Strategic Realty Trust, Inc. - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2012

OR

For the transition period from         to         

Commission file number 000-54376

TNP STRATEGIC RETAIL TRUST, INC.

(Exact name of registrant as specified in its charter)

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of November 6, 2012, there were 10,801,145 shares of the Registrant’s common stock issued and outstanding.

TNP STRATEGIC RETAIL TRUST, INC.

INDEX

PART I

FINANCIAL INFORMATION

The accompanying condensed consolidated unaudited financial statements as of and for the three and nine months ended September 30, 2012 have been prepared by TNP Strategic Retail Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 30, 2012. The financial statements herein should also be read in conjunction with the notes to the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.

ITEM 1. FINANCIAL STATEMENTS

TNP STRATEGIC RETAIL TRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

TNP STRATEGIC RETAIL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

TNP STRATEGIC RETAIL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

TNP STRATEGIC RETAIL TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(unaudited)

1. ORGANIZATION AND BUSINESS

TNP Strategic Retail Trust, Inc. (the “Company”) was formed on September 18, 2008 as a Maryland corporation. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations. The Company was initially capitalized by the sale of 22,222 shares of common stock for $200,000 to Thompson National Properties, LLC (the “Sponsor”) on October 16, 2008. The Company’s fiscal year end is December 31.

On November 4, 2008, the Company filed a registration statement with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 shares of its common stock to the public in its primary offering and 10,526,316 shares of its common stock pursuant to its distribution reinvestment plan (“DRIP”) (collectively, the “Offering”). On August 7, 2009, the SEC declared the registration statement effective and the Company commenced the Offering. The Company is offering shares to the public in its primary offering at a price of $10.00 per share, with discounts available for certain purchasers, and to its stockholders pursuant to the DRIP at a price of $9.50 per share.

On June 15, 2012, the Company filed with the SEC a registration statement on Form S-11 to register up to $900,000,000 in shares of the Company’s common stock in a follow-on public offering. The Company will offer shares in the Offering until the earlier of the date on which the SEC declares the registration statement for the follow-on offering effective or February 4, 2013.

The Company is externally advised by TNP Strategic Retail Advisor, LLC, a Delaware limited liability company (“Advisor”). Subject to certain restrictions and limitations, Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company.

Substantially all of the Company’s business is conducted through TNP Strategic Retail Trust Operating Partnership, L.P. (the “OP”). The initial limited partners of the OP were Advisor and TNP Strategic Retail OP Holdings, LLC, a Delaware limited liability company (“Holdings”). Advisor has invested $1,000 in the OP in exchange for common units of the OP (“Common Units”) and Holdings has invested $1,000 in the OP and has been issued a separate class of limited partnership units (the “Special Units”). As the Company accepts subscriptions for shares of its common stock, it transfers substantially all of the net proceeds of the Offering to the OP as a capital contribution. As of September 30, 2012 and December 31, 2011, the Company owned 96.03% and 95.4%, respectively, of the limited partnership interest in the OP. As of September 30, 2012 and December 31, 2011, Advisor owned 0.01% and 0.02%, respectively, of the limited partnership interest in the OP. Holdings owned 100% of the outstanding Special Units as of September 30, 2012 and December 31, 2011. In addition to the administrative and operating costs and expenses incurred by the OP in acquiring and operating real properties, the OP will pay all of the Company’s administrative costs and expenses, and such expenses will be treated as expenses of the OP.

On May 26, 2011, in connection with the acquisition of Pinehurst Square East (“Pinehurst”), a retail property located in Bismarck, North Dakota, the OP issued 287,472 Common Units to certain of the sellers of Pinehurst who elected to receive Common Units for an aggregate value of $2,587,000, or $9.00 per Common Unit. On March 12, 2012, in connection with the acquisition of the Shops at Turkey Creek (“Turkey Creek”), a retail property located in Knoxville, Tennessee, the OP issued 144,324 Common Units to certain of the sellers of Turkey Creek who elected to receive Common Units for an aggregate value of $1,371,000, or $9.50 per Common Unit.

The Company intends to use the net proceeds from the Offering to invest in a portfolio of income-producing retail properties throughout the United States, with a focus on grocery-anchored multi-tenant retail centers in the Western United States, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free-standing single-tenant retail properties. In addition to investments in real estate directly or through joint ventures, the Company may also acquire or originate first mortgages or second mortgages, mezzanine loans or other real estate-related loans, in each case provided that the underlying real estate meets the Company’s criteria for direct investment. The Company may also invest in any other real property or other real estate-related assets that, in the opinion of the Company’s board of directors, meets the Company’s investment objectives.

As of September 30, 2012, the Company’s portfolio comprised of 20 properties with 2,073,210 rentable square feet of retail space located in 14 states. As of September 30, 2012, the rentable space at the Company’s retail properties was 87% leased.

From commencement of the Offering through September 30, 2012, the Company had accepted investors’ subscriptions for, and issued, 10,740,178 shares, net of share redemptions, of the Company’s common stock, including 289,105 shares issued pursuant to the DRIP, resulting in gross offering proceeds of $106,194,000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affected the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.

The condensed consolidated financial statements include the accounts of the Company, the OP, and their direct and indirect wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC.

The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in FASB ASC 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of September 30, 2012, the Company did not have any joint ventures or variable interests in any variable interest entities.

Certain amounts in the Company’s condensed consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. Assets sold or held-for-sale and associated liabilities have been reclassified on the condensed consolidated balance sheets and the related operating results reclassified from continuing to discontinued operations on the condensed consolidated statements of operations.

Non-Controlling Interests

The Company’s non-controlling interests consist primarily of the Common Units in the OP. The Company accounts for non-controlling interests in accordance with ASC 810. In accordance with ASC 810, the Company reports non-controlling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent’s stockholders’ equity. Net income (loss) attributable to non-controlling interests as adjusted for distributions in excess of earnings is presented as a reduction from net income (loss) in calculating net income (loss) available to common stockholders on the statement of operations. Acquisitions or dispositions of non-controlling interests that do not result in a change of control are accounted for as equity transactions. In addition, ASC 810 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. In accordance with FASB ASC 480-10, Distinguishing Liabilities from Equity, non-controlling interests that are determined to be redeemable are carried at their fair value or redemption value as of the balance sheet date and reported as liabilities or temporary equity depending on their terms. The Company periodically evaluates individual non-controlling interests for the ability to continue to recognize the non-controlling interest as permanent equity in the consolidated balance sheets. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as liabilities or temporary equity and adjusted to the greater of (1) the carrying amount or (2) its redemption value as of the end of the period in which the determination is made, and the resulting adjustment is recorded in the consolidated statement of operations.

