation based on the trailing twelve month's results which includes an adjustment for tenants that are more than one-month delinquent in paying rent. A debt service coverage ratio below 1.10x is a Cash Trap Trigger Event (as defined in the Basis Loan Agreement), which gives the Basis Lender the right to institute a cash management period until the trigger is cured. A debt service coverage ratio below 1.05x for two consecutive calendar quarters gives the Basis Lender the right to remove the Company as manager of the properties. The Company was in compliance with the debt service coverage calculation for the twelve months ended December 31, 2022.
Basis Preferred Interest
In December 2019, the Operating Partnership and Big BSP Investments, LLC, a subsidiary of a real estate fund managed by Basis (the “Preferred Investor”), entered into an amended and restated operating agreement (the “Sub-OP Operating Agreement”) of Broad Street BIG First OP, LLC (the “Sub-OP”), a subsidiary of the Operating Partnership. Pursuant to the Sub-OP Operating Agreement, among other things, the Preferred Investor committed to make an investment of up to $10.7 million in the Sub-OP, of which $6.9 million had been funded, in exchange for a 1.0% membership interest in the Sub-OP designated as Class A units (the “Basis Preferred Interest”).
Pursuant to the Sub-OP Operating Agreement, the Preferred Investor was entitled to a cumulative annual return of 14.0% on its initial capital contribution (the “Class A Return”), and the Preferred Investor was entitled to a 20% return (the “Enhanced Class A Return”) on any capital contribution made to the Sub-OP in excess of the $10.7 million commitment. The Preferred Investor’s interests were required to be redeemed on or before the earlier of: (i) January 1, 2023 and (ii) the date on which the Basis Term Loan was paid in full (the “Redemption Date”). The Redemption Date was able to be extended to December 31, 2023 and December 31, 2024, in each case subject to certain conditions, including the payment of a fee equal to 0.25% of the Preferred Investor’s net invested capital for the first extension option and a fee of 0.50% of the Preferred Investor’s net invested capital for the second extension option. If the redemption price was paid on or before the Redemption Date, then the redemption price was equal to (a) all unreturned capital contributions made by the Preferred Investor, (b) all accrued but unpaid Class A Return, (c) all accrued but unpaid Enhanced Class A Return and (d) all costs and other expenses incurred by the Preferred Investor in connection with the enforcement of its rights under the Sub-OP Operating Agreement. Additionally, at the Redemption Date, the Preferred Investor was entitled to an amount equal to (a) the product of (i) the aggregate amount of capital contributions made and (ii) 0.4, less (b) the aggregate amount of Class A Return payments made to the Preferred Investor (the “Minimum Multiple Amount”). As of December 31, 2021, the Minimum Multiple Amount was approximately $0.8 million, which is included as indebtedness on the consolidated balance sheets.
The Preferred Investor’s interests in the Sub-OP under the Sub-OP Operating Agreement were mandatorily redeemable, and, as a result, are characterized as indebtedness in the accompanying consolidated financial statements.
On June 16, 2020, the Preferred Investor made two additional capital contributions available to the Sub-OP in the aggregate amount of approximately $2.9 million, which is classified as debt. The two capital contributions consisted of: (i) a $2.4 million capital contribution to the Sub-OP that the Sub-OP contributed to the Borrowers for purposes of making debt service payments under the Basis Loan Agreement and (ii) a $0.5 million capital contribution to the Sub-OP that the Sub-OP contributed to certain of its other property owning subsidiaries for purposes of making debt service payments on mortgage debt secured by the properties owned by such subsidiaries and making payments of the Class A return due to the Preferred Investor pursuant to the Sub-OP Operating Agreement. The Preferred Investor was entitled to a cumulative annual return of 13.0% on the additional capital contributions. As described below under the heading "—Mortgage Indebtedness," the Company repaid approximately $0.75 million of these funds with the proceeds from the Vista Shops mortgage refinance. Additionally, approximately $0.3 million of availability under the capital contributions was returned to the Preferred Investor. On October 1, 2021, approximately $1.0 million of availability under the capital contributions was returned to the Preferred Investor.
On November 23, 2022, the Company used a portion of the proceeds from the Preferred Equity Investment to redeem the Basis Preferred Interest in full for $8.5 million, including accrued Class A Return and the Minimum Multiple Amount.
78
MVB Loan
In December 2019, the Company, the Operating Partnership and BSR entered into a loan agreement (the “MVB Loan Agreement”) with MVB Bank, Inc. (“MVB”) with respect to a $6.5 million loan consisting of a $4.5 million term loan (the “MVB Term Loan”) and a $2.0 million revolving credit facility (the “MVB Revolver”). The MVB Term Loan had a maturity date of December 27, 2022 and the MVB Revolver had an original maturity date of December 27, 2020, which was extended to June 27, 2023. On March 22, 2022, the Company entered into agreements (the "MVB Amendments") that provided for a $2.0 million term loan (the "Second MVB Term Loan"). The Second MVB Term Loan had a maturity date of June 27, 2023. The MVB Term Loan and the Second MVB Term Loan had a fixed interest rate of 6.75% per annum. The MVB Revolver carried an interest rate of the greater of (i) prime rate plus 1.5% and (ii) 6.75%. On November 23, 2022, the Company used a portion of the proceeds from the Preferred Equity Investment to pay off the MVB Term Loan, the Second MVB Term Loan and the MVB Revolver for an aggregate payment of $6.8 million.
Lamont Street Preferred Interest
In connection with the closing of the Highlandtown and Spotswood Mergers on May 21, 2021 and June 4, 2021, respectively, Lamont Street contributed an aggregate of $3.9 million in exchange for a 1.0% preferred membership interest in BSV Highlandtown Investors LLC (“BSV Highlandtown”) and BSV Spotswood Investors LLC (“BSV Spotswood”) designated as Class A units (the “Lamont Street Preferred Interest”).
Lamont Street is entitled to a cumulative annual return of 13.5% (the “Lamont Street Class A Return”), of which 10.0% is paid current and 3.5% is accrued. Lamont Street’s interests are to be redeemed on or before September 30, 2023 (the “Lamont Street Redemption Date”). The Lamont Street Redemption Date may be extended by us to September 30, 2024 and September 30, 2025, in each case subject to certain conditions, including the payment of a fee equal to 0.25% of Lamont Street's net invested capital for the first extension option and a fee of 0.50% of Lamont Street's net invested capital for the second extension option. If the redemption price is paid on or before the Lamont Street Redemption Date, then the redemption price will be equal to (a) all unreturned capital contributions made by Lamont Street, (b) all accrued but unpaid Lamont Street Class A Return and (c) all costs and other expenses incurred by Lamont Street in connection with the enforcement of its rights under the agreements. Additionally, at the Lamont Street Redemption Date, Lamont Street is entitled to (i) a redemption fee of 0.50% of the capital contributions returned and (ii) an amount equal to (a) the product of (i) the aggregate amount of capital contributions made and (ii) 0.26 less (b) the aggregate amount of Lamont Street Class A Return payments made to Lamont Street (the "Lamont Street Minimum Multiple Amount"). The Lamont Street Minimum Multiple Amount of approximately $1.0 million was recorded as interest expense in the consolidated statements of operations during the second quarter of 2021. As of December 31, 2022, the remaining Lamont Street Minimum Multiple Amount was approximately $0.3 million, which is included in indebtedness on the consolidated balance sheet.
The Operating Partnership serves as the managing member of BSV Highlandtown and BSV Spotswood. However, Lamont Street has approval rights over certain major decisions, including, but not limited to (i) the incurrence of new indebtedness or modification of existing indebtedness by BSV Highlandtown or BSV Spotswood, or their direct or indirect subsidiaries, (ii) capital expenditures over $100,000, (iii) any proposed change to a property directly or indirectly owned by BSV Highlandtown or BSV Spotswood, (iv) direct or indirect acquisitions of new properties by BSV Highlandtown or BSV Spotswood, (v) the sale or other disposition of any property directly or indirectly owned by BSV Highlandtown or BSV Spotswood, (vi) the issuance of additional membership interests in BSV Highlandtown or BSV Spotswood, (vii) any amendment to an existing material lease related to the properties and (viii) decisions regarding the dissolution, winding up or liquidation of BSV Highlandtown or BSV Spotswood or the filing of any bankruptcy petition by BSV Highlandtown or BSV Spotswood or their subsidiaries.
Under certain circumstances, including an event whereby Lamont Street’s interests are not redeemed on or prior to the Lamont Street Redemption Date (as it may be extended), Lamont Street may remove the Operating Partnership as the manager of BSV Highlandtown and BSV Spotswood.
Mortgage Indebtedness
In addition to the indebtedness described above, as of December 31, 2022 and 2021, the Company had approximately $180.3 million and $94.9 million, respectively, of outstanding mortgage indebtedness secured by individual properties. The Hollinswood mortgage, Vista Shops mortgage, Brookhill mortgage, Highlandtown mortgage, Cromwell mortgage, Spotswood mortgage, Greenwood Village mortgage, Lamar Station Plaza West mortgage and the Midtown Row mortgage require the Company to maintain a minimum debt service coverage ratio (as such terms are defined in the respective loan agreements) as follows in the table below.
79
|
|
Minimum Debt Service Coverage |
Hollinswood Shopping Center |
|
1.40 to 1.00 |
Vista Shops at Golden Mile |
|
1.50 to 1.00 |
Brookhill Azalea Shopping Center |
|
1.30 to 1.00 |
Highlandtown Village Shopping Center |
|
1.25 to 1.00 |
Cromwell Field Shopping Center (1) |
|
1.20 to 1.00 |
Lamar Station Plaza West (2) |
|
1.30 to 1.00 |
Midtown Row (2) |
|
1.15 to 1.00 |
Spotswood Valley Square Shopping Center |
|
1.15 to 1.00 |
The Shops at Greenwood Village |
|
1.40 to 1.00 |
In March 2021, the Company completed the refinance of the Vista Shops mortgage loan. The new loan had a principal balance of $11.7 million, matures in June 2023, and carries an interest rate of 3.83% per annum. The Company deposited approximately $1.9 million of the proceeds from the refinance with the Basis Lender, which was applied as follows during 2021: (i) repaid approximately $0.75 million of the outstanding principal balance on the capital contributions, which are treated as debt, provided to the Company in June 2020 under the Basis Preferred Interest as described above under the heading “—Basis Preferred Interest”, (ii) paid approximately $46,000 in accrued interest on these funds and (iii) contributed approximately $1.1 million into an escrow account with the Basis Lender which will be used to pay down the outstanding principal balance of the capital contributions upon satisfaction of certain conditions. At December 31, 2022, the principal balance for the Vista Shops mortgage loan was $11.5 million.
In July 2021, the Company entered into a modification of the Lamar Station Plaza East mortgage loan, which extended the maturity date of the loan to . The amendment also waived the debt service coverage ratio test for the period ending June 30, 2021 and required a debt service coverage ratio of (i) 1.05 to 1.0 for the three months ended September 30, 2021; (ii) 1.15 to 1.0 for the six months ended December 31, 2021; and (ii) 1.25 to 1.0 for the twelve months ended March 31, 2022. In August 2022, the Company entered into an additional loan modification of the Lamar Station Plaza East mortgage loan, which further extended the maturity date of the loan to October 17, 2022 and changed the interest rate to the Wall Street Journal Prime Rate, effective July 17, 2022. The modification also eliminated the debt service coverage ratio test and prevented the Company from receiving any additional construction advances under the loan. On November 23, 2022, the Company repaid the Lamar Station Plaza East mortgage loan with a portion of the proceeds from the Preferred Equity Investment.
In connection with the closing of the Merger whereby the Company acquired The Shops at Greenwood Village as described in Note 3 under the heading “—2021 Real Estate Acquisitions”, on October 6, 2021, the Company entered into a $23.5 million mortgage loan secured by the property, which bears interest at prime rate less 0.35% per annum and matures on . The Company has entered into an interest rate swap which fixes the interest rate of the loan at 4.082%.
On November 9, 2022, the Company entered into a modification of the Cromwell Field Shopping Center mortgage and mezzanine loans, which extended the maturity dates of the loans to December 31, 2022. On December 22, 2022, the Company refinanced the Cromwell Field Shopping Center mortgage loan and repaid the mezzanine loan. The new loan has a principal balance of $15.0 million, of which $10.2 million was funded at closing. This loan matures in December 2027 and carries an interest rate of 6.71%.
In connection with the closing of the Midtown Row acquisition as described in Note 3 under the heading “—2022 Real Estate Acquisitions”, in November 2022, the Company entered into a $76.0 million mortgage loan secured by the property, which bears interest of 6.48% and matures on . Until December 1, 2025, payments made on the loan will be interest-only.
On December 9, 2022, the Company refinanced the Lamar Station Plaza West mortgage loan. The new loan has a principal capacity of $19.0 million of which $18.4 million was funded at closing. This loan matures in December 2027 and carries an interest rate of 5.67%.
As of December 31, 2022, the Company was in compliance with all covenants under its debt agreements.
Fortress Mezzanine Loan
In connection with the acquisition of Midtown Row, the Company also entered into a $15.0 million mezzanine loan (the “Fortress Mezzanine Loan”) secured by 100% of the membership interests in the entity that owns Midtown Row. The mezzanine loan matures on December 1, 2027. Pursuant to the mezzanine loan agreement, a portion of the interest on the Fortress Mezzanine Loan will be paid in cash (the “Current Interest”) and a portion of the interest will be capitalized and added to the principal amount of the Fortress Mezzanine Loan each month (the “Capitalized Interest” and, together with the Current Interest, the "Mezzanine Loan Interest"). The initial Mezzanine Loan Interest rate is 12% per annum, comprised of a 5% Current Interest rate and a 7% Capitalized Interest rate. The
80
Capitalized Interest rate increases each year by 1%. The Fortress Mezzanine Loan (including a prepayment penalty) will be due and payable in connection with an underwritten public offering by the Company meeting certain conditions (a “Qualified Public Offering”). However, in connection with a Qualified Public Offering, the lender for the Fortress Mezzanine Loan has the right to convert all or a portion of the principal of the Fortress Mezzanine Loan and any prepayment penalty into shares of common stock at a price of $2.00 per share, subject to certain adjustments. The mezzanine loan agreement provides for cross-default in the event of a Trigger Event under the Eagles Sub-OP Operating Agreement or an event of default under the loan agreement for the Midtown Row mortgage. The Company elected to measure the Fortress Mezzanine Loan at fair value in accordance with the FVO. The fair value at November 22, 2022 and December 31, 2022 was $14.7 million and $17.9 million, respectively. The Company recognized $3.1 million in net loss on fair value change on debt held under the fair value option in the consolidated statements of operations and $0.1 million in Change in fair value due to credit risk on debt held under the fair value option in the consolidated statements of comprehensive loss. For the year ended December 31, 2022, the Company recognized $0.2 million of interest expense in the consolidated statements of operations, which includes $0.1 million of Capitalized Interest recorded in the consolidated balance sheets.
PPP Loans
On April 20, 2020, a wholly owned subsidiary of the Company entered into a promissory note with MVB with respect to an unsecured loan of approximately $0.8 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the "PPP"), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and was administered by the U.S. Small Business Administration (the “SBA”). During the first quarter of 2021, the Company received forgiveness for its entire balance of the PPP Loan from the SBA, which is recognized as a gain on debt extinguishment in the Company’s statements of operations.
On March 18, 2021, a wholly owned subsidiary of the Company entered into a promissory note with MVB with respect to an unsecured loan of approximately $0.8 million (the “Second PPP Loan”) pursuant to the PPP. During the third quarter of 2021, the Company received forgiveness for its entire balance of the Second PPP Loan from the SBA, which is recognized as a gain on debt extinguishment in the Company's statements of operations.