Recent Accounting Pronouncements

In May 2011, the FASB issued new accounting guidance ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends various sections of ASC 820 (“ASC 820”) and changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies how the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities. In addition, the guidance expanded the disclosures for the unobservable inputs for Level 3 fair value measurements, requiring quantitative information to be disclosed related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The revised guidance is effective for interim and annual periods beginning after December 15, 2011 and early application by public entities is prohibited. ASU 2011-04 is to be applied prospectively. The Company’s adoption of this ASU for the reporting period beginning January 1, 2012, as required, did not have a material effect on the Company’s consolidated financial statements.

In December 2011, the FASB issued new accounting guidance ASU No. 2011-11, Balance Sheet (ASC Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The changes to the ASC as a result of this update are effective for periods beginning on or after January 1, 2013 (January 1, 2013 for the Company) and must be shown retrospectively for all comparative periods presented. This guidance requires new disclosures only and is not expected to have an impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued new accounting guidance ASU No. 2011-10, Derecognition of in Substance Real Estate — a Scope Clarification, which amends ASC Topic 360, Property, Plant and Equipment (“ASC 360”). ASU No. 2011-10 states that when an investor ceases to have a controlling financial interest in an entity that is in-substance real estate as a result of a default on the entity’s nonrecourse debt, the investor should apply the guidance under ASC Subtopic 360-20, Property, Plant and Equipment — Real Estate Sales, to determine whether to derecognize the entity’s assets (including real estate) and liabilities (including the nonrecourse debt). The changes to the ASC as a result of this update are effective prospectively for deconsolidation events occurring during fiscal years, and interim periods within those years, beginning on or after June 15, 2012 (January 1, 2013 for the Company). Adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

Revenue Recognition

Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or 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 use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

For leases with minimum scheduled rent increases, the Company recognized income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue amounts which differ from those that are contractually due from tenants. If the Company determines the collectability of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed and paid, and, when appropriate, establishes an allowance for estimated losses.  

The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants on an ongoing basis. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. The Company’s straight-line rent receivable, which is included in accounts receivable on the consolidated balance sheets, was $1,210,000 and $618,000 at September 30, 2012 and December 31, 2011, respectively.

Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all leases contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.

The Company recognizes gains or losses on sales of real estate in accordance with ASC 360. Profits are not recognized until (a) a sale has been consummated; (b) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (c) the Company’s receivable, if any, is not subject to future subordination; and (d) the Company has transferred to the buyer the usual risks and reward of ownership, and the Company does not have a substantial continuing involvement with the property. The results of operations of income producing properties where the Company does not have a continuing involvement are presented in the discontinued operations section of the Company’s condensed consolidated statements of operations when the property has been classified as held-for-sale or sold.

Investments in Real Estate and Mortgage Notes Receivable

Real Estate

Real property is recorded at cost, less accumulated depreciation and amortization. Costs include those related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of predevelopment and certain direct and indirect costs of development. Costs related to business combinations are expensed as incurred and are included in transaction expense in the Company’s condensed consolidated statements of operations.

Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:

Tenant improvement costs recorded as capital assets are depreciated over the shorter of (1) the tenant’s remaining lease term or (2) the life of the improvement.

Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized.

Mortgage Notes Receivable

Mortgage notes receivable are recorded at amortized cost, net of loan loss reserves (if any), and evaluated for impairment at each reporting period. There were no mortgage notes receivable outstanding at September 30, 2012 and December 31, 2011.

During the three and nine months ended September 30, 2011, the Company invested in three mortgage notes for an aggregate purchase price of $18.0 million and recorded $407,000 and $541,000, respectively, of interest income related to these mortgage notes. In October 2011, the Company foreclosed on the collateral retail property securing the mortgage notes, commonly known as Constitution Trail Shopping Center located in Normal, Illinois (“Constitution Trail”) with a then-fair value of $27.8 million, which was in excess of the then-carrying value of the mortgage notes.  

Business Combinations

The Company records the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. The balance of the purchase price is allocated to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a fair value basis at the acquisition date. Tenant improvements are classified as assets under investments in real estate and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases which come in three forms: (1) leasing commissions and legal costs, which represent the value associated with “cost avoidance” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in markets in which the Company operates; (2) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased; and (3) above- or below-market value of in-place leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks. The value of in-place leases are recorded in acquired lease intangibles and amortized over the remaining lease term. Above- or below-market leases are classified in acquired lease intangibles, or in acquired below-market lease intangibles, depending on whether the contractual terms are above- or below-market. Above-market leases are amortized as a decrease to rental revenue over the remaining non-cancelable terms of the respective leases and below-market leases are amortized as an increase to rental revenue over the remaining initial lease term and any fixed rate renewal periods, if applicable.

Transaction costs are expensed as incurred and costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. During the nine months ended September 30, 2012, the Company acquired nine properties (Note 3) for an aggregate purchase price of $103.4 million. The Company recorded these acquisitions as business combinations and incurred direct acquisition expense of $3,155,000 for the nine months ended September 30, 2012, including acquisition fees to Advisor of approximately $2,595,000 (Note 11).

During the nine months ended September 30, 2011, the Company acquired four properties, Craig Promenade, Pinehurst, Cochran Bypass and Topaz Marketplace, for an aggregate purchase price of $43.9 million. The Company recorded these acquisitions as business combinations and incurred direct acquisition expense of $1,537,000 for the nine months ended September 30, 2011. During the same period, the Company also acquired three distressed mortgage notes secured by Constitution Trial for an aggregate purchase price of $18.0 million.

Costs incurred in pursuit of targeted properties for acquisitions not yet closed or those determined to no longer be viable have been expensed and are included in transaction expense in the consolidated statements of operations.

Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s net income. These allocations also impact depreciation expense and gains or losses recorded on future sales of properties.

Impairment of Long-lived Assets

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that the Company estimates in this analysis include projected rental rates, capital expenditures and property sales capitalization rates. The Company did not record any impairment loss on its investments in real estate and related intangible assets during the three and nine months ended September 30, 2012 and 2011.