Deferred Financing Costs and Debt Discounts
The total amount of deferred financing costs associated with the Company’s debt as of December 31, 2022 and 2021 was $3.2 million, gross ($1.9 million, net) and $2.1 million, gross ($1.1 million, net), respectively. Debt discounts associated with the Company’s debt as of December 31, 2022 and 2021 was $2.1 million, gross ($0.4 million, net) and $2.1 million, gross ($1.0 million, net), respectively. Deferred financing costs and debt discounts are netted against the debt balance outstanding on the Company’s consolidated balance sheets and will be amortized to interest expense through the maturity date of the related debt.
The Company recognized amortization expense of deferred financing costs and debt discounts, included in interest expense in the consolidated statements of operations, of approximately $1.5 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively.
Debt Maturities
The following table details the Company’s scheduled principal repayments and maturities during each of the next five years and thereafter as of December 31, 2022:
Year ending December 31, |
|
(in thousands) |
|
|
2023 |
|
$ |
34,318 |
|
2024 |
|
|
81,129 |
|
2025 |
|
|
11,910 |
|
2026 |
|
|
2,063 |
|
2027 |
|
|
117,960 |
|
Thereafter |
|
|
19,772 |
|
|
|
|
267,152 |
|
Unamortized debt discounts and deferred financing costs, net and FVO adjustment |
|
|
464 |
|
Total |
|
$ |
267,616 |
|
Interest Rate Cap and Interest Rate Swap Agreements
To mitigate exposure to interest rate risk, the Company entered into an interest rate cap agreement, effective December 27, 2019, on the full $66.9 million Basis Term Loan to cap the previously variable LIBOR interest rate at 3.5%. On June 29, 2022, the Basis Loan Agreement was amended and restated to replace LIBOR with SOFR. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. On August 1, 2022, the interest rate cap for the Basis Term Loan was modified to cap the SOFR rate at 3.5%. On November 23, 2022, the Company entered into an interest rate cap agreement, effective January 1, 2023, on the full $66.9 million Basis Term Loan to cap the SOFR interest rate at 4.65%. As of December 31, 2022 and 2021, the interest rate of the Basis Term Loan was 6.125%. This interest rate cap matured January 1, 2023. The Company also entered into two interest rate swap agreements on the Hollinswood Loan to fix the interest rate at 4.06%. The swap agreements are effective as of
81
December 27, 2019 on the outstanding balance of $10.2 million and on July 1, 2021 for the additional availability of $3.0 million under the Hollinswood Loan.
On October 6, 2021, the Company entered into an interest rate swap agreement on the Greenwood Village Loan to fix the interest rate at 4.082%.
The Company recognizes all derivative instruments as assets or liabilities at their fair value in the consolidated balance sheets. Changes in the fair value of the Company’s derivatives that are not designated as hedges or do not meet the criteria of hedge accounting are recognized in earnings. For the years ended December 31, 2022 and 2021, the Company recognized gains of approximately $3.4 million and $0.4 million, respectively, as a component of "Derivative fair value adjustment" on the consolidated statements of operations.
The fair value of the Company’s derivative financial instruments as of December 31, 2022 and 2021 was an interest rate cap asset of $0.2 million and less than $0.1 million, respectively, an interest rate swap asset of approximately $3.2 million at December 31, 2022 and an interest rate swap liability of approximately $0.4 million at December 31, 2021. The interest rate cap asset and interest rate swap asset are included in Other assets, net and the interest rate swap liability is included in Accounts payable and accrued expenses on the consolidated balance sheets.
Covenants
The Company's loan agreements contain customary financial and operating covenants including debt service coverage ratios and aggregate minimum unencumbered cash covenants. As of December 31, 2022, the Company was in compliance with all covenants under its debt agreements.
Note 7 - Commitments and Contingencies
Commitments
The Company has no outstanding commitments as of December 31, 2022.
Leases, as lessee
At the inception of a lease and over its term, the Company evaluates each lease to determine the proper lease classification. Certain of these leases provide the Company with the contractual right to use and economically benefit from all of the space specified in the lease. Therefore, the Company has determined that they should be evaluated as lease arrangements. As of December 31, 2022, the Company was obligated under operating lease agreements consisting primarily of the Company’s office leases and equipment leases. The majority of the Company’s office leases contain provisions for specified annual increases over the rents of the prior year and are computed based on a specified annual increase over the prior year’s rent, generally 4.0%. The Company’s office leases have initial terms ranging from 3 to 51 years.
In accordance with the adoption of ASC 842 Leases, the Company recorded right-of-use assets (included in Other assets, net on the consolidated balance sheet) and related lease liabilities (included in Accounts payable and accrued expenses on the consolidated balance sheet) for these leases. As of December 31, 2022, the Company’s weighted average remaining lease term is approximately 22.5 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.8%. The Company has not recognized a right-of-use asset and lease liability for leases with terms of 12 months or less and without an option to purchase the underlying asset.
In calculating the right-of-use assets and related lease liabilities, the Company’s lease payments are typically discounted at its incremental borrowing rate because the interest rate implicit in the lease cannot be readily determined in the absence of key inputs which are typically not reported by our lessors. Judgment was used to estimate the secured borrowing rate associated with our leases and reflects the lease term specific to each lease.
The Company remeasures its lease liabilities monthly at the present value of the future lease payments using the discount rate determined at lease commencement. Rent expense relating to the operating leases, including straight-line rent, was approximately $0.5 million for each of the years ended December 31, 2022 and 2021, and is recorded in general and administrative in the statements of operations.
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The Company’s future minimum lease payments for its operating leases as of December 31, 2022 were as follows:
(in thousands) |
|
|
|
|
For the year ending: |
|
|
|
|
2023 |
|
$ |
418 |
|
2024 |
|
|
25 |
|
2025 |
|
|
25 |
|
2026 |
|
|
24 |
|
2027 |
|
|
22 |
|
Thereafter |
|
|
1,114 |
|
Total undiscounted future minimum lease payments |
|
|
1,628 |
|
Discount |
|
|
(890 |
) |
|
$ |
738 |
|
|
Contingencies
Impact of COVID-19
The Company continues to monitor and address risks related to the COVID-19 pandemic. Certain tenants experiencing economic difficulties during the pandemic have previously sought rent relief, which had been provided on a case-by-case basis primarily in the form of rent deferrals and, in more limited cases, in the form of rent abatements. Since April 2020, the Company has entered into lease modifications that deferred approximately $0.6 million and waived approximately $0.3 million of contractual revenue for rent that pertained to April 2020 through December 2021; the Company had no lease modifications related to COVID-19 during 2022. Less than $0.1 million of the total deferred rent from all lease modifications since April 2020 remained outstanding as of December 31, 2022.
Litigation
From time to time, the Company or its properties may be subject to claims and suits in the ordinary course of business. The Company’s lessees and borrowers have indemnified, and are obligated to continue to indemnify, the Company against all liabilities arising from the operations of the properties and are further obligated to indemnify it against environmental or title problems affecting the real estate underlying such facilities. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
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Note 8 - Fortress Preferred Equity Investment
On November 22, 2022, the Company, the Operating Partnership and Broad Street Eagles JV LLC, a newly formed subsidiary of the Operating Partnership (the “Eagles Sub-OP”), entered into a Preferred Equity Investment Agreement with CF Flyer PE Investor LLC (the “Fortress Member”), an affiliate of Fortress Investment Group LLC, pursuant to which the Fortress Member invested $80.0 million in the Eagles Sub-OP in exchange for a preferred membership interest (such interest, the “Fortress Preferred Interest” and such investment, the “Preferred Equity Investment”). We consolidate the Eagles Sub-OP under the guidance set forth in ASC 810 "Consolidation." We evaluated whether the Eagles Sub-OP met the criteria for classification as a VIE or, alternatively, as a voting interest entity and concluded that that the Eagles Sub-OP met the criteria of a VIE. The Company is considered to have a controlling financial interest in the Eagles Sub-OP because the Company determined that it is the primary beneficiary because it is most closely associated with the Eagles Sub-OP.
In connection with the Preferred Equity Investment, the Operating Partnership and the Fortress Member entered into the Eagles Sub-OP Operating Agreement, and the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East in November 2022, as well as Cromwell Field in December 2022. The subsidiaries of the Operating Partnership that indirectly own the following eight properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates: (i) Highlandtown, (ii) Spotswood and (iii) the six properties securing the Basis Term Loan (the “Portfolio Excluded Properties” and, collectively with Highlandtown and Spotswood the “Excluded Properties”). The outside dates for Highlandtown, the Portfolio Excluded Properties and Spotswood are May 6, 2023, June 30, 2023 and July 6, 2023, respectively.
Pursuant to the Amended and Restated Limited Liability Company Agreement of the Eagles Sub-OP (the “Eagles Sub-OP Operating Agreement”), the Fortress Member is entitled to monthly distributions, a portion of which is paid in cash (the “Current Preferred Return”) and a portion that accrues on and is added to the Preferred Equity Investment each month (the “Capitalized Preferred Return” and, together with the Current Preferred Return, the “Preferred Return”). The initial Preferred Return is 12% per annum, comprised of a 5% Current Preferred Return and a 7% Capitalized Preferred Return, provided that, until the Portfolio Excluded Properties are contributed to the Eagles Sub-OP, the Capitalized Preferred Return is increased by 4.75%. The Capitalized Preferred Return increases each year by 1%. Commencing on November 22, 2027, the Preferred Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter. Upon (i) the occurrence of a Trigger Event, (ii) during a three-month period in which distributions on the Preferred Equity Investment are not made because such payments would cause a violation of Delaware law or (iii) if a Qualified Public Offering has not occurred on or prior to November 22, 2027, the entire Preferred Return shall accrue at the then-applicable Preferred Return plus 4% and shall be payable monthly in cash. As of December 31, 2022, the Capitalized Preferred Return was approximately $1.0 million and is reflected within Preferred equity investment on the consolidated balance sheets. For the year ended December 31, 2022, the Company recognized $0.4 million and $1.1 million of Current Preferred Return and Capitalized Preferred Return, respectively, as a reduction to additional paid-in capital in the consolidated statements of equity.
Upon the closing of a Qualified Public Offering, unless earlier redeemed, the Eagles Sub-OP must redeem the entire Fortress Preferred Interest by payment in cash to the Fortress Member of the full Redemption Amount (as defined below), provided that (i) the Eagles Sub-OP may elect, in its discretion, not to redeem $37.5 million of the Preferred Equity Investment and (ii) $25.0 million of the Preferred Equity Investment (less the amount of the Fortress Mezzanine Loan converted into common stock in connection with such Qualified Public Offering, if any) will be converted to shares of common stock at a price of $2.00 per share, subject to certain adjustments. The Operating Partnership may cause the Eagles Sub-OP to redeem the Fortress Preferred Interest in whole (but not in part), by payment in cash to the Fortress Member of the full Redemption Amount, as long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption. The “Redemption Amount” is equal to the sum of: (i) all outstanding loans advanced to the Eagles Sub-OP by the Fortress Member in accordance with the terms of the Eagles Sub-OP Operating Agreement, together with all accrued and unpaid return on such loans; (ii) the unredeemed balance of the Preferred Equity Investment; (iii) an amount equal to the greater of (x) all accrued and unpaid Preferred Return and (y) a 1.40x minimum multiple on the amount of all loans and capital contributions made by the Fortress Member to the Eagles Sub-OP in accordance with the terms of the Eagles Sub-OP Operating Agreement, which minimum multiple shall be reduced to 1.30x upon the consummation of a Qualified Public Offering; and (iv) all other payments, fees, costs and expenses due or payable to the Fortress Member under the Eagles Sub-OP Operating Agreement, including a $10.0 million exit fee unless the Redemption Amount is paid upon or following the completion of a Qualified Public Offering.
The Operating Partnership serves as the managing member of the Eagles Sub-OP. However, the Fortress Member has approval rights over certain Major Actions (as defined in the Eagles Sub-OP Operating Agreement), including, but not limited to (i) the adoption and approval of annual corporate and property budgets, (ii) the amendment, renewal, termination or modification of material contracts, leases over 5,000 square feet and certain loan documents, (iii) the liquidation, dissolution, or winding-up of the Eagles Sub-OP, the Company or any of its subsidiaries, (iv) taking actions of bankruptcy or failing to defend an involuntary bankruptcy action of the Eagles Sub-OP, the Company or any of its subsidiaries, (v) effecting any reorganization or recapitalization of the Eagles Sub-OP, the Company or any of its subsidiaries, (vi) declaring or paying distributions on any equity security of the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (vii) issuing any equity securities in the Eagles Sub-OP, the Company or any of its
84
subsidiaries, subject to certain exceptions, (viii) conducting a merger or consolidation of the Eagles Sub-OP, the Company or the Operating Partnership or selling substantially all the assets of the Company and its subsidiaries or the Eagles Sub-OP and its subsidiaries, (ix) amending, terminating or otherwise modifying the loans secured by the properties indirectly owned by the Eagles Sub-OP, subject to certain exceptions, (x) incurring additional indebtedness or making prepayments on indebtedness, subject to certain exceptions; (xi) acquiring any property outside the ordinary course of business of the Company and (xii) selling any property below the minimum release price for such property.
Under the Eagles Sub-OP Operating Agreement, “Trigger Events” include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property owned by the Company or any of its subsidiaries; (ii) a bankruptcy event with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Eagles Sub-OP Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the Fortress Mezzanine Loan or the mortgage loans secured by properties owned directly or indirectly by the Eagles Sub-OP (including the Excluded Properties); (v) failure to meet the minimum Total Yield requirements under the Eagles Sub-OP Operating Agreement; (vi) failure to pay the Current Preferred Return (subject to a limited cure period) or failure to make distributions as required by the Eagles Sub-OP Operating Agreement; (vii) the occurrence of a Change of Control (as defined in the Eagles Sub-OP Operating Agreement); (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Mr. Jacoby (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of common stock and OP units, in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under certain other agreements related to the Preferred Equity Investment.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest by payment to the Fortress Member of the full Redemption Amount upon not less than 90 days prior written notice to the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
Under certain circumstances, including in the event of a Trigger Event or if a Qualified Public Offering has not occurred by November 22, 2027, the Fortress Member has the right (among other rights) to (i) remove the Operating Partnership as the managing member of the Eagles Sub-OP and to serve as the managing member until the Fortress Member is paid the Redemption Amount, (ii) cause the Eagles Sub-OP to sell one or more properties until the entire Fortress Preferred Interest has been redeemed for the Redemption Amount, (iii) cause the Eagles Sub-OP to use certain reserve accounts to pay the Fortress Member the full Redemption Amount, and (iv) terminate all property management and other service agreements with affiliates of the Company.
The obligations of the Operating Partnership under the Eagles Sub-OP are guaranteed by the Company. In addition, Messrs. Jacoby and Yockey guaranteed the full payment of the Redemption Amount in the event of a bankruptcy event of the Company or its subsidiaries without the consent of the Fortress Member or certain other events that interfere with the rights of the Fortress Member under certain other agreements related to the Preferred Equity Investment.
The Fortress Member’s interest in the Eagles Sub-OP under the Eagles Sub-OP Operating Agreement is a financial instrument with both equity and debt characteristics and is classified as mezzanine equity in our accompanying consolidated financial statements. The instrument was initially recognized at fair value net of issuance costs. As discussed above, the Preferred Equity Investment is redeemable at a determinable date (at year five (5), prior to year five if a Qualified Public Offering occurs or at any time so long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption) and therefore, at each subsequent reporting period we will accrete the carrying value to the Redemption Amount based on the effective interest method over the remaining term. All financial instruments that are classified as mezzanine equity are evaluated for embedded derivative features by evaluating each feature against the nature of the host instrument (e.g. more equity-like or debt-like). Features identified as embedded derivatives that are material are recognized separately as a derivative asset or liability in the consolidated financial statements. The Company has evaluated the Preferred Equity Investment and determined that its nature is that of a debt host and certain embedded derivatives exist that would require bifurcation on the Company’s consolidated balance sheets. The Company recognized a derivative liability of $0.4 million at November 22, 2022 in the consolidated balance sheets. The Company recognized subsequent measures of $0.8 million in derivative fair value adjustment in the consolidated statements of operations at December 31, 2022. The derivative liability was $1.2 million at December 31, 2022 and is reflected in accounts payable and accrued liabilities in the consolidated balance sheets.