Assets Held-for-Sale and Discontinued Operations

When certain criteria are met, long-lived assets are classified as held-for-sale and are reported at the lower of their carrying value or their fair value less costs to sell and are no longer depreciated. Discontinued operations is a component of an entity that has either been disposed of or is deemed to be held-for-sale and (i) the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

Cash and Cash Equivalents

Cash and cash equivalents represents current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit.

Restricted Cash

Restricted cash includes escrow accounts held by lenders for real property taxes, insurance, capital expenditures and tenant improvements, debt service, leasing costs and other requirements stipulated by the lenders.

Deferred Financing Costs

Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the straight-line method which approximates the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financings that do not close are expensed in the period in which it is determined that the financing will not close.

Capital Raising Issuance Costs

Costs incurred in connection with the issuance of common shares of the Company and Common Units of the OP are recorded as a reduction of additional paid-in capital.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company accounts for unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) applicable to common stockholders in the Company’s computation of EPS.

Fair Value Measurements

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

When available, the Company utilizes quoted market prices from independent third-party sources to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (1) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (2) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach.

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

The Company considers the following factors to be indicators of an inactive market: (1) there are few recent transactions, (2) price quotations are not based on current information, (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (6) there is a wide bid-ask spread or significant increase in the bid-ask spread, (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (8) little information is released publicly (for example, a principal-to-principal market).

The Company considers the following factors to be indicators of non-orderly transactions: (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT. The Company may also be subject to certain state or local income taxes, or franchise taxes.

The Company evaluates tax positions taken in the financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, the Company may 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 taxing authorities.

When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.  

The Company’s tax returns remain subject to examination and consequently, the taxability of the distributions is subject to change.

Reportable Segments

ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. The Company has one reportable segment, income-producing retail properties, which consists of activities related to investing in real estate. The retail properties are geographically diversified throughout the United States, and the Company’s chief operating decision maker evaluates operating performance on an overall portfolio level.

Concentration of Credit Risk

A concentration of credit risk arises in the Company’s business when a nationally- or regionally-based tenant occupies a substantial amount of space in multiple properties owned by the Company. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to the Company, exposing the Company to potential losses in rental revenue, expense recoveries, and percentage rent. Further, the impact may be magnified if the tenant is renting space in multiple locations. Generally, the Company does not obtain security from the nationally- or regionally-based tenants in support of their lease obligations to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk. As of September 30, 2012, Publix is the Company’s largest tenant and accounted for approximately 99,979 square feet, or approximately 5% of the Company’s gross leasable area, and approximately $1,048,000, or 4% of the Company’s annual minimum rent. As of September 30, 2012, the Company had $1,000 in outstanding receivables from this tenant. No other tenant accounted for over 5% of the Company’s annual minimum rent. At September 30, 2012, one tenant accounted for 15% of the Company’s tenant receivables (excluding straight-line rent receivable).

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2012, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 14 years with a weighted-average remaining term (excluding options to extend) of 9 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $617,000 and $371,000 as of September 30, 2012 and December 31, 2011, respectively.

3. ACQUISITIONS

During the nine months ended September 30, 2012, the Company acquired the following nine properties:

During the three and nine months ended September 30, 2012, the Company incurred approximately $422,000 and $4,180,000, respectively, of acquisition-related costs in connection with completed and pending property acquisitions, as well as costs related to acquisitions that did not materialize, which are included in transaction expenses in the consolidated statements of operations.

During the nine months ended September 30, 2012, the Company redeemed $1,500,000 of preferred equity of a subsidiary of the OP that was issued to the sellers of Summit Point Shopping Center, a property that was acquired in December 2011. The amount paid to redeem the preferred equity was accounted for as an additional payment for real estate acquisitions during the nine months ended September 30, 2012. Total amount paid including the unpaid accrued preferred return was approximately $1,530,000.

The revenues and contribution to net income (loss) recognized by the Company during the nine months ended September 30, 2012 for each of the properties acquired during the period are as follows:

Contribution to net income (loss) presented above includes each property’s direct acquisition expenses, which aggregated $3,155,000 for the nine months ended September 30, 2012.

The sources of funds used for the nine acquisitions completed during the nine months ended September 30, 2012 are as follows:

The financial information set forth below summarizes the Company’s purchase price allocations for the properties acquired during the nine months ended September 30, 2012. The Company’s purchase price allocations are preliminary and may be subject to adjustments as the Company finalizes the valuations of the identifiable tangible and intangible assets acquired and liabilities assumed in these acquisitions.

Pro Forma Financial Information

The following unaudited pro forma results of operations for the three and nine months ended September 30, 2012 and 2011 assume that the nine acquisitions completed during the nine months ended September 30, 2012 were completed as of January 1, 2011.

4. DISPOSITIONS AND DISCONTINUED OPERATIONS

The Company reports properties held-for-sale and operating properties sold in the current period as discontinued operations. The results of these discontinued operations are included in a separate component of income on the consolidated statements of operations under the caption “Discontinued operations.”

During the three months ended September 30, 2012, the Company sold a land parcel at Osceola Village for approximately $1,250,000 and recognized a loss of $90,000. Additionally, the Company sold the last land parcel at Morningside Marketplace for approximately $1,200,000 and recognized a gain of $208,000.

For the nine months ended September 30, 2012, the Company sold five land parcels, representing portions of the Morningside Marketplace and Osceola Village, for an aggregate sale price of approximately $7,748,000 and recognized an aggregate net gain of $118,000.

During the three and nine months ended September 30, 2011, the Company recognized a gain of $310,000 related to the sale of the Popeye’s parcel at the Craig Promenade property. Discontinued operations for the three and nine months ended September 30, 2011 included the operating results of three land parcels at Craig Promenade and San Jacinto, which were classified as held for sale as of September 30, 2011.

All dispositions in 2012 and 2011 were transacted as 1031 exchange transactions.

The components of income and expense related to discontinued operations for the three and nine months ended September 30, 2012 and 2011 are shown below.

The Company did not have any assets classified as held-for-sale at September 30, 2012.