85
The following table summarizes the preferred equity investment activities for the year ended December 31, 2022.
(thousands) |
|
Preferred Equity Investment |
|
|
Balance at December 31, 2021 |
|
$ |
— |
|
Investment in preferred equity |
|
|
80,000 |
|
Financing costs |
|
|
(5,589 |
) |
Discount on preferred equity |
|
|
(1,689 |
) |
Bifurcation of embedded derivatives |
|
|
(417 |
) |
Preferred equity return |
|
|
1,392 |
|
Balance at December 31, 2022 |
|
$ |
73,697 |
|
Note 9 - Equity
Common Stock
On January 3, 2022 and April 1, 2022, the Company issued 165,700 and 9,708 shares of common stock, respectively, to its directors. Also, on April 1, 2022 and July 1, 2022, the Company issued 60,106 and 36,064 shares of common stock, respectively, in connection with the redemption of OP units.
During 2021, the Company issued 9,083,730 shares of common stock in connection with the Mergers to acquire four properties (as discussed above in Note 3 under the heading “—2021 Real Estate Acquisitions") and 36,064 shares of common stock were issued in connection with the redemption of OP units.
On January 3, 2023 and April 3, 2023, the Company issued 166,125 and 32,904 shares of common stock, respectively, to its directors. On April 3, 2023, the Company issued 254,839 shares of common stock to Mr. Jacoby in lieu of cash payment of 50% of his bonus pursuant to the cash bonus plan approved by the compensation committee of the Company’s board of directors for the year ended December 31, 2022.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, in one or more series, with a $0.01 par value per share, of which 20,000 shares have been designated as Series A preferred stock, $0.01 par value per share (the “Series A preferred stock”).
As of December 31, 2022 and 2021, the Company had 500 shares of Series A preferred stock outstanding, all of which were assumed from MedAmerica upon completion of the Initial Mergers. The holders of Series A preferred stock are entitled to receive, out of funds legally available for that purpose, cumulative, non-compounded cash dividends on each outstanding share of Series A preferred stock at the rate of 10.0% of the $100 per share issuance price (“Series A preferred dividends”). The Series A preferred dividends are payable semiannually to the holders of Series A preferred stock, when and as declared by the Company’s board of directors, on June 30 and December 31 of each year, that shares of Series A preferred stock are outstanding; provided that due and unpaid Series A preferred dividends may be declared and paid on any date declared by the Company’s board of directors. As of December 31, 2022, less than $0.1 million of Series A preferred dividends were undeclared.
In the event of any voluntary or involuntary liquidation, sale, merger, consolidation, dissolution or winding up of the Company, before any distribution of assets shall be made to the holders of the Company’s common stock, each holder of Series A preferred stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount equal to the $100 issue price plus all Series A preferred dividends accrued and unpaid on such shares up to the date of distribution of the available assets (such amount, the “Liquidation Preference”). The amount deemed distributed for purposes of determining the Liquidation Preference shall be the cash or the fair market value of the property, rights or securities distributed to the holders of Series A preferred stock as determined in good faith by the Company’s board of directors. If, upon a liquidation event, the available assets are insufficient to pay the Liquidation Preference to the holders of Series A preferred stock in full, then the available assets shall be distributed ratably among the holders of Series A preferred stock in proportion to their respective ownership of shares of Series A preferred stock.
Shares of Series A preferred stock, excluding accrued Series A preferred dividends, which will be paid as described above, may, in the sole discretion of the holder of such shares of Series A preferred stock and by written notice to the Company, be converted into shares of the Company’s common stock, at a conversion price of $0.20 per share, subject to certain adjustments, in whole or in part at any time.
Holders of Series A preferred stock are generally not entitled to voting rights.
86
Noncontrolling Interest
As of December 31, 2022 and 2021, the Company owned an 85.3% interest and a 91.9% interest, respectively, in the Operating Partnership. On November 23, 2022, the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units in connection with the acquisition of Midtown Row, as well as 573,529 Common OP units in connection with the Merger related to Lamar Station Plaza West. Commencing on the 12-month anniversary of the date on which the Common OP units were issued, each limited partner of the Operating Partnership (other than the Company) has the right, subject to certain terms and conditions, to require the Operating Partnership to redeem all or a portion of the Common OP units held by such limited partner in exchange for cash based on the market price of the Company’s common stock or, at the Company’s option and sole discretion, for shares of the Company’s common stock on a one-for-one basis. Holders of Preferred OP units have the right to convert each Preferred OP unit into one Common OP unit, plus a cash payment for each Preferred OP unit so converted equal to (i) (A) the liquidation preference of the Preferred OP unit at such time, minus (B) $2.00 and (ii) all accrued and unpaid monthly distributions (to the extent not already added to the liquidation preference) (the “Conversion Liquidation Payment”). The liquidation preference means the sum of (i) $2.00 and (ii) the accrued Capitalized Preferred OP Unit Return (as defined below). On the date that the common stock is first listed on the New York Stock Exchange, the NYSE American or the Nasdaq Stock Market, each Preferred OP unit will automatically convert into one Common OP unit and the right to receive the Conversion Liquidation Payment. Pursuant to the amended Agreement of Limited Partnership of the Operating Partnership, a portion of the return on the Preferred OP units will be paid in cash (the “Current Preferred OP Unit Return”) and a portion of the return will accrue on and be added to the liquidation preference of the Preferred OP units each month (the “Capitalized Preferred OP Unit Return” and, together with the Current Preferred OP Unit Return, the "Preferred OP Unit Return"). The initial Preferred OP Unit Return is 12% per annum, comprised of a 5% Current Preferred OP Unit Return and a 7% Capitalized Preferred OP Unit Return. The Capitalized Preferred OP Unit Return increases each year by 1%. After November 23, 2027, the Preferred OP Unit Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter. The Preferred OP units have no voting rights.
On April 1, 2022 and July 1, 2022, the Company issued 60,106 and 36,064 shares of common stock, respectively, in connection with the redemption of Common OP units. On October 1, 2021, the Company converted 36,064 Common OP units to common stock.
Amended and Restated 2020 Equity Incentive Plan
On September 15, 2021, the Company’s board of directors approved the Company’s Amended and Restated 2020 Equity Incentive Plan (the “Plan”), which increased the number of shares of the Company’s common stock reserved for issuance under the Plan by 1,500,000 shares, from 3,620,000 shares to 5,120,000 shares. The Plan provides for the grant of stock options, share awards (including restricted stock and restricted stock units), share appreciation rights, dividend equivalent rights, performance awards, annual cash incentive awards and other equity based awards, including LTIP units, which are convertible on a one-for-one basis into Common OP units. As of December 31, 2022, there were 871,455 shares available for future issuance, subject to certain adjustments set forth in the Plan. Each share subject to an award granted under the Plan will reduce the available shares under the Plan on a one-for-one basis. The Plan is administered by the compensation committee of the Company’s board of directors.
Restricted Stock
Awards of restricted stock are awards of the Company’s common stock that are subject to restrictions on transferability and other restrictions as established by the Company’s compensation committee on the date of grant that are generally subject to forfeiture if employment (or service as a director) terminates prior to vesting. Upon vesting, all restrictions would lapse. Except to the extent restricted under the award agreement, a participant awarded restricted stock will have all of the rights of a stockholder as to those shares, including, without limitation, the right to vote and the right to receive dividends on the shares. The value of the awards is determined based on the market value of the Company’s common stock on the date of grant. The Company expenses the cost of restricted stock ratably over the vesting period.
The following table summarizes the stock-based award activity under the Plan for the years ended December 31, 2022 and 2021.
|
|
Restricted Stock Awards |
|
|
Weighted-Average Grant Date |
|
||
Outstanding as of December 31, 2020 |
|
|
153,200 |
|
|
$ |
0.55 |
|
Granted |
|
|
148,657 |
|
|
|
2.72 |
|
Vested |
|
|
(56,451 |
) |
|
|
2.95 |
|
Forfeited |
|
|
(7,785 |
) |
|
|
2.95 |
|
Outstanding as of December 31, 2021 |
|
|
237,621 |
|
|
|
1.26 |
|
Granted |
|
|
138,262 |
|
|
|
2.20 |
|
Vested |
|
|
(194,457 |
) |
|
|
1.00 |
|
Forfeited |
|
|
(21,987 |
) |
|
|
2.35 |
|
Outstanding as of December 31, 2022 |
|
|
159,439 |
|
|
$ |
1.62 |
|
87
Of the restricted shares that vested during 2022 and 2021, 4,307 and 11,917 shares, respectively, were surrendered by certain employees to satisfy their tax obligations.
Compensation expense related to these share-based payments for the year ended December 31, 2022 and 2021 was $0.2 million and $0.3 million, respectively, and was included in general and administrative expenses on the consolidated statements of operations. The remaining unrecognized costs from stock-based awards as of December 31, 2022 was approximately $0.1 million and will be recognized over a weighted-average period of 0.9 years.
On October 1, 2021, the Company granted 58,140 restricted shares of common stock to certain employees, which will vest ratably on January 1, 2022, January 1, 2023, and January 1, 2024, subject to continued service through such dates. The total value of these awards is calculated to be approximately $0.1 million.
On April 1, 2022, the Company granted 138,262 restricted shares of common stock to certain employees, which will vest ratably on January 1, 2023, January 1, 2024, and January 1, 2025, subject to continued service through such dates. The total value of these awards is calculated to be approximately $0.3 million.
On April 3, 2023, the Company granted 419,618 restricted shares of common stock to certain employees, which will vest ratably on January 1, 2024, January 1, 2025, and January 1, 2026, subject to continued service through such dates. The total value of these awards is calculated to be approximately $0.3 million.
Restricted Stock Units
The Company’s restricted stock unit (“RSU”) awards represent the right to receive unrestricted shares of common stock based on the achievement of Company performance objectives as determined by the Company’s compensation committee. Grants of RSUs generally entitle recipients to shares of common stock equal to 0% up to 300% of the number of units granted on the vesting date. RSUs are not eligible to vote or to receive dividends prior to vesting. Dividend equivalents are credited to the recipient and are paid only to the extent that RSUs vest based on the achievement of the applicable performance objectives.
On October 1, 2021, the Company granted certain employees RSUs with an aggregate target number of 1,220,930 RSUs, of which 0% to 300% will vest based on the Company’s Implied Equity Market Capitalization (defined as (i) the sum of (a) the number of shares of common stock of the Company outstanding and (b) the number of Common OP units outstanding (not including Common OP units held by the Company), in each case, as of the last day of the applicable performance period, multiplied by (ii) the value per share of common stock at the end of the performance period) on December 31, 2024, the end of the performance period, subject to the executive’s continued service on such date. If, however, the maximum amount of the award is not earned as of December 31, 2024, the remaining RSUs may be earned based on the Company’s Implied Equity Market Capitalization as of December 31, 2025. To the extent performance is between any two designated amounts, the percentage of the target award earned will be determined using a straight-line linear interpolation between the two designated amounts. The value of the awards is determined by using a Monte Carlo simulation model in estimating the market value of the RSUs as of the date of grant. The Company expenses the cost of RSUs ratably over the vesting period. The remaining unrecognized costs from RSU awards as of December 31, 2022 was approximately $3.7 million and will be recognized over 3.0 years. On February 28, 2023, 232,558 RSUs were forfeited as a result of an employee’s resignation.
Option Awards
In connection with the completion of the Initial Mergers, the Company assumed option awards previously issued to directors and officers of MedAmerica. Details of these options for the years ended December 31, 2022 and 2021, are presented in the table below:
|
|
Number of Shares Underlying Options |
|
|
Weighted Average Exercise Price Per Share |
|
|
Weighted Average Fair Value at Grant Date |
|
|
Weighted Average Remaining Contractual Life |
|
|
Intrinsic Value |
|
|||||
Balance at December 31, 2020 |
|
|
70,000 |
|
|
$ |
7.71 |
|
|
$ |
— |
|
|
|
2.76 |
|
|
$ |
— |
|
Options granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options expired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at December 31, 2021 |
|
|
70,000 |
|
|
$ |
7.71 |
|
|
$ |
— |
|
|
|
1.76 |
|
|
$ |
— |
|
Options granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options expired |
|
|
(60,000 |
) |
|
|
(8.00 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at December 31, 2022 |
|
|
10,000 |
|
|
$ |
6.00 |
|
|
$ |
— |
|
|
|
0.45 |
|
|
$ |
— |
|
The fair values of stock options are estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the five-year treasury rate at the date of grant. The expected life is based on the contractual life of the options at the date of grant. All 10,000 and 70,000 outstanding options at December 31, 2022 and 2021, respectively, were fully vested at grant date. The exercise price of the
88
outstanding options exceeded the closing price of the Company’s common stock at December 31, 2022. The intrinsic value is not material.
Warrants
On June 4, 2021, the Company issued to Lamont Street warrants to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.50 per share (the “Warrants”). The Warrants were issued in connection with the issuance of the Lamont Street Preferred Interest described in Note 6 under the heading “—Lamont Street Preferred Interest.” The fair value of these warrant liabilities is estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the U.S. Treasury rate at the date of grant. The expected life is based on the contractual life of the warrants at the date of grant, which is 4.3 years.
The table below provides the input that was used in the Black-Scholes model at June 4, 2021:
|
|
June 4, 2021 |
|
|
Expected dividend yield |
|
|
— |
|
Risk-free interest rate |
|
|
0.7 |
% |
Expected volatility |
|
|
38.6 |
% |
Expected Life |
|
|
4.3 |
|
On November 22, 2022, the Company issued to the Fortress Member warrants to purchase 2,560,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments (the “Fortress Warrants”). The Fortress Warrants may be exercised on a cashless basis. The Fortress Warrants will automatically be deemed exercised in full on a cashless basis upon the occurrence of a Qualified Public Offering. The fair value of these warrant liabilities are estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the U.S. Treasury rate of the date of grant. The expected life is based on the contractual life of the warrants at the date of grant, which is 10 years. The fair value of the Fortress Warrants is allocated to the proceeds of the Preferred Equity Investment and the Fortress Mezzanine Loan on a relative fair market basis.
The table below provides the input that was used in the Black-Scholes model at November 22, 2022:
|
|
November 22, 2022 |
|
|
Expected dividend yield |
|
|
— |
|
Risk-free interest rate |
|
|
3.8 |
% |
Expected volatility |
|
|
69.3 |
% |
Expected Life |
|
|
10.0 |
|
On November 23, 2022, the Company issued to Lamont Street warrants to purchase 500,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments (the “Lamont Warrants”). The Lamont Warrants may be exercised on a cashless basis. The fair value of these warrant liabilities are estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the U.S. Treasury rate of the date of grant. The expected life is based on the contractual life of the warrants at the date of grant, which is 5 years. The fair value of the Lamont Warrants is included as part of the purchase price for Lamar Station Plaza West and allocated on a relative fair market basis among the assets.