5. INTANGIBLES

As of September 30, 2012 and December 31, 2011, the Company’s lease intangibles and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows:

Increases (decreases) in net income as a result of amortization and write-off of the Company’s lease intangibles and below-market lease liabilities for the three months ended September 30, 2012 and 2011 were as follows:

Increases (decreases) in net income as a result of amortization and write-off of the Company’s lease intangibles and below-market lease liabilities for the nine months ended September 30, 2012 and 2011 were as follows:

The scheduled amortization of lease intangibles and below-market lease liabilities as of September 30, 2012 was as follows:

Other Intangible

In connection with the acquisition of Constitution Trail in October 2011, the Company was assigned the rights under a development agreement dated April 2006 entered into by the original property developer and the Town of Normal, pursuant to which the developer shall receive reimbursements of $2.0 million plus 6.5% simple interest per annum in exchange for certain public improvements that were constructed by the developer that subsequently became the property of the Town of Normal. The reimbursements will be determined by the Town of Normal based on one-half of the sales tax receipts remitted and will be paid to the Company at least twice a year. The agreement terminates on the earlier of August 1, 2021 and when the $2.0 million plus accrued interest is fully paid. The Company estimated the fair value of the assigned development agreement on the acquisition date at $1.0 million based on the remaining term of the agreement and the amount paid through the acquisition date. The recorded intangible is being amortized to reduce income on a straight-line basis over the remaining term of the agreement, which amounted to $77,000 for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, the Company accrued approximately $62,000 of sales tax rebate income, of which $41,000 was received.

6. PREPAID EXPENSES AND OTHER ASSETS

As of September 30, 2012 and December 31, 2011, the Company’s prepaid expenses and other assets consisted of the following:

7. DEBT

As of September 30, 2012 and December 31, 2011, the Company’s debt consisted of the following:

During the three months ended September 30, 2012 and 2011, the Company incurred $3,088,000 and $1,677,000, respectively, of interest expense, which included the amortization of deferred financing costs of $271,000 and $174,000, respectively. During the three months ended September 30, 2012 and 2011, interest expense also included the amortization of net premium/(discount) of $(16,000) and $28,000, respectively.

During the nine months ended September 30, 2012 and 2011, the Company incurred $9,573,000 and $3,180,000, respectively, of interest expense, which included the amortization and write-off of deferred financing costs of $1,762,000 and $207,000, respectively, primarily in connection with the June 2012 refinancing of certain properties from the secured line of credit with KeyBank National Association (“KeyBank”) to the new secured term loan with KeyBank. During the nine months ended September 30, 2012 and 2011, interest expense also included the amortization of net premium/(discount) of $(49,000) and $(49,000), respectively. In connection with certain refinancings completed in January and June 2012, the Company wrote-off approximately $930,000 of the remaining unamortized deferred financing costs associated with the properties being refinanced.

As of September 30, 2012 and December 31, 2011, accrued interest payable was $1,061,000 and $806,000, respectively.

The following is a schedule of principal payments for all of the Company’s outstanding notes payable as of September 30, 2012:

KeyBank Line of Credit

In connection with the acquisition of Morningside Marketplace in January 2012, the Company and certain of its subsidiaries entered into a Fifth Omnibus Amendment and Reaffirmation of the Loan Documents (the “Fifth Omnibus Amendment”) relating to the Credit Agreement with KeyBank dated December 17, 2010 (the “Credit Agreement”) to request an advance of $11,953,300 (the “Morningside Loan”), which Morningside Loan was used to acquire the Morningside Marketplace. The Fifth Omnibus Amendment also provided for a temporary increase of the maximum aggregate commitment under the Credit Agreement from $35 million to $43 million through April 30, 2012, at which time any amounts outstanding under the Credit Agreement in excess of $35 million would become due.

In February 2012, the Company and certain of its subsidiaries entered into the Sixth Omnibus Amendment and Reaffirmation of the Loan Documents relating to the Credit Agreement to request an advance of $1,680,300 (the “Cochran Bypass Loan”), which Cochran Bypass Loan was used to refinance the existing indebtedness on Cochran Bypass.

In connection with the acquisition of Ensenada Square in February 2012, the Company and certain of its subsidiaries entered into the Seventh Omnibus Amendment and Reaffirmation of Loan Documents relating to the Credit Agreement to request an advance of $3,266,200 (the “Ensenada Loan”), which Ensenada Loan was used to acquire Ensenada Square.

In connection with the acquisition of Turkey Creek in March 2012, the Company and certain of its subsidiaries entered into the Eighth Omnibus Amendment and Reaffirmation of Loan Documents relating to the Credit Agreement to request an advance of $2,520,000 (the “Turkey Creek Loan”), which Turkey Creek Loan was used to acquire Turkey Creek.

In connection with the acquisition of Aurora Commons in March 2012, the Company and certain of its subsidiaries entered into the Ninth Omnibus Amendment and Reaffirmation of Loan Documents relating to the Credit Agreement to request an advance of $4,550,000 (the “Aurora Loan”), which Aurora Loan was used to acquire Aurora Commons.

In May 2012, the Company entered into the Tenth Omnibus Amendment and Reaffirmation of Loan Documents modifying the Credit Agreement to among other things, to temporarily increase the commitment to $60 million until September 30, 2012. Commencing October 1, 2012 the temporary increase will be paid down and reduced to $45 million by December 1, 2012. At September 30, 2012, the balance under the Credit Agreement was $38.4 million and accordingly, there was no pay down required since the Company never utilized the entire commitment amount.

In connection with the acquisition of Florissant Marketplace in May 2012, the Company and certain of its subsidiaries entered into the Eleventh Omnibus Amendment and Reaffirmation of Loan Documents relating to the Credit Agreement to request an advance of $11,437,500 (the “Florissant Loan”), which Florissant Loan was used to acquire Florissant Marketplace.

In connection with the acquisition of Willow Run Shopping Center in May 2012, the Company and certain of its subsidiaries entered into the Twelfth Omnibus Amendment and Reaffirmation of Loan Documents relating to the Credit Agreement to request an advance of $8,662,500 (the “Willow Run Loan”), which Willow Run Loan was used to acquire Willow Run Shopping Center.

In connection with the acquisition of Visalia Marketplace in June 2012, the Company and certain of its subsidiaries entered into the Thirteenth Omnibus Amendment and Reaffirmation of Loan Documents relating to the Credit Agreement to request an advance of $14,250,000 (the “Visalia Loan”), which Visalia Loan was used to acquire Visalia Marketplace.

Borrowings pursuant to the Credit Agreement determined by reference to the Alternative Base Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Alternate Base Rate plus 2.50% per annum, or (2) the maximum rate of interest permitted by applicable law. Borrowings determined by reference to the Adjusted LIBO Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Adjusted LIBO Rate (with a LIBO floor of 2.0%) plus 3.50% per annum, or (2) the maximum rate of interest permitted by applicable law. The maturity date of the Credit Agreement is December 17, 2013 with an option to extend an additional year subject to certain conditions set forth in the Credit Agreement.