The table below provides the input that was used in the Black-Scholes model at November 23, 2022:
|
|
November 23, 2022 |
|
|
Expected dividend yield |
|
|
— |
|
Risk-free interest rate |
|
|
3.9 |
% |
Expected volatility |
|
|
87.7 |
% |
Expected Life |
|
|
5.0 |
|
89
Note 10 – Revenues
Disaggregated Revenue
The following tables represents a disaggregation of revenues from contracts with customers for the years ended December 31, 2022 and 2021 by type of service:
|
|
|
|
Year Ended December 31, |
|
|||||
(in thousands) |
|
Topic 606 |
|
2022 |
|
|
2021 |
|
||
Topic 606 Revenues |
|
|
|
|
|
|
|
|
||
Leasing commissions |
|
Point in time |
|
$ |
1,767 |
|
|
$ |
2,406 |
|
Property and asset management fees |
|
Over time |
|
|
299 |
|
|
|
591 |
|
Sales commissions |
|
Point in time |
|
|
756 |
|
|
|
430 |
|
Development fees |
|
Over time |
|
|
— |
|
|
|
264 |
|
Engineering services |
|
Over time |
|
|
178 |
|
|
|
250 |
|
Topic 606 Revenue |
|
|
|
|
3,000 |
|
|
|
3,941 |
|
Out of Scope of Topic 606 revenue |
|
|
|
|
|
|
|
|
||
Rental income |
|
|
|
|
29,871 |
|
|
|
21,408 |
|
Sublease income |
|
|
|
|
80 |
|
|
|
— |
|
Total Out of Scope of Topic 606 revenue |
|
|
|
|
29,951 |
|
|
|
21,408 |
|
Total Revenue |
|
|
|
$ |
32,951 |
|
|
$ |
25,349 |
|
Leasing Operations
Minimum cash rental payments due to the Company in future periods under executed non-cancelable operating leases in place for the Company’s properties as of December 31, 2022 are as follows:
(in thousands) |
|
|
|
|
For the year ending December 31: |
|
|
|
|
2023 |
|
$ |
28,227 |
|
2024 |
|
|
23,298 |
|
2025 |
|
|
20,994 |
|
2026 |
|
|
17,706 |
|
2027 |
|
|
14,887 |
|
Thereafter |
|
|
49,674 |
|
Total |
|
$ |
154,786 |
|
Note 11 – Concentrations of Credit Risks
The following table contains information regarding the geographic concentration of the properties in the Company’s portfolio as of December 31, 2022 and 2021.
(dollars in thousands) |
|
Number of Properties at December 31, |
|
Gross Real Estate Assets at December 31, |
|
|
Percentage of Total Gross Real Estate Assets at December 31, |
|
|
Rental income for the year ended December 31, |
|
|||||||||||||||||
Location |
|
2022 |
|
2021 |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||
Maryland (1) |
|
6 |
|
6 |
|
$ |
100,335 |
|
|
$ |
101,608 |
|
|
|
24.5 |
% |
|
|
39.4 |
% |
|
$ |
12,896 |
|
|
$ |
10,332 |
|
Virginia |
|
6 |
|
5 |
|
|
210,641 |
|
|
|
82,909 |
|
|
|
51.4 |
% |
|
|
32.1 |
% |
|
|
8,614 |
|
|
|
6,418 |
|
Pennsylvania |
|
1 |
|
1 |
|
|
27,201 |
|
|
|
27,628 |
|
|
|
6.6 |
% |
|
|
10.7 |
% |
|
|
2,325 |
|
|
|
2,457 |
|
Washington D.C. |
|
1 |
|
1 |
|
|
8,422 |
|
|
|
8,393 |
|
|
|
2.0 |
% |
|
|
3.3 |
% |
|
|
706 |
|
|
|
608 |
|
Colorado |
|
3 |
|
2 |
|
|
63,503 |
|
|
|
37,379 |
|
|
|
15.5 |
% |
|
|
14.5 |
% |
|
|
5,330 |
|
|
|
1,593 |
|
|
|
17 |
|
15 |
|
$ |
410,102 |
|
|
$ |
257,917 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
$ |
29,871 |
|
|
$ |
21,408 |
|
90
Note 12 – Employee Benefit Plan
The Company has a 401(k) retirement plan (the “401(k) Plan”), which permits all eligible employees to defer a portion of their compensation under the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the provisions of the 401(k) Plan, the Company may make discretionary contributions on behalf of the eligible employees. The Company made contributions to the 401(k) Plan of approximately $0.1 million for each of the years ended December 31, 2022 and 2021.
Note 13 - Earnings per Share
Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined based on the weighted average number of shares outstanding during the period combined with the incremental average shares that would have been outstanding assuming the conversion of all potentially dilutive common shares into common shares as of the earliest date possible. Potentially dilutive securities include stock options, convertible preferred stock, restricted stock, warrants, RSUs and OP units, which, subject to certain terms and conditions, may be tendered for redemption by the holder thereof for cash based on the market price of the Company’s common stock or, at the Company’s option and sole discretion, for shares of the Company’s common stock on a one-for-one basis. Stock options, convertible preferred stock, restricted stock, warrants, RSUs and OP units have been omitted from the Company’s denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the denominator would have no dilutive impact due to the net loss position. The weighted average number of anti-dilutive convertible preferred stock, restricted stock, RSUs and OP units outstanding for the year ended December 31, 2022 and 2021 was approximately 4.4 million and 3.3 million, respectively.
The following table sets forth the computation of earnings per common share for the years ended December 31, 2022 and 2021:
|
|
For the Year Ended December 31, |
|
|||||
(in thousands, except per share data) |
|
2022 |
|
|
2021 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net loss |
|
$ |
(16,273 |
) |
|
$ |
(10,744 |
) |
Less: Preferred equity return on Fortress preferred equity |
|
|
(1,492 |
) |
|
|
— |
|
Less: Preferred OP units return |
|
|
(48 |
) |
|
|
— |
|
Plus: Net loss attributable to noncontrolling interest |
|
|
2,522 |
|
|
|
1,236 |
|
Net loss attributable to common stockholders |
|
$ |
(15,291 |
) |
|
$ |
(9,508 |
) |
Denominator |
|
|
|
|
|
|
||
Basic weighted-average common shares |
|
|
32,379 |
|
|
|
26,929 |
|
Dilutive potential common shares |
|
|
— |
|
|
|
— |
|
Diluted weighted-average common shares |
|
|
32,379 |
|
|
|
26,929 |
|
|
|
|
|
|
|
|
||
Net loss per common share- basic and diluted |
|
$ |
(0.47 |
) |
|
$ |
(0.35 |
) |
Note 14 - Fair Value of Financial Instruments
Financial Assets and Liabilities Measured at Fair Value
The Company’s financial assets and liabilities measured at fair value on a recurring basis currently include derivative financial instruments and the Fortress Mezzanine Loan. The derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate caps and interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy. The fair value of the Company’s derivative assets, which is included in Other assets, net on the consolidated balance sheets was $3.4 million as of December 31, 2022 and de minimis as of December 31, 2021. The fair value of the Company’s interest rate swap liabilities, which are included in Accounts payable and accrued liabilities on the consolidated balance sheets, was approximately $0.4 million at December 31, 2021. See Note 6 “—Interest Rate Cap and Interest Rate Swap Agreements” for further discussion regarding the Company’s interest rate cap and interest rate swap agreements.
The Preferred Equity Investment contains embedded features that are required to be bifurcated from the temporary equity-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815, Derivatives and Hedging. The fair value of the embedded derivative liability was valued using a binomial lattice-based model which takes into account variables such as estimated volatility, expected holding period, stock price, the exit fee and the risk-free interest rate. The risk-free interest rate is the five-year treasury rate at the valuation date. This technique incorporates Level 1 and Level 2 inputs. The fair value of the embedded derivative liability was approximately $1.2 million at December 31, 2022.
The Company elected to measure the Fortress Mezzanine Loan at fair value in accordance with the FVO. The Fortress Mezzanine Loan is a debt host financial instrument containing embedded features which would otherwise be required to be bifurcated from the
91
debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815, Derivatives and Hedging. The FVO election for the Fortress Mezzanine Loan is due to the number and complexity of features that would require separate bifurcation absent this election. The fair value of the Fortress Mezzanine Loan is valued using a binomial lattice-based model which takes into account variables such as estimated volatility, expected holding period, stock price, the exit fee and the risk-free interest rate. The risk-free interest rate is the five-year treasury rate at the valuation date. This technique incorporates Level 1 and Level 2 inputs. The fair value of the Fortress Mezzanine Loan was approximately $17.9 million at December 31, 2022.
Financial Assets and Liabilities Not Carried at Fair Value
The carrying amounts of cash and cash equivalents, restricted cash, receivables and payables are reasonable estimates of their fair value as of December 31, 2022 and 2021 due to the short-term nature of these instruments (Level 1).
At December 31, 2022 and 2021, the Company’s indebtedness was comprised of borrowings that bear interest at variable and fixed rates. The fair value of the Company’s $111.4 million and $129.4 million in borrowings under variable rates as of December 31, 2022 and 2021, respectively, approximate their carrying values as the debt is at variable rates currently available and resets on a monthly basis (Level 2).
The fair value of the Company’s fixed rate debt as of December 31, 2022 and 2021 is estimated by using Level 2 inputs such as discounting the estimated future cash flows using current market rates for similar loans that would be made to borrowers with similar credit ratings and for the same remaining maturities. As of December 31, 2022, the fair value of the Company’s $140.2 million fixed rate debt was estimated to be approximately $139.4 million. As of December 31, 2021, the fair value of the Company’s $50.7 million fixed rate debt was estimated to be approximately $50.6 million.
Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible.
Note 15- Taxes
The income tax benefit consisted of the following for the years ended December 31, 2022 and 2021:
|
|
For the Year Ended December 31, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Current: |
|
|
|
|
|
|
||
Federal |
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
— |
|
|
|
— |
|
Total current tax expense (benefit) |
|
|
— |
|
|
|
— |
|
Deferred: |
|
|
|
|
|
|
||
Federal |
|
$ |
(4,214 |
) |
|
$ |
(2,471 |
) |
State |
|
|
(1,643 |
) |
|
|
(1,062 |
) |
Total deferred tax benefit |
|
|
(5,857 |
) |
|
|
(3,533 |
) |
Total income tax benefit |
|
$ |
(5,857 |
) |
|
$ |
(3,533 |
) |
The Company’s effective income tax rate for the years ended December 31, 2022 and 2021 reconciles with the federal statutory rate as follows:
|
|
For the Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Federal statutory rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
Loss attributable to partnership not subject to tax |
|
|
— |
|
|
|
(1.8 |
)% |
State income taxes, net of federal tax benefit |
|
|
6.0 |
% |
|
|
5.5 |
% |
Other |
|
|
(1.0 |
)% |
|
|
— |
|
Prior year adjustment |
|
|
1.7 |
% |
|
|
0.1 |
% |
Effective income tax rate on income before taxes |
|
|
27.7 |
% |
|
|
24.8 |
% |
The difference between the Company’s effective tax rate and federal statutory rate for the years ended December 31, 2022 and 2021 is 6.7% and 3.8%, respectively, which is primarily due to state taxes and permanent items.
92
Deferred income tax liabilities are comprised of the following as of December 31, 2022 and 2021:
|
|
For the Year Ended December 31, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Investment in the Operating Partnership |
|
$ |
(11,078 |
) |
|
$ |
(12,349 |
) |
NOL carryforwards |
|
|
6,646 |
|
|
|
3,255 |
|
Equity compensation |
|
|
461 |
|
|
|
130 |
|
Other |
|
|
3 |
|
|
|
— |
|
Total deferred tax liabilities |
|
$ |
(3,968 |
) |
|
$ |
(8,964 |
) |
At December 31, 2022 and 2021, the Company had pre-tax federal and state income tax NOL carryforwards of approximately $24.6 million and $12.1 million, respectively, which will carry forward indefinitely for federal purposes and for most states.
The Company had no uncertain tax positions as of December 31, 2022 and 2021. Generally, for federal and state purposes, the Company's tax years remain open for examination by tax authorities. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the Internal Revenue Service. The Company’s policy is to recognize interest and penalties associated with uncertain tax positions as part of income tax expense.
Note 16 – Related Party Transactions
Receivables and Payables
As of December 31, 2022 and 2021, the Company had $1.2 million and $0.2 million, respectively, in receivables due from related parties, included in Other assets, net on the consolidated balance sheets. The $1.2 million at December 31, 2022 relates to the Merger pursuant to which the Company acquired Lamar Station Plaza West, including the note receivable due from a related party. The $0.2 million at December 31, 2021 relates to receivables due from properties managed by the Company which were provided to the properties for working capital. Additionally, as of December 31, 2022 and 2021, the Company had less than $0.1 million and $0.6 million, respectively, in payables due to properties managed by the Company related to amounts borrowed by the Company for working capital, which are reflected in Payables due to related parties on the consolidated balance sheets. On October 6, 2022, Lamar Station Plaza West, a property managed by the Company and acquired in November 2022, advanced the Company $1.1 million for deposits related to the Company's financing in November 2022.
Approximately $0.4 million and $1.2 million of the Company’s total revenue for the years ended December 31, 2022 and 2021, respectively, was generated from related parties. Additionally, approximately $0.1 million of the Company’s accounts receivable, net balance at each of December 31, 2022 and 2021 was owed from related parties.
Prior to the completion of the Initial Mergers in 2019, BSR agreed to purchase a percentage of Mr. Yockey's ownership interest in BSR for total consideration of $1.5 million. Approximately $1.0 million of this consideration was paid to Mr. Yockey in the first quarter of 2020 and the remaining $0.5 million was paid to Mr. Yockey in the second quarter of 2021.
The Mergers
As consideration in the Mergers, as a result of their interests in the Broad Street Entities party to such Mergers, (i) Mr. Jacoby received 2,533,650 shares of the Company’s common stock and 993,018 Common OP units, (ii) Mr. Yockey received 2,533,650 shares of the Company’s common stock and 556,736 Common OP units, (iii) Alexander Topchy, the Company’s Chief Financial Officer, received an aggregate of 137,345 shares of the Company’s common stock and 62,658 Common OP units, (iv) Daniel J.W. Neal, a member of the Company’s board of directors, received, directly or indirectly, 878,170 shares of the Company’s common stock and (v) Samuel M. Spiritos, a member of the Company’s board of directors, indirectly received 13,827 shares of the Company’s common stock.
Management Fees
During the years ended December 31, 2021 and 2022, the Company provided management services for Lamar Station Plaza West, which was acquired during 2022 in the remaining Merger, and the Cypress Point property. The Company received a management fee ranging from 3.0% to 4.0% of such properties’ gross income. Messrs. Jacoby, Yockey and Topchy had interests in the Broad Street Entity that owned Lamar Station Plaza West. Messrs. Jacoby, Yockey, Topchy and Neal had interests in the Broad Street Entity that owned the Cypress Point property. In 2022, the Company terminated the merger agreement related to the Cypress Point property due to the performance of the property.
Messrs. Jacoby and Yockey along with Mr. Topchy, Mr. Neal, Jeffrey H. Foster, a member of the Company’s board of directors, and Aras Holden, the Company’s former Vice President of Asset Management and Acquisitions, had indirect ownership interests in BBL Current Owner, LLC (“BBL Current”), which owned Midtown Row. Mr. Jacoby also served as the chief executive officer and a director of BBL Current. On December 21, 2021, the Company entered into a purchase and sale agreement (the “MTR Agreement”) with BBL Current to acquire Midtown Row for a purchase price of $122.0 million in cash. On July 1, 2022, the MTR Agreement automatically terminated in accordance with its terms. On September 1, 2022, the Company and BBL Current entered into a third amendment and reinstatement of the MTR Agreement (the “MTR Amendment”), pursuant to which the MTR Agreement was fully
93
reinstated, subject to the terms of the MTR Amendment. The MTR Amendment increased the purchase price for the Midtown Row Acquisition to $123.3 million, to be payable in paid in cash and not less than $5.0 million of Common OP units and Preferred OP Units. On November 23, 2022, the Company completed the acquisition of Midtown Row and paid $118.7 million in cash and the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units. As consideration in the acquisition of Midtown Row, as a result of their direct or indirect interests in BBL Current, (i) Mr. Jacoby received 97,086 Common OP units, (ii) Mr. Neal indirectly received 202,861 Common OP units, (iii) Mr. Foster received 33,810 Common OP units, (iv) Mr. Yockey received 97,086 Common OP units and (v) Mr. Topchy received 17,337 Common OP units. The Company served as the development manager for Midtown Row and serves as the property manager and the leasing broker for the retail portion of Midtown Row.
Ground Lease
The Company acquired the fee-simple interest in the land that the Cromwell Field Shopping Center, a property managed by the Company, is located on under a leasehold interest. The Company leased the land to the owner of the Cromwell Field Shopping Center pursuant to a ground lease and recognized less than $0.1 million of revenue under the ground lease for the years ended December 31, 2021. On May 26, 2021, the ground lease was terminated upon the acquisition of Cromwell Field Shopping Center.
Tax Protection Agreements
On December 27, 2019, pursuant to the Merger Agreements, the Company and the Operating Partnership entered into tax protection agreements (the “Initial Tax Protection Agreements”) with each of the prior investors in BSV Colonial Investor LLC, BSV Lamonticello Investors LLC and BSV Patrick Street Member LLC, including Messrs. Jacoby, Yockey and Topchy, in connection with their receipt of Common OP units in certain of the Initial Mergers. On April 4, 2023, pursuant to the applicable Merger Agreement, the Company and the Operating Partnership entered into a tax protection agreement (together with the Initial Tax Protection Agreements, the “Tax Protection Agreements”), with each of the prior investors in BSV Lamont Investors LLC, including Messrs. Jacoby, Yockey and Topchy, in connection with their receipt of Common OP units in the Merger whereby the Company acquired Lamar Station Plaza West. Pursuant to the Tax Protection Agreements, until the seventh anniversary of the completion of the applicable Merger, the Company and the Operating Partnership may be required to indemnify the other parties thereto for their tax liabilities related to built-in gain that exists with respect to the properties known as Midtown Colonial, Midtown Lamonticello, Vista Shops at Golden Mile and Lamar Station Plaza West (the “Protected Properties”). Furthermore, until the seventh anniversary of the completion of the applicable Merger, the Company and the Operating Partnership will be required to use commercially reasonable efforts to avoid any event, including a sale of the Protected Properties, that triggers built-in gain to the other parties to the Tax Protection Agreements, subject to certain exceptions, including like-kind exchanges under Section 1031 of the Code.
Guarantees
The Company’s subsidiaries’ obligations under the Eagles Sub-OP Operating Agreement, Basis Loan Agreement, the Sub-OP Operating Agreement, and the Brookhill mortgage loan are guaranteed by Messrs. Jacoby and Yockey. We have agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan, the Sub-OP Operating Agreement, and the Brookhill mortgage loan. Mr. Jacoby is also a guarantor under the Cromwell mortgage loan agreement.
Consulting Agreement
The Company had engaged Timbergate Ventures, LLC, an entity wholly owned by Mr. Yockey, as a consultant for a two-year term beginning December 27, 2019. Pursuant to this arrangement, the Company paid Timbergate Ventures, LLC a consulting fee of $0.2 million during 2021, which was recorded in general and administrative expenses. This agreement expired on December 26, 2021.
Legal Fees
Mr. Spiritos is the managing partner of Shulman Rogers LLP, which represents the Company in certain real estate matters, including with matters related to the Mergers. During the years ended December 31, 2022 and 2021, the Company paid approximately $0.4 million and $0.5 million, respectively, in legal fees to Shulman Rogers LLP.
94
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Schedule III
Real Estate and Accumulated Depreciation
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Gross Amount at Which Carried at Close of Period |
|
|
|
|
|
|
|
|
||||||||||||||||||||
Property Name |
|
Location |
|
Property Type |
|
Encumbrances (1) |
|
|
Land |
|
|
Building and improvements, intangible lease assets and liabilities and furniture and equipment |
|
|
Cost Capitalized Subsequent to Acquisition |
|
|
Land |
|
|
Building and improvements, intangible lease assets and liabilities, furniture and equipment |
|
|
Total (2) |
|
|
Accumulated Depreciation and Amortization (2) (3) |
|
|
Date of Construction/ |
|
Date Acquired |
||||||||
Avondale Shops |
|
Washington, D.C. |
|
Shopping Center |
|
$ |
2,985 |
|
|
$ |
1,776 |
|
|
$ |
6,593 |
|
|
$ |
53 |
|
|
$ |
1,776 |
|
|
$ |
6,646 |
|
|
$ |
8,422 |
|
|
$ |
(920 |
) |
|
2010 |
|
2019 |
Brookhill Azalea Shopping Center |
|
Richmond, VA |
|
Shopping Center |
|
|
8,762 |
|
|
|
1,344 |
|
|
|
15,554 |
|
|
|
476 |
|
|
|
1,344 |
|
|
|
16,030 |
|
|
|
17,374 |
|
|
|
(2,976 |
) |
|
2012 |
|
2019 |
Coral Hills Shopping Center (4) |
|
Capitol Heights, MD |
|
Shopping Center |
|
|
10,689 |
|
|
|
2,186 |
|
|
|
14,317 |
|
|
|
(1 |
) |
|
|
2,186 |
|
|
|
14,316 |
|
|
|
16,502 |
|
|
|
(3,365 |
) |
|
2012 |
|
2019 |
Crestview Square Shopping Center (4) |
|
Landover Hills, MD |
|
Shopping Center |
|
|
11,924 |
|
|
|
2,853 |
|
|
|
15,717 |
|
|
|
83 |
|
|
|
2,853 |
|
|
|
15,800 |
|
|
|
18,653 |
|
|
|
(3,236 |
) |
|
2012 |
|
2019 |
Dekalb Plaza (4) |
|
East Norriton, PA |
|
Shopping Center |
|
|
14,558 |
|
|
|
7,573 |
|
|
|
17,479 |
|
|
|
2,148 |
|
|
|
7,573 |
|
|
|
19,627 |
|
|
|
27,200 |
|
|
|
(3,210 |
) |
|
2017 |
|
2019 |
Hollinswood Shopping Center |
|
Baltimore, MD |
|
Shopping Center |
|
|
12,760 |
|
|
|
5,907 |
|
|
|
15,050 |
|
|
|
3,953 |
|
|
|
5,907 |
|
|
|
19,003 |
|
|
|
24,910 |
|
|
|
(3,273 |
) |
|
2020 |
|
2019 |
Midtown Colonial (4) |
|
Williamsburg, VA |
|
Shopping Center |
|
|
8,429 |
|
|
|
3,963 |
|
|
|
10,014 |
|
|
|
3,728 |
|
|
|
3,963 |
|
|
|
13,742 |
|
|
|
17,705 |
|
|
|
(1,622 |
) |
|
2018 |
|
2019 |
Midtown Lamonticello (4) |
|
Williamsburg, VA |
|
Shopping Center |
|
|
9,839 |
|
|
|
3,108 |
|
|
|
12,659 |
|
|
|
276 |
|
|
|
3,108 |
|
|
|
12,935 |
|
|
|
16,043 |
|
|
|
(1,374 |
) |
|
2019 |
|
2019 |
Vista Shops at Golden Mile |
|
Frederick, MD |
|
Shopping Center |
|
|
11,478 |
|
|
|
4,342 |
|
|
|
10,219 |
|
|
|
132 |
|
|
|
4,342 |
|
|
|
10,351 |
|
|
|
14,693 |
|
|
|
(2,541 |
) |
|
2009 |
|
2019 |
West Broad Commons Shopping Center (4) |
|
Richmond, VA |
|
Shopping Center |
|
|
11,647 |
|
|
|
1,324 |
|
|
|
18,180 |
|
|
|
232 |
|
|
|
1,324 |
|
|
|
18,412 |
|
|
|
19,736 |
|
|
|
(2,951 |
) |
|
2017 |
|
2019 |
Lamar Station Plaza East |
|
Lakewood, CO |
|
Shopping Center |
|
|
— |
|
|
|
1,826 |
|
|
|
3,183 |
|
|
|
2,571 |
|
|
|
2,904 |
|
|
|
5,754 |
|
|
|
8,658 |
|
|
|
(1,088 |
) |
|
1984 |
|
2020 |
Cromwell Field Shopping Center |
|
Glen Burnie, MD |
|
Shopping Center |
|
|
10,113 |
|
|
|
2,256 |
|
|
|
15,618 |
|
|
|
355 |
|
|
|
2,256 |
|
|
|
15,973 |
|
|
|
18,229 |
|
|
|
(2,517 |
) |
|
2020 |
|
2021 |
Highlandtown Village Shopping Center |
|
Baltimore, MD |
|
Shopping Center |
|
|
7,090 |
|
|
|
2,998 |
|
|
|
4,341 |
|
|
|
10 |
|
|
|
2,998 |
|
|
|
4,351 |
|
|
|
7,349 |
|
|
|
(1,314 |
) |
|
1987 |
|
2021 |
Spotswood Valley Square Shopping Center |
|
Harrisonburg, VA |
|
Shopping Center |
|
|
14,241 |
|
|
|
4,715 |
|
|
|
9,685 |
|
|
|
— |
|
|
|
4,715 |
|
|
|
9,685 |
|
|
|
14,400 |
|
|
|
(3,141 |
) |
|
1997 |
|
2021 |
The Shops at Greenwood Village |
|
Greenwood Village, CO |
|
Shopping Center |
|
|
22,772 |
|
|
|
3,170 |
|
|
|
27,560 |
|
|
|
1,209 |
|
|
|
3,242 |
|
|
|
28,769 |
|
|
|
32,011 |
|
|
|
(3,711 |
) |
|
2019 |
|
2021 |
Lamar Station Plaza West (5) |
|
Lakewood, CO |
|
Shopping Center |
|
|
18,317 |
|
|
|
8,774 |
|
|
|
13,996 |
|
|
|
64 |
|
|
|
8,774 |
|
|
|
14,060 |
|
|
|
22,834 |
|
|
|
(292 |
) |
|
2016 |
|
2022 |
Midtown Row (5) |
|
Williamsburg, VA |
|
Mixed-Use |
|
|
93,870 |
|
|
|
7,960 |
|
|
|
116,778 |
|
|
|
645 |
|
|
|
7,960 |
|
|
|
117,423 |
|
|
|
125,383 |
|
|
|
(1,077 |
) |
|
2021 |
|
2022 |
Total |
|
|
|
|
|
|
269,474 |
|
|
|
66,075 |
|
|
|
326,943 |
|
|
|
15,934 |
|
|
|
67,225 |
|
|
|
342,877 |
|
|
|
410,102 |
|
|
|
(38,608 |
) |
|
|
|
|
95
|
|
For the year ended December 31, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Cost |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
253,125 |
|
|
$ |
181,725 |
|
Acquisitions |
|
|
149,956 |
|
|
|
68,087 |
|
Capitalized costs |
|
|
7,021 |
|
|
|
3,313 |
|
Balance at end of period |
|
$ |
410,102 |
|
|
$ |
253,125 |
|
|
|
|
|
|
|
|
||
Accumulated depreciation and amortization |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
21,620 |
|
|
$ |
9,625 |
|
Depreciation and amortization |
|
|
16,988 |
|
|
|
11,995 |
|
Balance at end of period |
|
$ |
38,608 |
|
|
$ |
21,620 |
|
The unaudited aggregate tax value of real estate assets for federal income tax purposes as of December 31, 2022 is estimated to be $300.6 million.
96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022, the end of the period covered by this report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective due to the existence of the material weaknesses in the Company’s internal control over financial reporting described below.
Notwithstanding the conclusion by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures as of December 31, 2022, were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described below, management believes that the consolidated financial statements and related financial information included in this Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with GAAP.
Management’s Annual Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We conducted our assessment of our internal control over financial reporting as is set forth in Item 308(a) of Regulation S-K promulgated under the Exchange Act, and Section 404 of the Sarbanes-Oxley Act as of December 31, 2022, the end of our last fiscal year. Our assessment noted that while remediation of the previously identified material weaknesses is in process, such remediation has not been completed nor have the remediated controls been in place for a sufficient amount of time to conclude as to their operating effectiveness. Consequently, the material weaknesses as previously disclosed continue to exist and our internal controls over financial reporting are ineffective as of December 31, 2022.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2022, the following previously reported material weaknesses continued to exist:
Control Environment, Risk Assessment, and Monitoring
We did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and monitoring activities to prevent or detect material misstatements to the consolidated financial statements in a timely manner. These deficiencies were attributed to (i) a lack of structure and responsibility, insufficient number of qualified resources, and inadequate oversight and accountability over the performance of controls, (ii) insufficient appropriate evidence to support the execution of our control activities, (iii) insufficient review of the completeness and accuracy of information used in the operation of our control activities across substantially all financial statement areas, including key assumptions used in determining significant estimates, (iv) ineffective
97
identification and assessment of risks impacting internal control over financial reporting, and (v) ineffective evaluation and determination as to whether the components of internal control were present and functioning.
Control Activities and Information and Communication
These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information technology environment.
Although these material weaknesses did not result in any material misstatement of our consolidated financial statements for the periods presented, they could lead to a material misstatement of account balances or disclosures. Accordingly, management has concluded that these control deficiencies constitute a material weakness.
Ongoing Remediation Plan
Under the oversight of the Audit Committee of the Board of Directors, management has continued to implement measures designed to improve our internal control over financial reporting to remediate the identified material weaknesses. The Company’s ongoing remediation efforts have included assessment of existing internal controls, identification of design enhancements, and evaluation of internal and external accounting resources.
As previously disclosed, the Company hired additional internal resources, including a Vice President of Finance and Reporting. The Company engaged outside consultants to assist with various accounting and financial reporting matters and continues to assess the need for hiring of additional accounting and financial reporting resources. Additionally, the Company retained the services of external information technology resources.
Once all appropriately designed controls are implemented, they will need to operate for a sufficient period of time prior to concluding they are operating effectively. As of December 31, 2022, while many of our controls are in place and operating, we have determined that our controls have not been operating for a sufficient period of time to conclude that they are operating effectively. Further, as we continue to evaluate the effectiveness of these controls, they may need further enhancement in order to properly address identified risks.
While we believe that these efforts will improve our internal control over financial reporting, we can provide no assurances that the measures we have taken to date, or that we may take in the future, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors
The following table sets forth information concerning our directors, including their ages as of April 24, 2023:
Name |
|
Age |
|
|
Position(s) |
|
Michael Z. Jacoby |
|
|
59 |
|
|
Chairman and Chief Executive Officer |
Vineet P. Bedi (1) (3) |
|
|
40 |
|
|
Director |
Donna Brandin |
|
|
66 |
|
|
Director |
Jeffrey H. Foster (2) (3) |
|
|
60 |
|
|
Director |
Daniel J.W. Neal (1) (3) |
|
|
64 |
|
|
Director |
Noah Shore (4) |
|
|
50 |
|
|
Director |
Samuel M. Spiritos (1) (2) |
|
|
61 |
|
|
Director |
Thomas M. Yockey (1) (2) |
|
|
68 |
|
|
Director |
_____________________
(1) Member of the Nominating and Corporate Governance Committee of the Board.
(2) Member of the Compensation Committee of the Board.
(3) Member of the Audit Committee of the Board.
(4) Designated as a director by CF Flyer PE Investor LLC (the “Fortress Member”), an affiliate of Fortress Investment Group LLC (“Fortress”), pursuant to the Governance Agreement, dated as of November 22, 2022 (the “Fortress Governance Agreement”), by and among the Company, the Fortress Member and Messrs. Jacoby and Yockey. See “Certain Relationships and Related Transactions, and Director Independence—Related Party Transactions—Fortress Agreements.”
Set forth below are descriptions of the backgrounds and principal occupations of each of our directors, and the period during which he or she has served as a director.