Borrowings under the Credit Agreement are secured by (1) pledges by the Company, the OP, TNP SRT Holdings LLC, (“TNP SRT Holdings”), and certain subsidiaries of TNP SRT Holdings, of their respective direct and indirect equity ownership interests in, as applicable, any subsidiary of TNP SRT Holdings or the Company which, directly or indirectly, owns real property, subject to certain limitations and exceptions, (2) guarantees, granted by the Company and the OP on a joint and several basis, of the prompt and full payment of all of the obligations, terms and conditions to be paid, performed or observed with respect to the Credit Agreement, (3) a security interest granted in favor of KeyBank with respect to all operating, depository (including, without limitation, the deposit account used to receive subscription payments for the sale of equity interests in Offering), escrow and security deposit accounts and all cash management services of the Company, the OP, TNP SRT Holdings and certain of its subsidiaries, and (4) a deed of trust, assignment agreement, security agreement and fixture filing in favor of KeyBank, with respect to the San Jacinto Esplanade, Craig Promenade, Willow Run Shopping Center, Visalia Marketplace, Aurora Commons and a pad at the Morningside Marketplace property. On September 30, 2012, the Company repaid $402,500 under the Credit Agreement secured by the pad at the Morningside Marketplace property in connection with the sale (Note 4).

As of September 30, 2012, the Company believes it was in compliance with financial covenants of the credit facility.

KeyBank Term Loans

On January 6, 2012, the Company, through TNP SRT Portfolio I, LLC (“TNP SRT Portfolio”), a wholly owned subsidiary of the OP, obtained a term loan from KeyBank in the original principal amount of $33,200,000 pursuant to a loan agreement by and between TNP SRT Portfolio and KeyBank and a promissory note by TNP SRT Portfolio in favor of KeyBank. The proceeds were used to refinance the portions of the Credit Agreement secured by Pinehurst, Northgate Plaza, Moreno Marketplace and Topaz Marketplace. The loan is due and payable in full on February 1, 2017 and bears an annual interest rate of 5.93%.

On June 13, 2012, the Company, through TNP SRT Portfolio II, LLC (“TNP SRT Portfolio II”), a wholly owned subsidiary of the OP, obtained a term loan from KeyBank in the original principal amount of $26,000,000 pursuant to a loan agreement by and between TNP SRT Portfolio II and KeyBank and a promissory note by TNP SRT Portfolio II in favor of KeyBank. The proceeds were used to refinance the portions of the Credit Agreement secured by Morningside Marketplace (other than the pad at the Morningside Marketplace property securing the Credit Agreement), Cochran Bypass (Bi Lo Grocery Store), Ensenada Square, Florissant Marketplace and Turkey Creek. The loan is due and payable in full on July 1, 2019 and bears an annual interest rate of 5.10%.

KeyBank Mezzanine Loan

On June 13, 2012, the Company, through TNP SRT Portfolio II Holdings, LLC (“TNP SRT Portfolio II Holdings”) obtained a mezzanine loan from KeyBank in the original principal amount of $2,000,000 pursuant to a loan agreement by and between TNP SRT Portfolio II Holdings and KeyBank and a promissory note by TNP SRT Portfolio II Holdings in favor of KeyBank. the proceeds were also used to refinance the portions of the Credit Agreement secured by Morningside Marketplace, Cochran Bypass (Bi Lo Grocery Store), Ensenada Square, Florissant Marketplace and Turkey Creek. The loan bears an interest rate of 10% through the “anticipated repayment date” of January 1, 2013 and after the “anticipated repayment date” the loan will bear interest through the maturity date of July 1, 2019 at 15.0%.

Under the term loan and mezzanine loan agreements with KeyBank, the Company believes it was in compliance with the covenants of these agreements as of September 30, 2012.

Woodland West Acquisition Loans

In connection with the acquisition of Woodland West in February 2012, the Company borrowed $10,200,000 from JP Morgan Chase Bank, National Association (“JPM”), pursuant to (1) a promissory note, loan agreement and fee and leasehold deed to secure debt, assignment of leases and rents and security agreement and (2) a mezzanine loan with JPM in the amount of $1,300,000. The $10,200,000 loan bears interest at 5.63% per annum and the principal and interest are due monthly. The mezzanine loan bears interest at 12.0% per annum the monthly payments are interest-only. The entire unpaid principal balances of both loans and all accrued and unpaid interest thereon are due and payable in full on March 1, 2017. The Company paid off the $1,300,000 mezzanine loan in full in August 2012.

Bloomingdale Hills Acquisition Loan

Following the acquisition of Bloomingdale Hills in June 2012, the Company borrowed $5,600,000 from ING Life Insurance and Annuity Company (“ING”). The loan bears interest at a fixed interest rate of 4.50% with interest only payments through and including July 1, 2014. Payments of principal and interest in the amount of $32,593 are due commencing August 1, 2014 and continuing to and including the maturity date of July 1, 2037. ING has the right to declare the entire amount of outstanding principal, interest and all other amounts remaining unpaid and due on the following “Call Dates” (i) July 1, 2022, (ii) July 1, 2027 and (iii) July 1, 2032. The loan may not be prepaid in whole or in part prior to July 1, 2013. Commencing July 1, 2013, the principal balance of the loan may be prepaid in whole and not in part by giving ING (i) not less than 60 days’ notice and payment of (ii) a prepayment premium equal to the greater of (a) the yield maintenance amount, as defined; or (b) 1% of the then-outstanding principal balance of the loan. The loan can be prepaid without a prepayment premium under the following conditions: (i) prepayment results from proceeds of a casualty or, (ii) 30 days prior to the loan maturity date or any call date, regardless of whether the lender exercised its option to call the loan.

8. EQUITY

Common Stock

Under the Company’s Articles of Amendment and Restatement (the “Charter”), the Company has the authority to issue 400,000,000 shares of common stock. All shares of common stock have a par value of $0.01 per share. On October 16, 2008, the Company issued 22,222 shares of common stock to Sponsor for an aggregate purchase price of $200,000. As of September 30, 2012, Anthony W. Thompson, the Company’s Chief Executive Officer, directly owned 111,111 shares of the Company’s common stock for which he paid an aggregate purchase price of $1,000,000 and the Sponsor, which is controlled by Mr. Thompson, owned 22,222 shares of the Company’s common stock. As of September 30, 2012 and December 31, 2011, the Company had issued 10,740,178 and 6,007,007 shares of common stock, net of share redemptions, for gross proceeds of approximately $106,194,000 and $59,248,000, respectively.