Michael Z. Jacoby. Mr. Jacoby has served as the Chairman and Chief Executive Officer of the Company since December 2019. Mr. Jacoby co-founded Broad Street Realty, LLC ("BSR") in 2002 and served as Chief Executive Officer of BSR from 2002 to December 2019. Mr. Jacoby has more than 31 years of experience in the real estate industry and is an expert in large-scale leasing, acquisition, and development transactions. He has successfully completed commercial property transactions involving the acquisition, financing, development and leasing of more than 25 million square feet of properties throughout the United States. Prior to co-founding BSR, Mr. Jacoby co-founded Core Location LLC, a firm focused on development, leasing, and capital partner relationships. During his time at Core Location, Mr. Jacoby was instrumental in the acquisition, financing, redevelopment, leasing and sale of the 1.2 million square foot Lakeside Technology Center in Chicago, Illinois, the world's largest data center, the San Jose Technology Center in San Jose, California and the Metro Atlanta Technology Center in Atlanta, Georgia. Prior to co-founding Core Location, Mr. Jacoby was senior vice president and manager of the Ezra Company. He served as manager of the HQ office and on the Ezra Board of Directors. At Ezra, he specialized in advising and negotiating on behalf of technology companies throughout the United States. Mr. Jacoby holds a Bachelor of Science degree from Washington & Lee University. Based on his knowledge of the Company, its business and properties as a co-founder of BSR and his extensive experience in the real estate industry, we have determined that Mr. Jacoby should serve as a director.
Vineet P. Bedi. Mr. Bedi has served as a director of the Company since May 2018. Mr. Bedi has nearly 20 years of experience in real estate investing, private equity, capital markets and public securities investing. Mr. Bedi currently serves as Chief Investment Officer for The W Group since January 2023. Mr. Bedi also currently serves as the Founder and Managing Partner of KRV Capital, LP since January 2016. Mr. Bedi currently serves as an Adjunct Professor of Finance at the NYU-Stern School of Business since September 2017. Previously, Mr. Bedi served as Chief Strategy Officer of Invesque Inc. (TSX: IVQ.U, IVQ) from February 2019 to May 2022. Prior, Mr. Bedi was the Founder, Managing Partner and Chief Investment Officer of Booth Park Capital Management, LLC, an alternative asset management firm investing in real estate related securities, from 2013 to 2015. Previously, Mr. Bedi served as a Managing Director and Portfolio Manager at Guggenheim Partners from 2012 to 2013, where he managed an opportunistic portfolio in the public REIT and private real estate markets. Prior to that, Mr. Bedi was a Principal and senior investment professional at High Rise Capital Management, LLC, a multi-billion dollar real estate securities fund investing in the public REIT and private real estate markets, from 2006 to 2011. Mr. Bedi began his career in the investment banking and proprietary trading groups at Bank of America Merrill Lynch and has held senior investment related positions with Carlson Capital, LP and Schonfeld Group Holdings. Mr. Bedi also serves as an advisor for various public and private real estate and real estate related entities. Mr. Bedi is a graduate of the NYU-Stern School of Business and is a CFA Charterholder. Based on his experience in real estate investing and capital markets and his advisory experience for public and private real estate companies, we have determined that Mr. Bedi should serve as a director.
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Donna Brandin. Ms. Brandin has served as a director of the Company since January 2022. Since January 2018, Ms. Brandin has served on the board of directors of Nuveen Global Cities REIT, Inc., a public, non-listed REIT as the chairperson of the Audit Committee. Since December 2021, Ms. Brandin also has served on the board of directors of CION Man Residential REIT Inc., a non-public REIT as the chair of the Audit Committee. From April 2008 to June 2018, she served as the Executive Vice President, Chief Financial Officer and Treasurer of the Lightstone Group. In addition, during this time period she served as Chief Financial Officer, Treasurer and Principal Accounting Officer of five public, non-listed REITs sponsored by the Lightstone Group. From October 2014 to June 2018, Ms. Brandin served as a director of Lightstone Enterprises Limited. From October 2019 to October 2021, Ms. Brandin served on the strategic advisory board of eRESI for a Prominent NYC Family Office, a company focused on launching investment products based on a technology efficient platform. From July 2019 to May 2021, Ms. Brandin served on the board of directors of Invesque Inc. (TSX: IVQ), a healthcare real estate company, where she served as chair of the Audit Committee. Prior to joining the Lightstone Group in April 2008, Ms. Brandin held the position of Executive Vice President and Chief Financial Officer of US Power Generation from September 2007 through November 2007. From July 2004 to September 2007, Ms. Brandin was the Executive Vice President and Chief Financial Officer of Equity Residential (NYSE: EQR), the largest publicly traded multifamily REIT in the country. Ms. Brandin holds a B.S. in Business Administration: Accounting from Kutztown University and a Master’s degree in Finance from St. Louis University. In 2021, Ms. Brandin completed the Corporate Directors Certificate Program at Harvard Business School of Executive Education. Based on her current and prior positions with real estate companies and her experience as a public company executive officer and director, we have determined that Ms. Brandin should serve as a director.
Jeffrey H. Foster. Mr. Foster has served as a director of the Company since December 2019. Since October 2021, he has served as Chief Financial Officer of Cloud Capital, a private equity fund focused on acquiring data centers. Since 2018, he has served as an Adjunct Professor of Real Estate at Georgetown University’s McDonough School of Business. Mr. Foster served as the Executive Vice President, Chief Financial Officer and Treasurer of DuPont Fabros Technology (formerly NYSE: DFT), a public data center REIT, from 2013 until it was acquired in 2017. As Chief Financial Officer, he was responsible for obtaining financing through common and preferred equity, bonds and bank debt. He was also responsible for strategic planning, investor relations, and accounting. From 2007 to 2014, Mr. Foster served as Chief Accounting Officer of DFT. Mr. Foster played an integral role in DFT’s initial public offering in 2007 and its sale to Digital Realty Trust in 2017. Prior to his time at DFT, Mr. Foster served as the Chief Accounting Officer of Global Signal, the first publicly traded cell tower REIT. Mr. Foster began his career as a CPA at Arthur Anderson. Mr. Foster also serves on the board and chairs the audit committee of Pegasus Digital Mobility Acquisition Corp., a special purpose acquisition company focused on consummating a business combination in the digital mobility sector, and serves on the board of Vault Digital Infrastructure, LP, a data center company. Mr. Foster has a B.S. in Accounting from the University of Florida and a Masters in Accountancy from the University of South Florida. Based on his experience as an executive officer of public REITs and his financial expertise, we have determined that Mr. Foster should serve as a director.
Daniel J.W. Neal. Mr. Neal has served as a director of the Company since December 2019. From 2006 to January 2023, Mr. Neal served as the chairman and chief executive officer of Kajeet, Inc. a privately held cloud software and wireless networking technologies company that he founded. Since January 2023, he has served as the Executive Chairman of Kajeet. Prior to founding Kajeet, Mr. Neal served as chief executive officer & vice chairman of VCampus Corporation (formerly NASDAQ: VCMP). Prior to VCampus, Mr. Neal was part of the team that built USinternetworking, Inc. (formerly NASDAQ: USIX). USinternetworking had a successful initial public offering and secondary offering and was subsequently acquired by AT&T. Mr. Neal is an inventor on 31 U.S. patents in the fields of wireless technology and software. Before entering the technology sector, Mr. Neal worked in real estate finance and in public sector real estate development. Mr. Neal was recruited by the Public Buildings Service of the U.S. General Services Administration to lead a large team of real estate facilities planners responsible for the analysis and programming of an 80 million square foot portfolio of owned and leased real estate in the national capital region. Mr. Neal also worked at a senior level in the Office of the Vice President to effect management improvements in Federal real estate financing, development and portfolio management. Mr. Neal holds an AB in political science from the University of California, Berkeley, and an M.B.A. from the Wharton School of the University of Pennsylvania. Based on his C-suite level management experience, including as a public company executive officer, we have determined that Mr. Neal should serve as a director.
Noah Shore. Mr. Shore is a Managing Director for the Fortress Credit Funds Business and is based in Los Angeles. Mr. Shore is head of the Real Estate Special Situations group and responsible for the West Coast Real Estate debt business. Mr. Shore has spent the last 26 years in his career focused on commercial real estate investment and development. Mr. Shore joined Fortress in 2007 and has originated direct loans, real estate and corporate securities, and real estate equity investments in most asset classes including office, hotel, retail, residential, and industrial. Prior to joining Fortress, Mr. Shore was a Vice President at The Taubman Company where he spent nine years working in all aspects of real estate acquisitions, leasing and development, focused on enhancing existing value, as well as unlocking and/or creating new value. Mr. Shore is a full member of the Urban Land Institute, a member of the International Council of Shopping Centers, and on the National Advisor Board of the Real Estate Center at the University of Colorado. Mr. Shore received a B.S. in Finance from the University of Colorado Boulder. Pursuant to the Fortress Governance Agreement, Mr. Shore was designated as a director by the Fortress Member.
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Samuel M. Spiritos. Mr. Spiritos has served as a director of the Company since December 2019. Since 2013, Mr. Spiritos has served as the Managing Shareholder of Shulman, Rogers, Gandal, Pordy & Ecker, P.A, a full-service Maryland law firm. Mr. Spiritos also currently serves as the Chair of the Shulman Rogers Hospitality Practice, where he focuses on deal structuring, purchase and sale contracts, franchise agreements, management agreements, financings (representing creditors and owners), joint ventures, construction and development. Mr. Spiritos has over 30 years of experience advising clients in commercial real estate transactions involving all asset classes. Mr. Spiritos also represents both lenders and borrowers on commercial loan transactions, particularly acquisitions and development financings, asset-based lending, health care financings, construction and permanent loans, retail, office and hotel development and financings and workouts. Prior to his service as Managing Shareholder, Mr. Spiritos served as Chair of both the Shulman Rogers Real Estate Department and the Commercial Real Estate Transactions Practice Group. Mr. Spiritos serves as Chair of the Board of Best Buddies (Maryland, D.C. Metro area). Mr. Spiritos holds a BS from The Wharton School of Management of the University of Pennsylvania, a J.D. from the University at Buffalo School of Law and an M.B.A. from the State University of New York at Buffalo. Based on his leadership experience and in advising on commercial real estate transactions and financing transactions, we have determined that Mr. Spiritos should serve as a director.
Thomas M. Yockey. Mr. Yockey has served as a director of the Company since December 2019. Mr. Yockey co-founded BSR in 2002 with Mr. Jacoby and served as President of BSR from 2002 to December 2019. Mr. Yockey has successfully managed large complex technical teams and a full range of development activities including acquisitions, dispositions, financing, leasing, zoning/entitlements, site planning, design, and engineering, permitting, contractor bidding/negotiation, base building construction, tenant improvements and legal matters. Prior to co-founding BSR, Mr. Yockey was Principal and Director of Development for Core Location, LLC, where he managed a national development program, focusing on projects that directly address the unique demands of mission critical telecommunications infrastructure and Internet data center providers. His duties included managing the company's development/construction team in the delivery of 2,500,000 square feet of projects over a two-year period and participating as a key member of Core Location's acquisition and due diligence team. He directly managed the development of Core Location's two key projects in partnership with The Carlyle Group of Washington, D.C., including Lakeside Technology Center in Chicago, Illinois and San Jose Technology Center, San Jose, California. Mr. Yockey earned a Masters Degree from the Department of City and Regional Planning, University of North Carolina at Chapel Hill, as well as a B.A. in Economics from the University of Michigan. Based on his knowledge of the Company, its business and properties as a co-founder of BSR and his extensive experience in the real estate industry, we have determined that Mr. Yockey should serve as a director.
Executive Officers
The following table sets forth information regarding our executive officers, including their ages as of April 24, 2023:
Name |
|
Age |
|
|
Position(s) |
|
Michael Z. Jacoby |
|
|
59 |
|
|
Chairman and Chief Executive Officer |
Alexander Topchy |
|
|
52 |
|
|
Chief Financial Officer and Secretary |
Set forth below is a description of the background of Mr. Topchy. Mr. Jacoby’s background is described above under “Board of Directors.”
Alexander Topchy. Mr. Topchy has served as the Chief Financial Officer and Secretary of the Company since December 2019. Mr. Topchy served as the chief financial officer of BSR from 2009 to December 2019. Prior to joining BSR, from 2003 to 2006, Mr. Topchy was Vice President of Finance at EastBanc, Inc., a real estate developer based in Washington, D.C., engaged in repositioning high-street retail properties and developing ground up luxury residential condominiums. While at EastBanc, Mr. Topchy coordinated with foreign financial partners, investors, and lenders, and performed financial feasibility studies for all of EastBanc’s investments. Prior to EastBanc, he worked as a Senior Financial Analyst at Core Location, LLC, performing financial analysis for development projects, including two major technology centers. Mr. Topchy began his career at The Clark Construction Group, where he gained experience in project management and contract negotiation. Mr. Topchy has an M.B.A. in Finance and International Business from the University of Maryland's Robert H. Smith School of Business, and a B.S. in Civil and Environmental Engineering from Cornell University. He is a member of the CFA Institute and the CFA Society Washington, D.C., and has been a CFA Charterholder since 2004. Mr. Topchy previously served as Treasurer from 2017 to 2019 and as Director from 2016 to 2017 for the CFA Society Washington, D.C., Board of Directors.
Certain Corporate Governance Matters
Audit Committee
The Board has established the Audit Committee, which is comprised of Messrs. Bedi, Neal and Foster. Mr. Foster, the chairman of our Audit Committee, qualifies as an “audit committee financial expert” as that term is defined by the SEC and is independent under applicable standards.
101
Code of Ethics
The Board established the Code of Ethics for Chief Executive Officer and Senior Financial Officers, which applies to our chief executive officer, chief financial officer, chief accounting officer and controller, or persons performing similar functions. Among other matters, the Code of Ethics for Chief Executive Officer and Senior Financial Officers is designed to deter wrongdoing and to promote:
Our Code of Ethics for Chief Executive Officer and Senior Financial Officers is available on our website at www.investors.broadstreetrealty.com under the Governance tab. Any changes to this code, and any waivers granted by us with respect to this code, will be posted on our website. Information on or accessible from our website is not and should not be considered a part of this report.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires that our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities, file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Executive officers, directors and greater than 10% stockholders are required by the SEC to furnish us with copies of all Forms 3, 4 and 5 that they file.
Based on our review of the copies of such forms, and/or on written representations from the reporting persons that they were not required to file a Form 5 for the fiscal year, we believe that these filing requirements were satisfied by the reporting persons during the fiscal year ended December 31, 2022, except that Michael Z. Jacoby was inadvertently late in reporting one transaction reportable on Form 4 related to a purchase of common stock on November 30, 2022.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned with respect to the years ended December 31, 2022 and 2021 by our named executive officers, which include our chief executive officer and our chief financial officer. See “—Employment Agreements” below.
Name and Principal Position |
|
Year |
|
Salary |
|
|
Stock |
|
|
|
Non-Equity |
|
|
All Other |
|
|
Total |
|
|||||
Michael Z. Jacoby |
|
2022 |
|
$ |
400,000 |
|
|
$ |
119,999 |
|
(4) |
|
$ |
395,000 |
|
(5) |
$ |
28,421 |
|
|
$ |
943,420 |
|
Chief Executive Officer |
|
2021 |
|
|
400,000 |
|
|
|
3,307,559 |
|
(6) |
|
|
377,204 |
|
|
|
29,718 |
|
|
|
4,114,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Alexander Topchy |
|
2022 |
|
$ |
225,000 |
|
|
$ |
40,000 |
|
(7) |
|
$ |
111,000 |
|
|
$ |
29,095 |
|
|
$ |
405,095 |
|
Chief Financial Officer and Secretary |
|
2021 |
|
|
225,000 |
|
|
|
1,020,349 |
|
(8) |
|
|
106,089 |
|
|
|
25,000 |
|
|
|
1,376,438 |
|
102
Outstanding Equity Awards at Fiscal Year-End
The following table shows all outstanding equity awards held by the named executive officers at December 31, 2022.