The Company’s board of directors is authorized to amend the Charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series of capital stock that the Company has authority to issue.

Common Units of the OP

On May 26, 2011, in connection with the acquisition of Pinehurst, the OP issued 287,472 Common Units to certain of the sellers of Pinehurst who elected to receive Common Units for an aggregate value of approximately $2,587,000, or $9.00 per Common Unit. On March 12, 2012, in connection with the acquisition of Turkey Creek, the OP issued 144,324 Common Units to certain of the sellers of Turkey Creek who elected to receive Common Units for an aggregate value of approximately $1,371,000, or $9.50 per Common Unit.

Preferred Stock

The Charter authorizes the Company to issue 50,000,000 shares of $0.01 par value preferred stock. As of September 30, 2012 and December 31, 2011, no shares of preferred stock were issued and outstanding.  

Share Redemption Program

The Company’s share redemption program allows for share repurchases by the Company when certain criteria are met by requesting stockholders. Share repurchases pursuant to the share redemption program will be made at the sole discretion of the Company. The number of shares to be redeemed during any calendar year is limited to no more than (1) 5.0% of the weighted average of the number of shares of the Company’s common stock outstanding during the prior calendar year and (2) those that could be funded from the net proceeds from the sale of shares under the DRIP in the prior calendar year plus such additional funds as may be borrowed or reserved for that purpose by the Company’s board of directors. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time. During the nine months ended September 30, 2012 and 2011, the Company redeemed 26,094 and 12,159 shares of common stock under its share redemption program, respectively.

Distributions

In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Until the Company generates sufficient cash flow from operations to fully fund the payment of distributions, some or all of the Company’s distributions will be paid from other sources, including proceeds from the Offering.

The following table sets forth the distributions declared and paid to the Company’s common stockholders and Common Unit holders for the first, second and third quarter of 2012 and for the year ended December 31, 2011:

On September 30, 2012, the Company declared a monthly distribution in the aggregate of $624,000, of which $383,000 was paid in cash on or about October 15, 2012 and $241,000 was paid through the DRIP in the form of additional shares issued on or about October 15, 2012.

On September 30, 2012, the Company declared a monthly distribution related to the Common Units, of which $25,000 was paid to minority Common Unit holders and all of which was paid in cash on or about October 15, 2012.

Distribution Reinvestment Plan

The Company has adopted the DRIP that allows common stockholders to purchase additional shares of the Company’s common stock through the reinvestment of distributions, subject to certain conditions. The Company registered and reserved 10,526,316 shares of its common stock for sale pursuant to the DRIP. For the nine months ended September 30, 2012 and 2011, $1,685,000 and $516,000 in distributions were reinvested and 177,303 and 54,275 shares of common stock were issued under the DRIP, respectively.  

9. EARNINGS PER SHARE

The following table sets forth the computation of the Company’s basic and diluted (loss) earnings per share:

Shares of restricted stock are considered participating securities because dividend payments are not forfeited even if the underlying award does not vest, which require the use of the two-class method when computing basic and diluted earnings per share.

10. INCENTIVE AWARD PLAN

The Company adopted an incentive award plan on July 7, 2009 (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. The Company has reserved 2,000,000 shares of common stock for stock grants pursuant to the Incentive Award Plan.

Pursuant to the Company’s Amended and Restated Independent Directors Compensation Plan, which is a sub-plan of the Incentive Award Plan (the “Directors Plan”), the Company granted each of its independent directors an initial grant of 5,000 shares of restricted stock (the “initial restricted stock grant”) following the Company’s raising of the $2,000,000 minimum offering amount in the Offering on November 12, 2009. Each new independent director that subsequently joins the board of directors receives the initial restricted stock grant on the date he or she joins the board of directors. In addition, on the date of each of the Company’s annual stockholders meetings at which an independent director is re-elected to the board of directors, he or she will receive 2,500 shares of restricted stock. The restricted stock vests one-third on the date of grant and one-third on each of the next two anniversaries of the grant date. The restricted stock will become fully vested and non-forfeitable in the event of an independent director’s termination of service due to his or her death or disability, or upon the occurrence of a change in control of the Company. Shares of restricted common stock have full voting rights and rights to dividends.

On July 18, 2012, the Company issued 2,500 shares of restricted stock to each of Jeffrey S. Rogers, Peter K. Kompaniez and Phillip I. Levin in connection with their reelection to the Company’s board of directors. One-third of the shares of restricted stock granted to Messrs Rogers, Kompaniez and Levin became non-forfeitable on the date of grant and an additional one third of the shares will become non-forfeitable on each of the first two anniversaries of the date of grant.

On August 29, 2012, upon the appointment of Mr. Kompaniez as the Company’s Co-Chief Executive Officer and Mr. Kompaniez’s resignation as the Company’s director, the Board of Directors affirmed that the restricted stock previously granted to Mr. Kompaniez pursuant to the Directors Plan as related to the unvested shares of restricted stock held by Mr. Kompaniez will not be forfeited upon his resignation as a director. The unvested shares of restricted stock held by Mr. Kompaniez will continue to vest pursuant to the terms of the Plan. Effective October 9, 2012, Mr. Kompaniez resigned from his position as Co-Chief Executive Officer of the Company.

For the three and nine months ended September 30, 2012, the Company recognized compensation expense of $39,000 and $65,000, respectively, related to restricted stock grants to its independent directors, which is included in general and administrative expense in the Company’s accompanying condensed consolidated statements of operations. The compensation expense recognized for the three and nine months ended September 30, 2012 included expenses associated with the initial vesting of the 2012 annual grants issued to independent directors that were re-elected at the July 2012 annual meeting.

For the three and nine months ended September 30, 2011, the Company recognized compensation expense of $17,000 and $128,000, respectively, related to restricted stock grants to its independent directors, which is included in general and administrative expense in the Company’s accompanying condensed consolidated statements of operations. The compensation expense recognized for the nine months ended September 30, 2012 included expenses associated with the initial vesting of the 2011 annual grants issued to independent directors that were re-elected at the June 2011 annual meeting, as well as expenses associated with the accelerated vesting of remaining unvested grants issued to two former independent directors that resigned during the period.

As of September 30, 2012 and December 31, 2011, there was $69,000 and $66,000, respectively, of total unrecognized compensation expense related to non-vested shares of restricted common stock. As of September 30, 2012, this expense is expected to be realized over a remaining period of 1.2 years. As of September 30, 2012 and December 31, 2011, the fair value of the non-vested shares of restricted common stock was $91,000 and $98,000, respectively. There were 10,058 and 10,833 shares that remain unvested at September 30, 2012 and December 31, 2011, respectively. During the three and nine months ended September 30, 2012, 7,500 shares of restricted stock were issued. During the three and nine months ended September 30, 2012, 3,325 and 8,275 shares vested, respectively.

11. RELATED PARTY TRANSACTIONS

Pursuant to the advisory agreement by and among the Company, the OP and Advisor (the “Advisory Agreement”) and the dealer manager agreement (the “Dealer Manager Agreement”) by and among the Company, the OP, and TNP Securities, LLC (the “Dealer Manager” or “TNP Securities”), the Company is obligated to pay Advisor and Dealer Manager specified fees upon the provision of certain services related to the Offering, the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to certain limitations, the Company is also obligated to reimburse Advisor and Dealer Manager for organization and offering costs incurred by Advisor and Dealer Manager on behalf of the Company, and the Company is obligated to reimburse Advisor for acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company. The Company records all related party fees as incurred, subject to any limitations described in the Advisory Agreement.

On August 7, 2011, the Company, the OP and Advisor entered into Amendment No.1 to the Advisory Agreement, effective as of August 7, 2011, in order to renew the term of the Advisory Agreement for an additional one-year term expiring on August 7, 2012. On November 11, 2011, the Company, the OP and the Advisor entered into Amendment No. 2 to the Advisory Agreement to clarify the provisions of asset management fees to be earned by Advisor. On January 12, 2012, the Company, the OP and the Advisor entered into Amendment No. 3 to the Advisory Agreement to provide for the payment of a financing coordination fee to Advisor in an amount equal to 1.0% of any amount financed or refinanced by the Company or the OP. On August 1, 2012, the Company, the OP and Advisor entered into an amendment to the Company’s Advisory Agreement, effective as of August 7, 2012, which, among other things:

Organization and Offering Costs

Organization and offering costs of the Company (other than selling commissions and the dealer manager fee described below) are generally initially paid by Advisor and its affiliates on the Company’s behalf. Such costs include legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses of certain of Advisor’s employees and employees of Advisor’s affiliates and others. Pursuant to the Advisory Agreement, the Company is obligated to reimburse Advisor or its affiliates, as applicable, for organization and offering costs associated with the Offering, provided the Company is not obligated to reimburse Advisor to the extent organization and offering costs, other than selling commissions and dealer manager fees, incurred by the Company exceed 3.0% of the gross offering proceeds from the Offering. Any such reimbursement will not exceed actual expenses incurred by Advisor. In addition, Advisor is to fund all such organization and offering expenses to the extent they exceed 15.0% of gross offering proceeds. All organization costs of the Company are recorded as an expense when the Company has an obligation to reimburse Advisor. Similarly, all offering costs of the Company are recorded as deductions to additional paid-in capital when the Company has an obligation to reimburse Advisor.

As of September 30, 2012 and December 31, 2011, organization and offering costs incurred by Advisor on the Company’s behalf or paid directly by the Company were $4,074,000 and $3,016,000, respectively. Pursuant to the Advisory Agreement, organization and offering costs are payable by the Company to the extent organization and offering costs, other than selling commissions and dealer manager fees, do not exceed 3.0% of the gross proceeds of the Offering. As of September 30, 2012, cumulative organization and offering costs reimbursed to Advisor or paid directly by the Company exceeded the 3.0% by $889,000. Accordingly, the excess amount has been billed to Advisor and included in due from advisor, net on the balance sheet. As of December 31, 2011, the unreimbursed amount of organization and offering costs incurred by Advisor was $1,269,000 and such amount was deferred and recorded as deferred offering costs and accrued by the Company in due to related parties on the December 31, 2011 balance sheet.

Selling Commissions and Dealer Manager Fees

The Dealer Manager receives a selling commission of 7.0% of the gross proceeds from the sale of shares of common stock in the primary offering. The Dealer Manager also receives 3.0% of the gross proceeds from the sale of shares in the primary offering in the form of a dealer manager fee. Both selling commissions and dealer manager fees are recorded by the Company as an offset to additional paid-in capital when incurred.

Reimbursement of Operating Expenses

The Company reimburses Advisor for all expenses paid or incurred by Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse Advisor for any amount by which the Company’s operating expenses (including the asset management fee described below) at the end of the four preceding fiscal quarters exceeds the greater of: (1) 2% of its average invested assets (as defined in the Charter), or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% guideline”). Notwithstanding the above, the Company may reimburse Advisor for expenses in excess of the 2%/25% guideline if a majority of the independent directors determines that such excess expenses are justified based on unusual and nonrecurring factors. For the 12 months ended September 30, 2012, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% guideline.

The Company reimburses Advisor for the cost of administrative services, including personnel costs and its allocable share of other overhead of Advisor such as rent and utilities; provided, however, that no reimbursement shall be made for costs of such personnel to the extent that personnel are used in transactions for which Advisor receives acquisition, origination, financing or disposition fees or with respect to an officer of the Company who is also an officer of Advisor. For the three months ended September 30, 2012 and 2011, the Company incurred $315,000 and $178,000, respectively, of administrative services to Advisor. For the nine months ended September 30, 2012 and 2011, the Company incurred $736,000 and $310,000, respectively, of administrative services to Advisor. As of September 30, 2012 and December 31, 2011, there were $115,000 and $0, respectively, of accrued operating expenses due to Advisor, which is included in amounts due to advisor, net on the balance sheets.  

Property Management Fee

The Company pays TNP Property Manager, LLC (“TNP Manager”), its property manager and an affiliate of Advisor, a market-based property management fee of up to 5.0% of the gross revenues generated by each property in connection with the operation and management of the Company’s properties. TNP Manager may subcontract with third-party property managers and is responsible for supervising and compensating those property managers. For the three months ended September 30, 2012 and 2011, the Company incurred $344,000 and $116,000, respectively, in property management fees payable to TNP Manager. For the nine months ended September 30, 2012 and 2011, the Company incurred $882,000 and $311,000, respectively, in property management fees payable to TNP Manager. As of September 30, 2012 and December 31, 2011, property management fees of $6,000 and $16,000, respectively, were included in amounts due to related parties.