Name |
|
Number of Shares That Have Not Vested (#) (1) |
|
|
Market Value of Shares That Have Not Vested ($) (2) |
|
|
Equity Incentive Plan Awards: Number of Unearned Shares or Units That Have Not Vested (#) (3) |
|
|
Equity Incentive Plan Awards: Market Value of Unearned Shares or Units That Have Not Vested ($) (2) |
|
||||
Michael Z. Jacoby |
|
|
83,615 |
|
|
$ |
120,406 |
|
|
|
755,814 |
|
|
$ |
1,088,372 |
|
Alexander Topchy |
|
|
27,872 |
|
|
$ |
40,136 |
|
|
|
232,558 |
|
|
$ |
334,884 |
|
Narrative to Summary Compensation Table and Outstanding Equity Awards at Fiscal Year-End
Restricted Shares of Common Stock and RSUs
In March 2022, upon recommendation from the Compensation Committee, the board of directors approved the following grants under the Company’s Amended and Restated 2020 Equity Incentive Plan (the “Plan”), in each case with an effective grant date of April 1, 2022: 54,545 and 18,182 restricted shares of the Company’s common stock to Messrs. Jacoby and Topchy, respectively, which are scheduled to vest ratably over a three-year period beginning on January 1, 2023, subject to such executive’s continued service on such dates and the terms of such executive’s employment agreement and a restricted stock award agreement previously approved by the board of directors.
In September 2021, upon recommendation from the Compensation Committee, the board of directors approved the following grants under the Plan, in each case with an effective grant date of October 1, 2021: (i) 43,605 and 14,535 restricted shares of the Company’s common stock to Messrs. Jacoby and Topchy, respectively, which are scheduled to vest ratably over a three-year period beginning on January 1, 2022, subject to such executive’s continued service on such dates and the terms of such executive’s employment
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agreement and a restricted stock award agreement previously approved by the board of directors; and (ii) RSUs with a target number of RSUs of 755,814 and 232,558 to Messrs. Jacoby and Topchy, respectively. The grants of the RSUs were made pursuant to performance award of stock units agreements, substantially in the form filed as Exhibit 10.18 hereto (the “RSU Award Agreement”).
Subject to the executive’s continued service on such date and certain exceptions set forth in the RSU Award Agreement, the RSUs will vest based on the Company’s Implied Equity Market Capitalization (as defined in the RSU Award Agreement) at the end of the performance period ending on December 31, 2024, according to the following schedule:
Performance Level |
|
Implied Equity Market Capitalization |
|
|
% of "Target Award" that Vests |
|
Threshold |
|
$ |
118,000,000 |
|
|
50% |
Target |
|
$ |
200,000,000 |
|
|
100% |
Stretch |
|
$ |
300,000,000 |
|
|
200% |
Outperform |
|
$ |
400,000,000 |
|
|
300% |
If, however, the maximum amount of the award is not earned as of December 31, 2024, the remaining RSUs may be earned based on the Company’s Implied Equity Market Capitalization as of December 31, 2025. To the extent performance is between any two designated amounts, the percentage of the target award earned will be determined using a straight-line linear interpolation between the two designated amounts.
Cash Bonuses
For 2022, the Compensation Committee approved a cash bonus plan for Messrs. Jacoby and Topchy, with the amount of each officer’s cash bonus dependent on the achievement of certain pre‑established goals determined by the Compensation Committee, including the Company’s 2022 revenue and general and administrative expense, as well as certain strategic and individual goals. The range of the 2022 cash bonuses were based on the following threshold, target and stretch amounts, as a percentage of each executive’s base salary: Mr. Jacoby – 75% (threshold), 100% (target) and 125% (stretch); and Mr. Topchy – 37.5% (threshold), 50% (target) and 62.5% (stretch). Based on the Compensation Committee’s review of the performance of Messrs. Jacoby and Topchy in relation to the pre-determined goals, on March 29, 2023, the Compensation Committee approved bonuses for Messrs. Jacoby and Topchy in the amounts of $395,000 and $111,000, respectively. Mr. Jacoby was granted 254,839 shares of common stock as a result of his election to receive common stock in lieu of cash payment of 50% of his bonus. Mr. Jacoby’s and Mr. Topchy’s bonuses were otherwise paid in cash. These amounts are reported in the "Non-Equity Incentive Plan Compensation" column of the Summary Compensation Table in this Amendment No. 1.
Employment Agreements
On December 27, 2019, Mr. Jacoby and Mr. Topchy entered into employment agreements with the Company and the Operating Partnership.
The employment agreements each have initial three-year terms with automatic one-year renewals thereafter, unless the executive or the Company provides timely notice of non-renewal to the other party. Mr. Jacoby’s employment agreement provides for a base salary of $400,000 per year and Mr. Topchy’s employment agreement provides for a base salary of $215,000 per year, both of which may be adjusted from time to time. Each employment agreement provides the executive with an annual bonus opportunity, which may be adjusted annually at the discretion of the Company’s Compensation Committee. The executive will also be eligible to receive equity-based incentives, as determined by the Compensation Committee, or by the Board in the absence of a compensation committee, and participate in other compensatory and benefit plans generally available to all employees.
The employment agreements provide that, if the executive’s employment is terminated:
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Additionally, in the event of a change in control (as defined in the employment agreements), or if the executive’s employment is terminated by the Company without “cause,” by the executive for “good reason” or as a result of a non-renewal of the employment term by us, all of the executive’s outstanding unvested equity-based awards will vest and become immediately exercisable and unrestricted.
The executive’s right to receive the severance payments and benefits described above is subject to his delivery and non-revocation of an effective general release of claims in favor of the Company and compliance with customary restrictive covenant provisions, including, relating to confidentiality, noncompetition, nonsolicitation, cooperation and nondisparagement.
Director Compensation
The Board has adopted a director compensation policy for non-employee directors, effective as of January 16, 2020. The policy provides for the compensation of non-employee directors with cash and equity compensation. Under the policy, each non-employee director will receive an annual board service retainer of $35,000 paid in cash and a grant of $50,000 in restricted shares of our common stock, which are expected to vest one year after the date of grant, subject to continued service on such date. The chairperson of our Audit Committee will receive an additional annual committee chair service retainer of $20,000. Other members of our Audit Committee, our Compensation Committee and our Nominating and Corporate Governance Committee will receive additional annual cash retainers of $4,000 for each such committee of which they are a member. Each non-employee director may elect to receive up to 100% of his annual cash retainers in shares of our common stock. We also reimburse all reasonable out-of-pocket expenses incurred by non-employee directors in attending meetings of the Board or any committee thereof.
For the fiscal year ended December 31, 2021, the Compensation Committee determined to pay all retainers in shares of our common stock, which grants were made on January 3, 2022, along with the 2021 annual grant of common stock. The 2022 annual grant of common stock was made on January 3, 2023.
The following table provides information on the compensation of our directors for the fiscal year ended December 31, 2022, other than Mr. Jacoby, who received no separate compensation for his service as a director. For information on the compensation of Mr. Jacoby, please refer to “—Summary Compensation Table.”
Name |
|
Fees Paid in Cash |
|
|
Stock Awards (1) |
|
|
Total |
|
|||
Vineet P. Bedi |
|
$ |
43,000 |
|
|
$ |
74,076 |
|
|
$ |
117,076 |
|
Joseph Bencivenga (2) |
|
|
1,192 |
|
(3) |
|
70,892 |
|
|
|
72,084 |
|
Donna Brandin |
|
|
33,931 |
|
|
|
— |
|
|
|
33,931 |
|
Jeffrey H. Foster |
|
|
59,000 |
|
(4) |
|
86,822 |
|
|
|
145,822 |
|
Daniel J.W. Neal |
|
|
43,000 |
|
|
|
74,076 |
|
|
|
117,076 |
|
Noah Shore (5) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Samuel M. Spiritos |
|
|
43,000 |
|
(6) |
|
74,076 |
|
|
|
117,076 |
|
Thomas M. Yockey |
|
|
43,000 |
|
|
|
74,076 |
|
|
|
117,076 |
|
105
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table gives information about shares of our common stock that may be issued under our equity compensation plans (including individual compensation arrangements) as of December 31, 2022.
Plan Category |
|
Number of Securities to be |
|
|
Weighted Average |
|
|
Number of Securities |
|
|||
Equity compensation plans approved by stockholders |
|
— |
|
|
— |
|
|
— |
|
|||
Equity compensation plans not approved by stockholders |
|
|
3,672,790 |
|
(1) |
$ |
6.00 |
|
(2) |
|
871,455 |
|
Total |
|
|
3,672,790 |
|
|
$ |
6.00 |
|
|
|
871,455 |
|
Principal Stockholders
The following table sets forth the beneficial ownership of our common stock as of April 24, 2023 for:
The percentage ownership information shown in the table below is based upon 33,119,639 shares of common stock and 5,560,296 OP units (not including OP units held by us) outstanding as of April 24, 2023.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, these rules require that we include shares of common stock issuable pursuant to the vesting of restricted stock units and the exercise of stock options and warrants that are either immediately exercisable or exercisable within 60 days of April 24, 2023. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
Unless otherwise indicated, the address for persons listed in the table is c/o Broad Street Realty, Inc., 7250 Woodmont Ave, Suite 350, Bethesda, Maryland 20814.
106
Name of Beneficial Owner |
|
Number of Shares Beneficially Owned |
|
|
Percentage of All Shares |
|
|
Number of OP Units Beneficially Owned |
|
|
Percentage of All Shares and OP Units |
|
||||
Named executive officers and directors(1): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Michael Z. Jacoby |
|
|
3,196,918 |
|
|
|
9.7 |
% |
|
|
1,090,104 |
|
|
|
11.1 |
% |
Thomas M. Yockey |
|
|
2,612,720 |
|
|
|
7.9 |
% |
|
|
653,822 |
|
|
|
8.4 |
% |
Vineet P. Bedi |
|
|
25,000 |
|
(2) |
* |
|
|
|
— |
|
|
* |
|
||
Donna Brandin |
|
|
25,000 |
|
|
* |
|
|
|
— |
|
|
* |
|
||
Jeffrey H. Foster |
|
|
44,033 |
|
|
* |
|
|
|
33,810 |
|
|
* |
|
||
Daniel J.W. Neal |
|
|
973,920 |
|
(3) |
|
2.9 |
% |
|
|
202,861 |
|
(4) |
|
3.0 |
% |
Noah Shore |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Samuel M. Spiritos |
|
|
134,802 |
|
(5) |
* |
|
|
|
— |
|
|
* |
|
||
Alexander Topchy |
|
|
235,003 |
|
|
* |
|
|
|
79,995 |
|
|
* |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
All current executive officers and directors as a group (9 persons) |
|
|
7,247,396 |
|
|
|
21.9 |
% |
|
|
2,060,592 |
|
|
|
24.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
More than 5% Beneficial Owners |
|
|
|
|
|
|
|
|
|
|
|
|
||||
CF Flyer Mezz Holdings LLC (6) |
|
|
2,560,000 |
|
(7) |
|
7.7 |
% |
|
|
— |
|
|
|
— |
|
* Represents beneficial ownership of less than 1%
Related Party Transaction Policy
The Board has adopted a written related person transaction approval policy to further the goal of ensuring that any related person transaction is properly reviewed, approved by the Audit Committee and fully disclosed in accordance with the rules and regulations of the SEC. The policy applies to transactions or arrangements between the Company and any related person, including directors, director nominees, executive officers, greater than 5% stockholders and the immediate family members of each of these groups (the “Related Persons”). This policy, however, does not apply with respect to general conflicts between the interests of the Company and our employees, officers and directors, including issues relating to engaging in a competing business and receiving certain benefits from the Company, such as loans or guarantees of obligations, which are reported and handled in accordance with the Company’s Code of Business Conduct and Ethics and other procedures and guidelines implemented by the Company from time to time.
Under the policy, the Related Person is responsible for identifying and reporting to the Audit Committee any proposed related person transaction. In the event the Chief Executive Officer determines that it is impractical or undesirable to wait until an Audit
107
Committee meeting can be convened in order to review a transaction with the Related Person, the Chairperson of the Audit Committee may act as an authorized subcommittee on behalf of the Audit Committee to review such transaction, so long as the Chairperson is a disinterested member with respect to such transaction. After considering all the facts and circumstances available to the Audit Committee, the Audit Committee will approve, ratify or reject the transaction, in its discretion. All approved transactions with Related Persons are disclosed to the full Board.
Related Party Transactions
The Mergers
As consideration in the Mergers, as a result of their interests in the parties of such Mergers, (i) Mr. Jacoby received 2,533,650 shares of the Company’s common stock and 993,018 Common OP units, (ii) Mr. Yockey received 2,533,650 shares of the Company’s common stock and 556,736 Common OP units, (iii) Mr. Topchy received an aggregate of 137,345 shares of the Company’s common stock and 62,658 Common OP units, (iv) Mr. Neal received, directly or indirectly, 878,170 shares of the Company’s common stock and (v) Mr. Spiritos indirectly received 13,827 shares of the Company’s common stock.
Purchase of BSR Interests
Prior to the completion of the Mergers in 2019, BSR agreed to purchase a percentage of Mr. Yockey's ownership interest in BSR for total consideration of $1.5 million. Approximately $1.0 million of this consideration was paid to Mr. Yockey in the first quarter of 2020 and the remaining $0.5 million was paid to Mr. Yockey in the second quarter of 2021.
Representation Warranty and Indemnification Agreement
Concurrently with the entry into the merger agreements for the Mergers, Messrs. Jacoby and Yockey entered into a representation, warranty and indemnification agreement with the Company and the Operating Partnership, pursuant to which they have agreed to indemnify the Company and the Operating Partnership for certain breaches of the representations and warranties of BSR, Broad Street Ventures, LLC and certain other parties to the merger agreements contained in the merger agreements for a period of one year following the closing of the Mergers, subject to certain exceptions and limitations.
Fortress Agreements
In connection with the Preferred Equity Investment November 2022, we entered into a number of agreements with affiliates of Fortress.
Preferred Equity Investment
The Operating Partnership and the Eagles Sub-OP entered into a preferred equity investment agreement with the Fortress Member, pursuant to which the Fortress Member made the Preferred Equity Investment and the Operating Partnership and the Fortress Member entered into the Eagles Sub-OP Operating Agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fortress Preferred Equity Investment” in this report for additional information regarding the Preferred Equity Investment and the Eagles Sub-OP Operating Agreement.
Fortress Governance Agreement
In connection with the Preferred Equity Investment, we entered into the Fortress Governance Agreement. Pursuant to the Fortress Governance Agreement, so long as (i) the Preferred Equity Investment is outstanding, in whole or in part, or (ii) the Fortress Member or its affiliates hold five percent (5%) or more of our issued and outstanding common stock (assuming all securities held by the Fortress Member or its affiliates that are convertible or exchangeable into shares of common stock have been so converted or exchanged) (the “Governance Rights Period”), at each annual or special meeting of the stockholders, we must nominate, and use reasonable efforts to solicit proxies for, a person identified by the Fortress Member (the “Fortress Director”) to serve on the Board. During the Governance Rights Period, any vacancy in the Fortress Director’s seat on the Board must be filled by the Board with a new Fortress Director identified by the Fortress Member. Furthermore, Messrs. Jacoby and Yockey agreed to vote in favor of each Fortress Director nominated to serve on the Board.
In addition, upon the request of the Fortress Member, the Company must appoint the Fortress Director to each committee of the Board as the Fortress Member may request, subject to certain exceptions and applicable independence and other requirements of the SEC or any national securities exchange or over-the-counter market on which the common stock is traded or quoted.
In connection with the closing of the Preferred Equity Investment, the Board appointed Mr. Shore to serve as the initial Fortress Director.
108
During the Governance Rights Period, the Fortress Member is also entitled to designate an individual to attend meetings of the Board or any committee thereof, in each case as a non-voting observer and subject to certain exceptions.
Fortress Warrant
In connection with the Preferred Equity Investment, we issued a warrant to purchase common stock (the “Fortress Warrant”) to the Fortress Member. The Fortress Warrant was subsequently assigned to CF Flyer Mezz.
The Fortress Warrant provides CF Flyer Mezz the right to purchase 2,560,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments. The Fortress Warrant may be exercised on a cashless basis and will automatically be deemed exercised in full on a cashless basis upon the occurrence of a Qualified Public Offering.
If at any time we grant, issue or sell any convertible securities or other rights to purchase stock, warrants, securities or other property pro rata to holders of shares of common stock, CF Flyer Mezz will be entitled to acquire, on the same terms as granted to holders of shares of common stock, the aggregate number of convertible securities or other rights to purchase stock, warrants, securities or other property that CF Flyer Mezz would have otherwise been entitled to acquire had CF Flyer Mezz held the number of shares of common stock acquirable upon complete exercise of the Fortress Warrant on the record date for such grant by us.
In the event of a Reorganization Event (as defined in the Fortress Warrant), as a result of which the common stock would be converted into, or exchanged for stock, other securities, other property or assets, the right to receive shares of common stock upon exercise of the Fortress Warrant will be changed to a right to receive the kind and amount of shares of stock, other securities or other property or assets that a holder of one share of common stock was entitled to receive in connection with such Reorganization Event.
Cash Flow Pledge
In connection with the Preferred Equity Investment, the Operating Partnership entered into a cash flow pledge agreement (the “Cash Flow Pledge”) in favor of the Fortress Member. Pursuant to the Cash Flow Pledge, the Operating Partnership pledged to the Eagles Sub-OP, and agreed to contribute to the Eagles Sub-OP, all distributions that the Operating Partnership receives from its subsidiaries that, directly or indirectly, own the Excluded Properties, after taking into account amounts payable by such entities on account of mortgages secured by the Excluded Properties.
Guaranty of Recourse Obligations
In connection with the Preferred Equity Investment, we entered into a guaranty of recourse obligations (the “Company Guaranty”) for the benefit of the Fortress Member. Pursuant to the Company Guaranty, we guaranteed certain obligations of our subsidiaries under the documents entered into in connection with the Preferred Equity Investment. In addition, Messrs. Jacoby and Yockey guaranteed the full payment of the Redemption Amount in the event of a bankruptcy event of us or our subsidiaries without the consent of the Fortress Member or certain other events that interfere with the rights of the Fortress Member under the documents entered into in connection with the Preferred Equity Investment.
Registration Rights Agreement
In connection with the Preferred Equity Investment, we entered into a registration rights agreement (the “Registration Rights Agreement”) with the Fortress Member. Pursuant to the Registration Rights Agreement, we provided the Fortress Member with certain registration rights with respect to the shares of common stock issuable upon conversion of the Fortress Preferred Interest and/or the Fortress Mezzanine Loan and the exercise of the Fortress Warrant, including, at any time after a Qualified Public Offering, up to three demand registrations and up to three underwritten offerings in any 12-month period, as well as certain piggyback rights. In addition, we and the Fortress Member agreed to certain lock-up restrictions in connection with any underwritten offerings.
Fortress Mezzanine Loan
In connection with the acquisition of Midtown Row, one of our subsidiaries and CF Flyer Mezz entered into the Fortress Mezzanine Loan. See “Management’s Discussion and Analysis of Financial Condition and Results Of Operations—Liquidity and Capital Resources—Consolidated Indebtedness and Preferred Equity—Fortress Mezzanine Loan” in this report for additional information regarding the Fortress Mezzanine Loan.”
Receivables and Payables
As of December 31, 2022 and 2021, we had $1.2 million and $0.2 million, respectively, in receivables due from related parties. The $1.2 million at December 31, 2022 relates to the Merger pursuant to which we acquired Lamar Station Plaza West, including the note receivable due from a related party. The $0.2 million at December 31, 2021 relates to receivables due from properties managed by us which were provided to the properties for working capital. Additionally, as of December 31, 2022 and 2021, we had less than $0.1
109
million and $0.6 million, respectively, in payables due to properties managed by us related to amounts borrowed by us for working capital. On October 6, 2022, Lamar Station Plaza West, a property managed by us and acquired in November 2022, advanced us $1.1 million for deposits related to our financing in November 2022.
Approximately $0.4 million and $1.2 million of our total revenue for the years ended December 31, 2022 and 2021, respectively, was generated from related parties. Additionally, approximately $0.1 million of our accounts receivable, net balance at each of December 31, 2022 and 2021 was owed from related parties.
Management Fees
During the years ended December 31, 2021 and 2022, the Company provided management services for Lamar Station Plaza West, which was acquired during 2022 in the remaining Merger, and the Cypress Point property. The Company received a management fee ranging from 3.0% to 4.0% of such properties’ gross income. Messrs. Jacoby, Yockey and Topchy had interests in the entity that owned Lamar Station Plaza West. Messrs. Jacoby, Yockey, Topchy and Neal had interests in the entity that owned the Cypress Point property. In 2022, the Company terminated the merger agreement related to the Cypress Point property due to the performance of the property.
Midtown Row Acquisition
Messrs. Jacoby, Yockey, Topchy, Foster and Neal had indirect ownership interests in BBL Current Owner, LLC (“BBL Current”), which owned Midtown Row. Mr. Jacoby also served as the chief executive officer and a director of BBL Current. On November 23, 2022, we completed the acquisition of Midtown Row and paid $118.7 million in cash and the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units. As consideration in the acquisition of Midtown Row, as a result of their direct or indirect interests in BBL Current, (i) Mr. Jacoby received 97,086 Common OP units, (ii) Mr. Neal indirectly received 202,861 Common OP units, (iii) Mr. Foster received 33,810 Common OP units, (iv) Mr. Yockey received 97,086 Common OP units and (v) Mr. Topchy received 17,337 Common OP units. The Company served as the development manager for Midtown Row and serves as the property manager and the leasing broker for the retail portion of Midtown Row.
Guarantees
Our subsidiaries’ obligations under the Eagles Sub-OP Operating Agreement, the Basis Loan Agreement and the Brookhill mortgage loan are guaranteed by Messrs. Jacoby and Yockey. Our subsidiaries’ obligations under the Sub-OP Operating Agreement were guaranteed by Messrs. Jacoby and Yockey. We have agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan, the Sub-OP Operating Agreement, and the Brookhill mortgage loan. Mr. Jacoby is also a guarantor under the Cromwell mortgage loan agreement. For more information about the Eagles Sub-OP Operating Agreement, the Preferred Equity Investment and the Basis Loan Agreement, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources—Consolidated Indebtedness and Preferred Equity.”
Tax Protection Agreements
On December 27, 2019, pursuant to the merger agreements for the Mergers, the Company and the Operating Partnership entered into tax protection agreements (the “Initial Tax Protection Agreements”) with each of the prior investors in BSV Colonial Investor LLC, BSV Lamonticello Investors LLC and BSV Patrick Street Member LLC, including Messrs. Jacoby, Yockey and Topchy, in connection with their receipt of Common OP units in certain of the Mergers closed on December 27, 2019. On April 4, 2023, pursuant to the applicable merger agreements for the Mergers, the Company and the Operating Partnership entered into a tax protection agreement (together with the Initial Tax Protection Agreements, the “Tax Protection Agreements”), with each of the prior investors in BSV Lamont Investors LLC, including Messrs. Jacoby, Yockey and Topchy, in connection with their receipt of Common OP units in the Merger whereby the Company acquired Lamar Station Plaza West. Pursuant to the Tax Protection Agreements, until the seventh anniversary of the completion of the applicable Merger, the Company and the Operating Partnership may be required to indemnify the other parties thereto for their tax liabilities related to built-in gain that exists with respect to the properties known as Midtown Colonial, Midtown Lamonticello, Vista Shops at Golden Mile and Lamar Station Plaza West (the “Protected Properties”). Furthermore, until the seventh anniversary of the completion of the applicable Merger, the Company and the Operating Partnership will be required to use commercially reasonable efforts to avoid any event, including a sale of the Protected Properties, that triggers built-in gain to the other parties to the Tax Protection Agreements, subject to certain exceptions, including like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended.
Consulting Agreement
We had engaged Timbergate Ventures, LLC, an entity wholly owned by Mr. Yockey, as a consultant for a two-year term beginning upon the completion of the Mergers on December 27, 2019. Pursuant to this arrangement, we paid Timbergate Ventures, LLC a consulting fee of $200,000 during 2021. This agreement expired on December 26, 2021.
110
Shulman Rogers LLP Legal Fees
Mr. Spiritos is the managing partner of Shulman Rogers LLP, which represents us in certain real estate matters, including with matters related to the Mergers. During the years ended December 31, 2022 and 2021, the Company paid $355,279 and $545,305, respectively, in legal fees to Shulman Rogers LLP.
Indemnification of Officers and Directors
Our charter and bylaws provide for certain indemnification rights for our directors and officers and we entered into an indemnification agreement with each of our executive officers and directors, providing for procedures for indemnification and advancement by us of certain expenses and costs relating to claims, suits or proceedings arising from their service to us or, at our request, service to other entities, as officers or directors, or in certain other capacities, to the maximum extent permitted by Delaware law.
Independence of Directors
After broadly considering all relevant facts and circumstances, the Board affirmatively has determined that each of the following directors is independent under applicable standards: Messrs. Bedi, Foster and Neal and Ms. Brandin.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The financial statements presented in this report were audited by BDO USA LLP, the Company’s independent registered accounting firm that was appointed upon completion of the Mergers on December 27, 2019.
The following summarizes the fees billed by BDO USA LLP for services performed for the fiscal years ended December 31, 2022 and 2021:
|
|
For the Year Ended December 31, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Audit Fees (1) |
|
$ |
1,192,445 |
|
|
$ |
936,929 |
|
Audit-Related Fees (2) |
|
|
177,750 |
|
|
|
74,766 |
|
Total |
|
$ |
1,370,195 |
|
|
$ |
1,011,695 |
|
Pre-Approval Policies and Procedures
The Audit Committee’s policy is to review and pre-approve, either pursuant to the Company’s Audit and Non-Audit Services Pre-Approval Policy (the “Pre-Approval Policy”) or through a separate pre-approval by the Audit Committee, any engagement of the Company’s independent auditor to provide any permitted non-audit service to the Company. Pursuant to the Pre-Approval Policy, which the Audit Committee reviews and reassesses periodically, a list of specific services within certain categories of services, including audit, audit-related and tax services, are specifically pre-approved for the upcoming or current fiscal year, subject to an aggregate maximum annual fee payable by us for each category of pre-approved services. Any service that is not included in the approved list of services must be separately pre-approved by the Audit Committee. In addition, the Audit Committee may delegate authority to its chairperson to pre-approve engagements for the performance of audit and non-audit services. Additionally, all audit and permissible non-audit services in excess of the pre-approved fee level, whether or not included on the pre-approved list of services, must be separately pre-approved by the Audit Committee. The Audit Committee has delegated authority to its chairperson to pre-approve engagements for the performance of audit and non-audit services, for which the estimated cost for such services shall not exceed $50,000 in the aggregate for any calendar year. The chairperson must report all pre-approval decisions to the Audit Committee at its next scheduled meeting and provide a description of the terms of the engagement.
111
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of the report
The following documents are filed as part of this report:
The consolidated financial statements of the Company, together with the independent registered public accounting firm’s report thereon, are included herein and are incorporated by reference. See “Item 8. Financial Statements and Supplementary Data”, filed herewith, for a list of financial statements.
The following financial statement schedule is included in Item 8 and are filed as part of this report. Schedule III—Combined Real Estate Accumulated Depreciation
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions, are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
The exhibits listed in the accompanying Exhibit Index, which is incorporated herein by reference, are filed or furnished as part of this report.
ITEM 16. FORM 10‑K SUMMARY
The Company has elected not to include a summary.
112
EXHIBIT INDEX
Exhibit Number |
|
Description |
|
|
|
2.1 |
|
|
|
|
|
2.2 |
|
|
|
|
|
2.3 |
|
|
|
|
|
2.4 |
|
|
|
|
|
2.5 |
|
|
|
|
|
2.6 |
|
|
|
|
|
2.7 |
|
|
|
|
|
2.8 |
|
|
|
|
|
2.9 |
|
|
|
|
|
2.10 |
|
|
|
|
|
2.11 |
|
|
|
|
|
2.12 |
|
|
|
|
|
2.13 |
|
|
|
|
|
2.14 |
|
|
|
|
|
113
2.15 |
|
|
|
|
|
2.16 |
|
|
|
|
|
2.17 |
|
|
|
|
|
2.18 |
|
|
|
|
|
2.19 |
|
|
|
|
|
2.20 |
|
|
|
|
|
2.21 |
|
|
|
|
|
2.22 |
|
|
|
|
|
2.23 |
|
|
|
|
|
2.24 |
|
|
|
|
|
2.25 |
|
|
|
|
|
2.26 |
|
|
|
|
|
2.27 |
|
|
|
|
|
2.28 |
|
114
|
|
|
|
|
|
2.29 |
|
|
|
|
|
2.30 |
|
|
|
|
|
2.31 |
|
|
|
|
|
2.32 |
|
|
|
|
|
2.33 |
|
|
|
|
|
2.34 |
|
|
|
|
|
2.35 |
|
|
|
|
|
2.36 |
|
|
|
|
|
2.37 |
|
|
|
|
|
2.38 |
|
|
|
|
|
2.39 |
|
|
|
|
|
2.40 |
|
115
|
|
|
|
|
|
2.41 |
|
|
|
|
|
2.42 |
|
|
|
|
|
2.43 |
|
|
|
|
|
2.44 |
|
|
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
3.3 |
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3.4 |
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3.5 |
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3.6 |
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4.1 |
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4.2 |
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10.1† |
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10.2† |
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10.3* |
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10.4 |
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116
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 † |
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10.10 |
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10.11† |
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10.12 |
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10.13 |
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10.14 |
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10.15† |
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10.16† |
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10.17 |
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10.18† |
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10.19 |
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10.20 |
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117
10.21 |
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10.22 |
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10.23 |
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10.24 |
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10.25 |
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10.26 |
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21.1* |
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23.1* |
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31.1* |
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31.2* |
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32.1* |
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
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101.INS* |
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Inline XBRL Instance Document |
101.SCH* |
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Inline XBRL Taxonomy Extension Schema |
101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF* |
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Inline XBRL Taxonomy Definition Linkbase |
101.LAB* |
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Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE* |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
† Denotes management contract or compensatory plan, contract or arrangement
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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BROAD STREET REALTY, INC. |
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Date: |
April 28, 2023 |
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By: |
/s/ MICHAEL Z. JACOBY |
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Michael Z. Jacoby |
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Chief Executive Officer |
119
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Date: |
April 28, 2023 |
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By: |
/s/ MICHAEL Z. JACOBY |
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Michael Z. Jacoby |
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Chief Executive Officer |
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(principal executive officer) |
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Date: |
April 28, 2023 |
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By: |
/s/ ALEXANDER TOPCHY |
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Alexander Topchy |
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Chief Financial Officer and Secretary |
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(principal financial and accounting officer) |
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Date: |
April 28, 2023 |
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By: |
/s/ VINEET P. BEDI |
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Vineet P. Bedi |
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Director |
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Date: |
April 28, 2023 |
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By: |
/s/ DONNA BRANDIN |
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Donna Brandin |
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Director |
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Date: |
April 28, 2023 |
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By: |
/s/ JEFFREY H. FOSTER |
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Jeffrey H. Foster |
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Director |
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Date: |
April 28, 2023 |
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By: |
/s/ DANIEL J.W. NEAL |
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Daniel J.W. Neal |
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Director |
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Date |
April 28, 2023 |
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By: |
/s/ NOAH SHORE |
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Noah Shore |
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Director |
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Date: |
April 28, 2023 |
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By: |
/s/ SAMUEL M. SPIRITOS |
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Samuel M. Spiritos |
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Director |
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Date: |
April 28, 2023 |
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By: |
/s/ THOMAS M. YOCKEY |
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Thomas M. Yockey |
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Director |
120