Acquisition and Origination Fee

The Company pays Advisor an acquisition fee equal to 2.5% of the cost of investments acquired, including acquisition expenses and any debt attributable to such investments. The Company incurred $0 and $338,000 in acquisition fees payable to Advisor during the three months ended September 30, 2012 and 2011, respectively. The Company incurred $2,595,000 and $1,483,000 in acquisition fees payable to Advisor during the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012 and December 31, 2011, there were no acquisition fees payable due to Advisor.

The Company pays Advisor 2.5% of the amount funded by the Company to acquire or originate real estate-related loans, including third-party expenses related to such investments and any debt used to fund the acquisition or origination of the real estate related loans. The Company incurred $0 and $10,000 in loan origination fees payable to Advisor during the three months ended September 30, 2012 and 2011, respectively. The Company incurred $0 and $49,000 in loan origination fees payable to Advisor during the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012 and December 31, 2011, there were no loan origination fees payable due to Advisors.

Pursuant to the Advisory Agreement, the Company has complied with NASAA REIT guidelines where the total of all acquisition fees, origination fees, and acquisition expenses payable in connection with any investment shall not exceed 6.0% of the “contract purchase price,” as defined. 

Asset Management Fee

The Company pays Advisor a monthly asset management fee equal to one-twelfth of 0.6% of the aggregate cost of all real estate investments the Company acquires; provided, however, that Advisor will not be paid the asset management fee until the Company’s funds from operations exceed the lesser of (1) the cumulative amount of any distributions declared and payable to the Company’s stockholders or (2) an amount that is equal to a 10.0% cumulative, non-compounded, annual return on invested capital for the Company’s stockholders. On November 11, 2011, the board of directors approved Amendment No. 2 to the Advisory Agreement to clarify that, upon termination of the Advisory Agreement, any asset management fees that may have accumulated in arrears, but which had not been earned pursuant to the terms of the Advisory Agreement, will not be paid to Advisor. Because the payment of asset management fees was determined to be remote, the Company reversed asset management fees that had been accrued, but which had not been earned, through September 30, 2011. There were no asset management fees incurred for the three and nine months ended September 30, 2012.

Disposition Fee

If Advisor or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, Advisor or its affiliates will be paid a disposition fee of up to 50.0% of a customary and competitive real estate commission, to the extent the total commissions and disposition fees do not exceed 3.0% of the contract sales price of each property sold. For the three months ended September 30, 2012 and 2011, the Company incurred $25,000 and $0, respectively, of disposition fees to Advisor. For the nine months ended September 30, 2012 and 2011, the Company incurred $130,000 and $0, respectively, of disposition fees to Advisor.

Leasing Fee

On June 9, 2011, pursuant to Section 11 of the Advisory Agreement with Advisor, the Company’s board of directors approved the payment of fees to Advisor for services it provides in connection with leasing of the Company’s properties. The amount of such leasing fees will be usual and customary for comparable services rendered for similar real properties in the geographic market of the properties leased. The leasing fees will be in addition to the market-based fees for property management services payable by the Company to TNP Manager, an affiliate of Advisor. For the three months ended September 30, 2012 and 2011, the Company incurred $103,000 and $0, respectively, of leasing fees to Advisor or its affiliates. For the nine months ended September 30, 2012 and 2011, the Company incurred approximately $108,000 and $0, respectively, of leasing fees to Advisor or its affiliates.

Financing Coordination Fee

On January 12, 2012, the board of directors approved Amendment No. 3 to the Advisory Agreement to provide for the payment of a financing coordination fee to Advisor in an amount equal to 1.0% of any amount financed or refinanced by the Company or the OP. For the three and nine months ended September 30, 2012, the Company incurred $0 and $811,000, respectively, of financing coordination fees to Advisor or its affiliates. As of September 30, 2012, there were $12,000 of financing coordination fees payable to Advisor, which is included in amounts due to advisor, net on the balance sheets.

Guaranty Fees

In connection with certain acquisition financings, the Company’s Chairman and Chief Executive Officer and/or the Sponsor had executed certain guaranty agreements to the respective lenders. As consideration for such guaranties, the Company entered into a reimbursement and fee agreements to provide for upfront payments and annual guaranty fee payments for the duration of the guarantee periods. For the three months ended September 30, 2012 and 2011, the Company incurred approximately $4,000 and $36,000, respectively, of guaranty fees. For the nine months ended September 30, 2012 and 2011, the Company incurred approximately $41,000 and $90,000, respectively, of guaranty fees. As of September 30, 2012 and December 31, 2011, guaranty fees of approximately $34,000 and $50,000, respectively, were included in amounts due to affiliates. At September 30, 2012, the Company’s obligation pursuant to the Sponsor’s guarantee relates to the guarantee on the financing on Waianae Mall and master lease guarantees on Constitution Trail and Osceola Village.

Related Party Loans and Loan Fees

In connection with the acquisition of Morningside Marketplace in January 2012, the Company financed the payment of a portion of the purchase price with the proceeds of (1) a loan in the aggregate principal amount of $235,000 from the Sponsor, (2) a loan in the aggregate principal amount of $200,000 from Mr. James Wolford, the Company’s Chief Financial Officer at the time of such acquisition, and (3) a loan in the aggregate principal amount of $920,000 from Mrs. Sharon Thompson, the spouse of Mr. Anthony W. Thompson, the Company’s Chairman, Chief Executive Officer and President (collectively, the “Morningside Affiliate Loans”). The Morningside Affiliate Loans each accrued interest at a rate of 12% per annum and were due on April 8, 2012. All amounts outstanding under the Morningside Affiliate Loans, including unpaid accrued interest, were repaid in full during the first quarter of 2012.

In connection with the acquisition of the three mortgage notes secured by Constitution Trail during the second quarter of 2011 (Note 2), the Company obtained a loan from TNP 2008 Participating Notes Program, LLC, an affiliated program sponsored by the Sponsor, in the amount of $995,000 and paid loan fees in the amount of $40,000. The loan bore an interest rate of 14.0% and was repaid in full in July 2011. Interest expense incurred and paid by the Company to an affiliate of Advisor through September 30, 2011 was $31,000.

Summary of Related Party Transactions

Summarized below are the related party transactions for the three and nine months ended September 30, 2012 and 2011, respectively, and payable as of September 30, 2012 and December 31, 2011: