Strategic Realty Trust, Inc. - Quarter Report: 2013 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2013

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  ¨    No  x

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 May 15, 2013, there were 10,969,714 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 months ended March 31, 2013 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, 2012, as filed with the SEC on April 1, 2013. 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 months ended March 31, 2013 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. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TNP STRATEGIC RETAIL TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TNP STRATEGIC RETAIL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TNP STRATEGIC RETAIL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TNP STRATEGIC RETAIL TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(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 shares of common stock to Thompson National Properties, LLC (the “Sponsor”) on October 16, 2008.

On November 4, 2008, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 in shares of its common stock to the public in its primary offering at $10.00 per share and 10,526,316 shares of its common stock to the Company’s stockholders at $9.50 per share 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. On February 7, 2013, the Company terminated the Offering and ceased offering shares of common stock in the primary offering and under the DRIP. As of December 31, 2012, the Company had accepted subscriptions for, and issued, 10,893,227 shares of common stock in the Offering (net of share redemptions), including 365,242 shares of common stock pursuant to the DRIP, resulting in gross offering proceeds of $107,609,000. As of the termination of the Offering on February 7, 2013, the Company had accepted subscriptions for, and issued, 10,969,714 shares of common stock (net of share redemptions), including 391,182 shares of common stock pursuant to the DRIP, resulting in gross offering proceeds of $108,357,000.

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 subsequently determined not to proceed with the contemplated follow-on public offering and on March 1, 2013, the Company requested that the SEC withdraw the registration statement for the follow-on public offering, effective immediately. As a result of the termination of the Offering and the withdrawal of the registration statement for the Company’s follow-on public offering, offering proceeds are not currently available to fund the Company’s cash needs, and will not be available until the Company is able to successfully engage in an offering of its securities. The Company currently does not expect to commence a follow-on offering.

The Company is externally advised by TNP Strategic Retail Advisor, LLC, a Delaware limited liability company (“Advisor”). Subject to certain restrictions and limitations, Advisor provides certain services to the Company pursuant to an advisory agreement with the Company. The Company is currently negotiating with Glenborough, LLC and its affiliates (“Glenborough”) to replace the Advisor as the Company’s external advisor. Glenborough is a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of high quality commercial properties. Glenborough and its predecessor entities have over three decades of experience in the commercial real estate industry. The Company’s board of directors is actively engaged in ongoing negotiations regarding the transition to Glenborough as the Company’s external advisor and the termination of the current advisory agreement and the property management agreements with respect to the Company’s properties. However, any change to the Company’s advisor or the Company’s property manager will require the consent of a number of the Company’s significant lenders, which the Company is still in the process of negotiating. The Company can give no assurance that it will be able to secure such lender consents or come to terms with Glenborough with respect to the transition. In December 2012, the Company entered into a consulting agreement with Glenborough to assist the Company through the advisor change process. Pursuant to the consulting agreement, the Company pays Glenborough a monthly consulting fee and reimburses Glenborough for its reasonable out-of-pocket expenses. From December 2012 through April 2013, the Company agreed to pay Glenborough a monthly consulting fee of $75,000 pursuant to the consulting agreement. Effective May 1, 2013, the Company and Glenborough amended the consulting agreement to expand the services provided to the Company by Glenborough and increase the monthly consulting fee payable to Glenborough to $90,000. The consulting agreement is terminable by either party upon 10 business days’ written notice.

Substantially all of the Company’s business is conducted through TNP Strategic Retail Trust Operating Partnership, L.P., a Delaware limited partnership (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 accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. As of March 31, 2013 and December 31, 2012 the Company owned 96.2% of the limited partnership interest in the OP. As of March 31, 2013 and December 31, 2012, Advisor owned 0.01% of the limited partnership interest in the OP. Holdings owned 100% of the outstanding Special Units as of March 31, 2013 and December 31, 2012.

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’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses and interest on outstanding indebtedness and the payment of distributions to stockholders. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of various fees and expenses such as acquisition fees and management fees and for payment of distributions to stockholders. As discussed below, the Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any offering of its securities that it conducts in the future. The Company expects that its investment activities will be reduced for the foreseeable future until it is able to engage in an offering of its securities or is able to identify other significant sources of financing. The Company also has suspended its share redemption program and dividend distributions until an improvement in liquidity and capital resources occurs following the completion of the advisor transition and the refinancing of the Company’s credit agreement with KeyBank National Association (“KeyBank”) following the expiration of the Company’s forbearance agreement with Key Bank (see Note 6. Notes Payable).

On August 2, 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, established a requirement that the Company maintain at all times a cash reserve of at least $4,000,000 and provided that Advisor may deploy any cash proceeds in excess of the cash reserve for the Company’s business pursuant to the terms of the advisory agreement. As a result of the significant cash required to complete the Company’s acquisition of the Lahaina Gateway property on November 9, 2012, and the additional cash required by the mortgage lender for the Lahaina Gateway property acquisition for reserves and mandatory principal payments, the Company’s cash and cash equivalents have fallen to approximately $1,126,000 at March 31, 2013, significantly below the $4,000,000 cash reserve required under the advisory agreement. The Company’s cash and cash equivalents is likely to fall further and may remain significantly limited until the Company finds other sources of cash, such as from borrowings, sales of equity capital or sales of assets. Although no assurances may be given, the Company believes that its current cash from operations will be sufficient to support the Company’s ongoing operations, including its debt service payments, other than the required payment on the Company’s credit agreement with KeyBank following the expiration of the Company’s forbearance agreement with Key Bank (see discussion below).

On April 1, 2013, the Company executed the forbearance agreement on the Company’s credit agreement with KeyBank (see additional discussions in Note 6 – NOTES PAYABLE). On or before the expiration of the forbearance period, the Company currently intends to (1) refinance the credit agreement on or before the expiration of the forbearance agreement with KeyBank or with another lender; or (2) refinance a portion of the credit agreement on or before the expiration of the forbearance agreement with KeyBank or with another lender, and paydown of a portion of the balance of the credit agreement with proceeds from disposition of certain properties securing the credit agreement.

The Company has invested 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. As of March 31, 2013, the Company’s portfolio comprised of 20 properties with approximately 2,035,402 rentable square feet of retail space located in 14 states. As of March 31, 2013, the rentable space at the Company’s retail properties was 88% leased. Due to the Company’s currently limited capital resources, cash and cash equivalents on hand and sources of liquidity, the Company is not currently actively seeking additional investments.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated unaudited 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.

The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in 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 March 31, 2013, the Company did not have any joint ventures or variable interests in any variable interest entities.

Non-Controlling Interests

The Company’s non-controlling interests comprise 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 condensed consolidated financial statements, but separate from the parent’s stockholders’ equity. Net income (loss) attributable to non-controlling interests is presented as a reduction from net income 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 condensed 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 condensed consolidated statement of operations. All non-controlling interests at March 31, 2013 qualified as permanent equity.

Use of Estimates

The preparation of the Company’s financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in the Company’s financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of the Company’s results of operations to those of companies in similar businesses. The Company considers significant estimates to include the carrying amounts and recoverability of investments in real estate, impairments, real estate acquisition purchase price allocations, allowance for doubtful accounts, the estimated useful lives to determine depreciation and amortization, and fair value determinations, among others.

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. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.

Restricted Cash

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

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 on a cash basis. 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 tenant receivables on the condensed consolidated balance sheets, was $1,743,000 and $1,380,000 at March 31, 2013 and December 31, 2012, 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 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.

Valuation of Accounts Receivable

The Company makes estimates of the collectability of its tenant receivables related to base rents, including deferred rents receivable, expense reimbursements and other revenue or income.

The Company analyzes tenant receivables, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

Concentration of Credit Risk

A concentration of credit risk arises in the Company’s business when a national 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-based 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 March 31, 2013, 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. No other tenant accounted for over 5% of the Company’s annual minimum rent. There were no outstanding receivables from Publix at March 31, 2013.

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2013, 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 condensed consolidated balance sheets and totaled $664,000 and $651,000 as of March 31, 2013 and December 31, 2012, respectively.  

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 is 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.

Acquisition 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 three months ended March 31, 2013, the Company did not acquire any property. During the three months ended March 31, 2012, the Company acquired five properties, Morningside Marketplace (“Morningside Marketplace”), Woodland West Marketplace (“Woodland West”), Ensenada Square (“Ensenada Square”), the Shops at Turkey Creek (“Turkey Creek”), and Aurora Commons (“Aurora Commons”), and recorded the acquisitions as business combinations and expensed $1,453,000 of acquisition costs. 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 also classified in the condensed consolidated statement of operations as transaction expenses.

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.

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.

Investments in 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 a 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.

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 months ended March 31, 2013 and 2012.

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.

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 or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify 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 use significant judgment 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 an asset owned by it 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 (i) 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 (ii) another a present value technique that considers the future cash flows based on contractual obligations discounted by an observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value.

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.

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.

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.

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.

Reclassification

Certain amounts from the prior year have been reclassified to conform to current period presentation. Assets sold or held-for-sale 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 and condensed consolidated statements of cash flows. 

3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

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

During the three months ended March 31, 2013, the Company completed the sale of the Waianae Mall in Waianae, Hawaii (acquired in June 2010), for a sales price of $30,500,000. The Company classified assets and liabilities (including the mortgage debt) related to Waianae Mall as held for sale in the consolidated balance sheet at December 31, 2012. The results of operations related to Waianae Mall were classified as discontinued operations for the three months ended March 31, 2013 and 2012.

During the three months ended March 31, 2013, the Company also completed the sale of the McDonalds parcel at Willow Run Shopping Center (acquired in May 2012) to McDonalds Real Estate Company, for $1,050,000. Net proceeds from the sale of $983,000 were used to pay down the KeyBank line of credit. The results of operations related to the McDonalds parcel were classified as discontinued operations for the three months ended March 31, 2013. The McDonalds parcel was not classified as held for sale at December 31, 2012.

On December 4, 2012, the Company entered into a purchase and sale agreement, as amended, with a third party for the sale of the office building at the Aurora Commons property (acquired in March 2012), for gross proceeds of $1,250,000. The Company classified assets and liabilities related to the office portion of the Aurora Commons property as held for sale in the condensed consolidated balance sheets at March 31, 2013 and December 31, 2012. The results of operations related to the office building at Aurora Commons were classified as discontinued operations for the three months ended March 31, 2013 and 2012.

During the three months ended March 31, 2012, the Company completed the sale of the KFC parcel at Morningside Marketplace (acquired in January 2012), for $1,200,000. The results of operations related to the KFC parcel were classified in discontinued operations for the three months ended March 31, 2012. Discontinued operations for the three months ended March 31, 2012 also included the operating results of the Chase and Chevron parcels at Morningside Marketplace which were sold in April 2012.

The components of income and expense relating to discontinued operations for the three months ended March 31, 2013 and 2012 are shown below.

The major classes of assets and liabilities related to assets held for sale included in the condensed consolidated balance sheets are as follows:

Amounts above are being presented at their carrying value which the Company believes to be lower than their estimated fair value less costs to sell.

4. FUTURE MINIMUM RENTAL INCOME

Operating Leases

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2013, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 15 years with a weighted-average remaining term (excluding options to extend) of eight years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying condensed consolidated unaudited balance sheets and totaled $664,000 and $651,000 as of March 31, 2013 and December 31, 2012, respectively.

As of March 31, 2013, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows:

5. ACQUIRED LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES

As of March 31, 2013 and December 31, 2012, the Company’s acquired lease intangibles and below-market lease liabilities were as follows:

Increases (decreases) in net income as a result of amortization of the Company’s lease intangibles and below-market lease liabilities for the three months ended March 31, 2013 and 2012 were as follows:

The scheduled amortization of lease intangibles and below-market lease liabilities as of March 31, 2013 was as follows:

6. NOTES PAYABLE

As of March 31, 2013 and December 31, 2012, the Company’s notes payable consisted of the following:

During the three months ended March 31, 2013 and 2012, the Company incurred $3,669,000 and $2,789,000, respectively, of interest expense, which included the amortization and write-off of deferred financing costs of $287,000 and $821,000, respectively. In connection with the refinancing completed in January 2012 of the mortgage loans secured by four properties under the KeyBank line of credit into a KeyBank term loan, the Company wrote off approximately $540,000 of the remaining unamortized deferred financing costs associated with four properties under the KeyBank line of credit. As of March 31, 2013 and December 31, 2012, interest expense payable was $1,264,000 and $1,097,000, respectively.

The following is a schedule of principal maturities for all of the Company’s notes payable outstanding as of March 31, 2013:

KeyBank Credit Facility

On December 17, 2010, the Company, through its wholly owned subsidiary, TNP SRT Secured Holdings, LLC (“TNP SRT Holdings”), entered into a line of credit with KeyBank and certain other lenders (collectively, the “Lenders”) to establish a secured revolving credit facility with an initial maximum aggregate commitment of $35 million (the “Credit Facility”). The proceeds of the Credit Facility may be used by the Company for general corporate purposes, subject to the terms of the Credit Facility. The Credit Facility initially consisted of an A tranche (“Tranche A”) with an initial aggregate commitment of $25 million, and a B tranche (“Tranche B”) with an initial aggregate commitment of $10 million. Tranche B under the Credit Facility terminated as of June 30, 2011. The aggregate commitment under Tranche A was subsequently increased on multiple occasions and, as of March 31, 2013, had an aggregate commitment of $45 million. As discussed below, due to the Company’s default under the Credit Facility, the Company entered into a forbearance agreement with KeyBank which, among other things, converted the entire outstanding principal amount under Tranche A into a term loan which is due and payable in full on July 31, 2013. As of March 31, 2013, the outstanding principal balance on the Credit Facility was $36,455,000.

Borrowings under the Credit Facility are secured by (1) pledges by the Company, the OP, 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 us 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 under the Credit Facility, (3) a security interest granted in favor of KeyBank with respect to all operating, depository, escrow and security deposit accounts and all cash management services of the Company, the OP, TNP SRT Holdings and any other borrower under the Credit Facility, 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 and Aurora Commons properties.

Under the Credit Facility, the Company is required to comply with certain restrictive and financial covenants. In January 2013, the Company became aware of a number of events of default under the Credit Facility relating to, among other things, the Company’s failure to use the net proceeds from its sale of shares in the Offering and the sale of its assets to repay borrowings under the Credit Facility as required by the Credit Facility and its failure to satisfy certain financial covenants under the Credit Facility (collectively, the “Existing Events of Default”). The Company also did not comply with certain financial covenants at March 31, 2013. Due to the Existing Events of Default, the Lenders became entitled to exercise all of their rights and remedies under the Credit Facility and applicable law.

On April 1, 2013, the Company, the OP, certain subsidiaries of the OP which are borrowers under the Credit Facility (collectively, the “Borrowers”) and KeyBank, as lender and agent for the other Lenders, entered into a forbearance agreement (the “Forbearance Agreement”) which amended the terms of the Credit Facility and provides for certain additional agreements with respect to the Existing Events of Default. Pursuant to the terms of the Forbearance Agreement, KeyBank and the other Lenders agreed to forbear the exercise of their rights and remedies with respect to the Existing Events of Default until the earliest to occur of (1) July 31, 2013, (2) the Company’s default under or breach of any of the representations or covenants under the Forbearance Agreement or (3) the date any additional events of defaults (other than the Existing Events of Default) under the Credit Facility occur or become known to KeyBank or any other Lender, (the “Forbearance Expiration Date”). Upon the Forbearance Expiration Date, all forbearances, deferrals and indulgences granted by the Lenders pursuant to the Forbearance Agreement will automatically terminate and the Lenders will be entitled to enforce, without further notice of any kind, any and all rights and remedies available to them as creditors at law, in equity, or pursuant to the Credit Facility or any other agreement as a result of the existing events of default or any additional events of default which occur or come to light following the date of the Forbearance Agreement.

Pursuant to the Forbearance Agreement, the Company, the OP and all of the Borrowers under the Credit Facility have jointly and severally agreed to pay to KeyBank (1) any and all out-of-pocket costs or expenses (including legal fees and disbursements) incurred or sustained by the Lenders in connection with the preparation of the Forbearance Agreement and all related matters, and (2) from time to time after the occurrence of any default under the Forbearance Agreement any out-of-pocket costs or expenses (including legal fees and consulting and other similar professional fees and expenses) incurred by the Lenders in connection with the preservation of or enforcement of any rights of the Lenders under the Forbearance Agreement and the Credit Facility. In connection with the execution of the Forbearance Agreement, the Company has agreed to pay a forbearance fee of approximately $192,000 to KeyBank, with 50% of such fee paid upon the execution of the Forbearance Agreement and the remaining 50% to be paid upon the earlier of the Forbearance Expiration Date or the date the Outstanding Loans are repaid in full.

The Company paid down a total of $1,983,000 on the Credit Facility from the net proceeds from the sales of the Waianae Mall in January 2013 and the McDonalds pad at Willow Run in February 2013. The Forbearance Agreement converts the entire outstanding principal balance under the Credit Facility (the “Outstanding Loans”) into a term loan which is due and payable in full on July 31, 2013. Pursuant to the Forbearance Agreement, the Company, the OP and every other borrower under the Credit Facility must apply 100% of the net proceeds from, among other things, (1) the sale of shares in the Offering or any other sale of securities by the Company, the OP or any other borrower, (2) the sale or refinancing of any of the Company’s properties or other assets, and (3) the collection of insurance or condemnation proceeds due to any damage or destruction of properties or any condemnation for public use of any properties, to the repayment of the Outstanding Loans. The Forbearance Agreement provides that all commitments under the Credit Facility will terminate on July 31, 2013 and that, effective as of the date of the Forbearance Agreement, the Lenders have no further obligation whatsoever to advance any additional loans or amounts under the Credit Facility. The Forbearance Agreement also provides that neither the Company, the OP or any other borrower under the Credit Facility may, without KeyBank’s prior written consent, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any indebtedness other than the existing indebtedness specified in the Forbearance Agreement and any refinancing of such existing indebtedness which does not materially modify the terms of such existing indebtedness in a manner adverse to the Company or the Lenders.

Waianae Loan Assumption

On January 22, 2013, the Company sold the Waianae Mall in Waianae, Hawaii to an unaffiliated buyer for a final sales price of $29,763,000. The mortgage loan secured by the Waianae Mall with an outstanding balance of $19,717,000 was assumed by the buyer in connection with the sale. The Company incurred a disposition fee to the Advisor of $893,000 in connection with the sale.

Lahaina Loan

In connection with the acquisition of Lahaina Gateway Shopping Center on November 9, 2012, the Company, through TNP SRT Lahaina Gateway, LLC (“TNP SRT Lahaina”), borrowed $29,000,000 (the “Lahaina Loan”) from DOF IV REIT Holdings, LLC, (the “Lahaina Lender”). The entire unpaid principal balance of the Lahaina Loan and all accrued and unpaid interest thereon is due and payable in full on October 1, 2017. The Lahaina Loan bears interest at a rate of 9.483% per annum for the initial 12 months, and then 11.429% for the remainder of the term of the loan. On each of December 1, 2012, January 1, 2013, and February 1, 2013, the Company was required to make a mandatory principal prepayment of $333,333, such that the Company would prepay an aggregate $1,000,000 of the outstanding principal balance of the Lahaina Loan, no later than February 1, 2013.

On January 14, 2013, the Company received a letter of default from the Lahaina Lender in connection with the certain Guaranty of Recourse Obligations by the Company and Anthony W. Thompson, the Company’s Chairman and Co-Chief Executive Officer, for the benefit of the Lahaina Lender, pursuant to which the Company and Mr. Thompson guaranteed the obligations of TNP SRT Lahaina under the Lahaina Loan. The letter of default stated that two events of default existed under the Lahaina Loan as a result of the failure of TNP SRT Lahaina to (1) pay a deposit into a rollover account, and (2) pay two mandatory principal payments. The Lahaina Lender requested payment of the missed deposit into the rollover account, the two overdue mandatory principal payments, and late payment charges and default interest in the aggregate amount of $1,281,000 by January 18, 2013. On January 22, 2013, the Company used a portion of the proceeds from our sale of the Waianae Mall (discussed above) to pay the entire amount requested by Lahaina Lender and cure the events of default under the Lahaina Loan.

Since the acquisition of the Lahaina Gateway property on November 9, 2012, cash from operations from the Lahaina Gateway property has not been sufficient to support the property’s operating expenses, the debt service obligations under the Lahaina Loan, and the various cash reserve requirements imposed by the Lahaina Lender. As a result, since the acquisition of the Lahaina Gateway property, the Company has supported the property’s cash requirements with cash from operations generated by other properties within the Company’s portfolio. In order to settle the Company’s obligations under the Lahaina Loan and avoid potential litigation and foreclosure proceedings (and the associated delays and expenses), relating to the Lahaina Gateway property, the Company is currently negotiating a deed in lieu of foreclosure agreement with the Lahaina Lender (the “DIL Agreement”). Pursuant to the proposed terms of the DIL Agreement, the Company will convey title to the Lahaina Gateway property to the Lahaina Lender in exchange for the Lahaina Lender’s agreement not to seek payment from the Company for any amounts owed under the Lahaina Loan, subject to certain exceptions as set forth in the DIL Agreement.

The execution of the DIL Agreement is subject to a number of conditions, including mutual agreement on its final terms, and there is no guarantee that the Company will enter into the DIL Agreement on the terms described above, or at all.

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 Facility secured by Morningside Marketplace, Cochran Bypass (Bi Lo Grocery Store), Ensenada Square, Florissant Marketplace and Turkey Creek. The KeyBank Mezzanine Loan was paid in January 2013 using a portion of the proceeds from our sale of the Waianae Mall.

7. FAIR VALUE DISCLOSURES

The Company believes the total values reflected on its condensed consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and amounts due to affiliates due to their short-term nature, except for the Company’s notes payable, which are disclosed below.

The fair value of the Company’s notes payable is estimated using a present value technique based on contractual cash flows and management’s observations of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. The Company significantly reduces the amount of judgment and subjectivity in its fair value determination through the use of cash flow inputs that are based on contractual obligations. Discount rates are determined by observing interest rates published by independent market participants for comparable instruments. The Company classifies these inputs as Level 2 inputs.

The following table provides the carrying values and fair values of the Company’s notes payable as of March 31, 2013 and December 31, 2012:

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 the Sponsor for an aggregate purchase price of $200,000. As of March 31, 2013, Anthony W. Thompson, the Company’s current Co-Chief Executive Officer and President, 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.

On February 7, 2013, the Company terminated the Offering and ceased offering shares of common stock in the primary offering and under the DRIP. As of the termination of the Offering on February 7, 2013, the Company had accepted subscriptions for, and issued, 10,969,714 shares of common stock (net of share redemptions), including 391,182 shares of common stock pursuant to the DRIP, resulting in gross offering proceeds of $108,357,000.

Common Units

On May 26, 2011, in connection with the acquisition of Pinehurst Square East, a retail property located in Bismarck, North Dakota, the OP issued 287,472 Common Units to certain of the sellers of Pinehurst Square East 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, 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 approximately $1,371,079, 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 March 31, 2013 and December 31, 2012, 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 are 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. The Company did not redeem any common shares under its share redemption program during the three months ended March 31, 2013. During the three months ended March 31, 2012, the Company redeemed 17,649 shares (including 549 shares issued under the DRIP program) of common shares under its share redemption program.

Effective January 15, 2013, the Company suspended its share redemption program, including redemptions upon death and disability.

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 have been paid from other sources, including proceeds from the Offering.

Effective January 15, 2013, the Company announced that it will no longer be making monthly distributions. Quarterly distributions will be considered by the Company’s board of directors for 2013. On March 19, 2013, the Company announced that it will not be making a quarterly distribution for the quarter ended March 31, 2013.

The following table sets forth the distributions declared and paid to the Company’s common stockholders and non-controlling Common Unit holders for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively:

Distribution Reinvestment Plan

The Company adopted the DRIP which allowed 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 The DRIP was terminated effective February 7, 2013 in connection with the expiration of the Offering and the Company’s deregistration of all of the unsold shares registered for sale pursuant to the Offering. For the three months ended March 31, 2013 and 2012, $246,000 and $406,000 in distributions were reinvested and 25,940 and 42,818 shares of common stock were issued under the DRIP, respectively.

9. EARNINGS PER SHARE

EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.

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

(1) Number of convertible Common Units pursuant to the redemption rights outlined in the Company's registration statement on Form S-11. Anti-dilutive for three months ended March 31, 2012.

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.

For the three months ended March 31, 2013 and 2012, the Company recognized compensation expense of $15,000 and $13,000, respectively, related to restricted common stock grants to its independent directors, which is included in general and administrative expense in the Company’s accompanying condensed consolidated statements of operations. Shares of restricted common stock have full voting rights and rights to dividends.

As of March 31, 2013 and December 31, 2012, there was $45,000 and $60,000, respectively, of total unrecognized compensation expense related to non-vested shares of restricted common stock. As of March 31, 2013, this expense is expected to be realized over a remaining period of one year. As of March 31, 2013 and December 31, 2012, the fair value of the non-vested shares of restricted common stock was $90,000 and 10,000 shares remain unvested. During the three months ended March 31, 2013, there were no restricted stock grants issued and no shares vested.

11. RELATED PARTY TRANSACTIONS

Pursuant to the advisory agreement by and among the Company, the OP and Advisor (the “Advisory Agreement”), the Company is obligated to pay Advisor specified fees upon the provision of certain services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services. Pursuant to 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”), prior to the termination of the Offering, the Company was obligated to pay the Dealer Manager certain commissions and fees in connection with the sales of shares in the Offering. 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 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. On August 1, 2012, the Company, the OP and Advisor entered into an amendment to the Company’s Advisory Agreement, effective 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 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.

As of March 31, 2013 and December 31, 2012, cumulative organization and offering costs incurred by Advisor on the Company’s behalf were $3,272,000 and $3,016,000, respectively. These 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 March 31, 2013, cumulative organization and offering costs reimbursed to the Advisor or paid directly by the Company were $4,273,000, which amount exceeded 3.0% of the gross proceeds from the Offering by $1,001,000. This excess was billed to Advisor and settled as of January 31, 2013.

Selling Commissions and Dealer Manager Fees

The Dealer Manager received a sales commission of 7.0% of the gross proceeds from the sale of shares of common stock in the primary offering. The Dealer Manager also received 3.0% of the gross proceeds from the sale of shares in the primary offering in the form of a dealer manager fee as compensation for acting as the dealer manager. The Company incurred selling commissions and dealer manager fees during the following periods:

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 twelve months ended March 31, 2013, 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 a separate fee or with respect to an officer of the Company. For the three months ended March 31, 2013 and 2012, the Company recorded a net recovery of administrative services of $98,000 and incurred $182,000 of administrative services to Advisor, respectively. The $98,000 net recovery resulted from an overaccrual of certain operating costs in 2012.  As of March 31, 2013 and December 31, 2012, administrative services of $0 and $209,000, respectively, were included in amounts due to affiliates.

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 March 31, 2013 and 2012, the Company incurred $344,000 and $250,000, respectively, in property management fees to TNP Manager. As of March 31, 2013 and December 31, 2012, property management fees of $60,000 and $48,000, respectively, were included in amounts due to affiliates.

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 and paid $13,000 and $1,212,000 in acquisition fees to Advisor during the three months ended March 31, 2013 and 2012.

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 did not incur any loan origination fees to Advisor for the three months ended March 31, 2013 and 2012.

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. There were no asset management fees incurred for the three months ended March 31, 2013 and 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 disposition fees up to 50.0% of a customary and competitive real estate commission, but not to exceed 3.0% of the contract sales price of each property sold. For the three months ended March 31, 2013 and 2012, the Company incurred $924,000 and $24,000 of disposition fees payable to Advisor related to the Waianae Sale and the sale of the McDonalds pad at Willow Run in 2013 and the disposition of the KFC pad at Morningside Marketplace in 2012. There were no disposition fees payable to Advisor as of March 31, 2013 and December 31, 2012.

Leasing Commission Fee

On June 9, 2011, pursuant to Section 11 of the Advisory Agreement with the Advisor, the Company’s board of directors approved the payment of fees to the Advisor for services it provides in connection with leasing 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 the Advisor. For the three months ended March 31, 2013 and 2012, the Company incurred and paid approximately $124,000 and $5,000 of lease commissions to Advisor or its affiliates, respectively. As of March 31, 2013 and December 31, 2012, leasing commission fees of $0 and $14,000, respectively, were included in amounts due to 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. There were no financing coordination fees incurred for the three months ended March 31, 2013. For the three months ended March 31, 2012, the Company incurred and paid $361,000 of financing coordination fees to Advisor or its affiliates.

Guaranty Fees

In connection with certain acquisition financings, the Company’s Chairman and Co-Chief Executive Officer and/or the Sponsor had executed certain guaranty agreements to the respective lenders. As consideration for such guaranty, the Company entered into a reimbursement and fee agreement to provide for an upfront payment and an annual guaranty fee payment for the duration of the guarantee period. For the three months ended March 31, 2013 and 2012, the Company incurred approximately $14,000 and $13,000, respectively, of guaranty fees. As of March 31, 2013 and December 31, 2012, guaranty fees of approximately $4,000 and $10,000, respectively, were included in amounts due to affiliates. At March 31, 2013, the Company’s outstanding guaranty agreements relate to the guarantee on the financing on Constitution Trail and Osceola Village.

Related Party Loans

In connection with the acquisition of Morningside Marketplace in January 2012, the Company financed the payment of a portion of the purchase price for Morningside Marketplace 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 former Chief Financial Officer, 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, Co-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 Morningside Affiliate Loans including unpaid accrued interest were paid in full as of March 31, 2012.

Interest expense incurred and paid by the Company to an affiliate of Advisor during the three months ended March 31, 2013 and 2012 was $0 and $20,000, respectively.

Summary of Related Party Fees

Summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2013 and 2012, respectively, and payable as of March 31, 2013 and December 31, 2012:

In March 2012, the Company reimbursed its advisor $240,000 related to a non-refundable earnest deposit incurred by an affiliate of Advisor in 2010 on a potential acquisition commonly known as Morrison Crossing. The reimbursement was subsequently determined by the Company to be non-reimbursable since the acquisition was not one that was approved by the Company’s board of directors in 2010 and accordingly, the Company recorded the amount as a receivable from Advisor and recorded a provision to reserve the entire amount at March 31, 2013 and December 31, 2012. In May 2013, the Company settled with Advisor and determined to not seek reimbursement from Advisor for the amount previously paid.

12. COMMITMENTS AND CONTINGENCIES

Lahaina Gateway Ground Lease

The Lahaina Gateway property is encumbered by a ground lease which was assigned to the Company in connection with the acquisition of the property on November 9, 2012. The original lease term is for a period of 55 years, commencing on February 2, 2005 with an expiration date of February 1, 2060. The current annual base rent is $1,187,000, payable in monthly installments of approximately $99,000 through February 1, 2015. The annual base rent will increase to $1,342,000 on February 2, 2015, with scheduled increases of 13% every five years through February 2, 2035. Thereafter, the annual base rent will be renegotiated each five year period through lease expiration.

Osceola Village Contingencies

In connection with the acquisition financing on Osceola Village, the Company through its subsidiary, granted a lender a profit participation in the property equal to 25% of the net profits received by the Company upon the sale of the property (the “Profit Participation Payment”). Net profits is calculated as (1) the gross proceeds received by the Company upon a sale of the property in an arms-length transaction at market rates to third parties less (2) the sum of: (a) principal repaid to the lender out of such sales proceeds at the time of such sale; (b) all bona fide closing costs and similar expenses provided that all such closing costs and similar expenses are paid to third parties, unaffiliated with the Company including, without limitation, reasonable brokerage fees and reasonable attorneys’ fees paid to third parties, unaffiliated with the Company and incurred by the Company in connection with the sale; and (c) a stipulated amount of $3,200,000. If for any reason consummation of such sale has not occurred on or before the scheduled maturity date or any earlier foreclosure of the underlying mortgage loan secured by the property, the Company shall be deemed to have sold the property as of the business day immediately preceding the mortgage loan maturity date or the filing date of the foreclosure action, whichever is applicable, for an amount equal to a stipulated sales price and shall pay the lender the Profit Participation Payment. In the event the underlying mortgage loan is prepaid, the Company shall also be required to immediately pay the Profit Participation Payment based upon a deemed sale of the property for a stipulated sales price. Based on the estimated sale price as of March 31, 2013 the Company has recorded an accrual for the estimated liability under the Profit Participation Payment.

Additionally, in connection with the acquisition financing on Osceola Village, the Company entered into a Master Lease Agreement (the “Master Lease”) with TNP SRT Osceola Village Master Lessee, LLC, a wholly-owned subsidiary of the OP (the “Master Lessee”). Pursuant to the Master Lease, TNP SRT Osceola Village leased to Master Lessee the approximately 23,000 square foot portion of Osceola Village which was not leased to third-party tenants as of the closing date (the “Premises”). The Master Lease provides that the Master Lessee will pay TNP SRT Osceola Village a monthly rent in an amount equal to $36,425, provided that such monthly amount will be reduced proportionally for each square foot of space at the premises subsequently leased to third-party tenants pursuant to leases which are reasonably acceptable to the lender and which satisfy certain criteria set forth in the Master Lease (“Approved Leases”). The Master Lease has a seven-year term, subject to earlier expiration upon the earlier to occur of (1) the date on which all available rentable space at the Premises is leased to third-party tenants pursuant to Approved Leases and (2) the date on which the mortgage loan is repaid in full in cash (other than as a result of a credit bid by the lender at a foreclosure sale). The Master Lessee has no right to assign or pledge the Master Lease or to sublet any part of the premises without the prior written consent of TNP SRT Osceola Village and the lender. In connection with the acquisition of Osceola Village, TNP SRT Osceola Village obtained a mortgage (the “Osceola Loan”) from ANICO. The Master Lease was assigned to ANICO pursuant to the assignment of leases and rents in favor of ANICO entered into by TNP SRT Osceola Village in connection with the Osceola Loan. Pursuant to the Master Lease, the Master Lessee acknowledges and agrees that upon any default by TNP SRT Osceola Village under any of the loan documents related to the Osceola Loan, ANICO will be entitled to enforce the assignment of the Master Lease to ANICO and replace TNP SRT Osceola Village under the Master Lease for all purposes.

Constitution Trail Contingency

In connection with the financing of the Constitution Trail acquisition, TNP SRT Constitution Trail, LLC, a wholly owned subsidiary of the OP (“TNP SRT Constitution Trail”), TNP SRT Constitution Trail Master Lessee, LLC (the “Starplex Master Lessee”), a wholly owned subsidiary of the OP, and the Sponsor, entered into a Master Lease Agreement with respect to a portion of Constitution Trail (the “Starplex Master Lease”). Pursuant to the Starplex Master Lease, TNP SRT Constitution Trail leased to the Starplex Master Lessee an approximately 7.78 acre parcel of land included in the Constitution Trail property, and the approximately 44,064 square foot Starplex Cinemas building located thereon (the “Starplex Premises”). The Starplex Master Lease provides that, in the event that the annual gross sales from the Starplex premises are less than $2,800,000, then thereafter the Starplex Master Lessee will pay TNP SRT Constitution Trail a monthly rent in an amount equal to $62,424 ($749,088 annually), subject to an offset based on any minimum annual rent for the Starplex premises received by TNP SRT Constitution Trail. The Starplex Master Lease will expire upon the earlier to occur of (1) December 31, 2018 and (2) the date on which the Constitution Trail mortgage loan is repaid in full in cash (other than as a result of a credit bid by the lender at a foreclosure sale or refinancing of the Constitution Trail Loan). The Starplex Master Lessee has no right to assign or pledge the Starplex Master Lease or to sublet any part of the Starplex premises without the prior written consent of TNP SRT Constitution Trail and the lender of the mortgage loan.

Carson Plaza Contingency

In 2012, the Company pursued an acquisition commonly known as Carson Plaza and placed a non-refundable deposit of $250,000 into escrow which was expensed and included in transaction expense for the year ended December 31, 2012. The acquisition did not materialize as a result of the Company’s claim of certain undisclosed environmental conditions uncovered during due diligence. The seller disagreed with the Company’s claim. The outcome of the Company’s claim and the prospect of the recovery of the deposit are unknown at the present time and accordingly, the Company did not accrue for any recovery of such amount at March 31, 2013 and December 31, 2012.

Economic Dependency

The Advisor and its affiliates currently provide certain services to the Company pursuant to the Advisory Agreement and the property management agreements with respect to the Company’s properties, management of the daily operations of the Company’s investment portfolio and certain general and administrative responsibilities. These services are currently relatively limited due to the fact that the Company is not currently actively engaged in acquisitions and has hired a number of employees of its own. As disclosed in “Note 1. ORGANIZATION AND BUSINESS”, the Company is currently engaged in negotiations to replace the Advisor with Glenborough. In the event that the Company is successful in transitioning to Glenborough as its external advisor and property manager, the Company will become dependent upon Glenborough and its affiliates to provide similar services to the Company pursuant to an advisory agreement and property management agreements with Glenborough. In the event that the Advisor, or Glenborough or any other successor advisor, is unable to provide the respective services, the Company will be required to obtain such services from other sources.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on its results of operations or financial condition.

13. SUBSEQUENT EVENTS

Amendment of Credit Facility by entering into Forbearance Agreement

On April 1, 2013, the Company, the OP, certain subsidiaries of the OP which are borrowers under the Credit Facility and KeyBank, as lender and agent for the other Lenders, entered into the Forbearance Agreement which amended the terms of the Credit Facility and provides for certain additional agreements. See “Note 6.NOTES PAYABLE.”

Amendment to Consulting Agreement

The Company’s board of directors is actively negotiating with Glenborough to replace the Company’s current advisor. In December 2012, the Company entered into a consulting agreement with Glenborough to assist the Company through the advisor change process. Effective May 1, 2013, the Company and Glenborough entered into an amendment to the consulting agreement which expanded the scope of the consulting services provided to the Company by Glenborough (as described below) and increased the monthly consulting fee payable to Glenborough by the Company from $75,000 per month to $90,000 per month.

Effective May 1, 2013, pursuant to the amendment to the consulting agreement, Glenborough shall perform the following accounting services for the Company:

Effective June 1, 2013, the following additional services will also be performed by Glenborough pursuant to the amendment to the consulting agreement:

The Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued.

Pending Disposition

On or about May 9, 2013, the purchase and sale agreement, as amended, for the sale of the office building at the Aurora Commons property (Note 3) had expired and the buyer did not release the contingencies in the purchase and sale agreement.

The following discussion and analysis should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2012 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or SEC, on April 1, 2013, which we refer to herein as our “Form 10-K.” As used herein, the terms “we,” “our,” and “us” refer to TNP Strategic Retail Trust, Inc. and, as required by context, TNP Strategic Retail Operating Partnership, LP, a Delaware limited partnership (which we refer to as our “OP”) and to their subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our 2012 Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 2012 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.

Overview

TNP Strategic Retail Trust, Inc. is a Maryland corporation formed on September 18, 2008 to invest in and manage a portfolio of income producing retail properties, located primarily in the Western United States, and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. We have elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes, commencing with the taxable year ended December 31, 2009. We own substantially all of our assets and conduct our operations through our OP, of which we are the sole general partner.

On November 4, 2008, we filed a registration statement on Form S-11 with the Securities and Exchange Commission, or SEC, for our initial public offering of up to $1,000,000,000 in shares of our common stock to the public at $10.00 per share in our primary offering and up to $100,000,000 shares of our common stock to our stockholders at $9.50 per share pursuant to our distribution reinvestment plan. On August 7, 2009, the SEC declared our registration statement effective and we commenced our initial public offering. On February 7, 2013, we terminated our initial public offering and ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan.

From the commencement of our initial public offering through the termination of our initial public offering on February 7, 2013, we accepted subscriptions for, and issued, 10,969,714 shares of our common stock (net of share redemptions), including 391,182 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $108,357,000, net of redemptions. As of March 31, 2013, we had redeemed 160,409 shares pursuant to our share redemption program for an aggregate redemption amount of approximately $1,604,000. Due to short-term liquidity issues and defaults under certain of our loan agreements, we suspended our share redemption program, including with respect to redemptions upon death and disability, effective as of January 15, 2013. For more information regarding our share redemption program, see Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer of Equity Securities—Share Redemption Program” in our 2012 Annual Report on Form 10-K.

On June 15, 2012, we filed a registration statement on Form S-11 with the SEC to register a following-on public offering of up to $900,000,000 in shares of our common stock. However, we subsequently determined not to proceed with our contemplated follow-on public offering and on March 1, 2013 we requested that the SEC withdraw the registration statement for our contemplated follow-on public offering, effective immediately. We currently do not expect to commence a follow-on offering.

Subject to certain restrictions and limitations, our business is currently managed by TNP Strategic Retail Advisor, LLC, our external advisor, pursuant to an advisory agreement. We refer to TNP Strategic Retail Advisor, LLC as our “advisor.” Our advisor and TNP Property Manager, LLC, which we refer to as our “property manager,” manage our operations and our portfolio of real estate and real estate-related assets. Our advisor and property manager are affiliates of our sponsor, Thompson National Properties, LLC. Our advisor and property manager depend on the capital from our sponsor and fees and other compensation that they receive from us in connection with the purchase, management and sale of our assets to conduct their operations.

Our sponsor has a limited operating history and, since its inception, has operated at a significant net loss. In addition, our sponsor and its subsidiaries also have substantial secured and unsecured debt obligations coming due in the next several years. As a result of our sponsor’s financial condition, our board of directors is actively negotiating with Glenborough, LLC and its affiliates (“Glenborough”) to replace our current advisor. Glenborough is a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of high quality commercial properties. Glenborough and its predecessor entities have over three decades of experience in the commercial real estate industry. Our board of directors is engaged in ongoing negotiations regarding the transition to Glenborough as our external advisor and the termination of our current advisory agreement and the property management agreements with respect to our properties. However, any change to our advisor or our property manager will require the consent of a number of our significant lenders, which we are still in the process of negotiating. We can give no assurance that we will be able to secure such lender consents or come to terms with Glenborough with respect to the transition. In December 2012, we entered into a consulting agreement with Glenborough to assist us through the advisor change process. Pursuant to the consulting agreement, we agree to pay Glenborough a monthly consulting fee of $75,000 and reimburse Glenborough for its reasonable out-of-pocket expenses. From December 2012 through April 2013, we agreed to pay Glenborough a monthly consulting fee of $75,000 pursuant to the consulting agreement. Effective May 1, 2013, we amended the consulting agreement to expand the services provided to us by Glenborough and increase the monthly consulting fee payable to Glenborough to $90,000. The consulting agreement is terminable by either party upon 10 business days’ written notice.

Effective January 15, 2013, we announced that we will no longer be making monthly distributions. Quarterly distributions will be considered by our board of directors for 2013. On March 19, 2013, we announced that we will not be making a quarterly distribution for the quarter ended March 31, 2013.

Market Outlook

Since 2007 and the emergence of the global economic crisis, there have been persistent concerns regarding the creditworthiness and refinancing capabilities of both corporations and sovereign governments. Economies throughout the world have experienced lingering levels of high unemployment and low levels of consumer and business confidence due to a global downturn in economic activity. While some markets have shown some signs of recovery, concerns remain regarding job growth, income growth and the overall economic health of consumers, businesses and governments. Recent global economic events remain centered on the potential for the default of several European sovereign debt issuers and the impact that such an event would have on the European Union and the rest of the world’s financial markets. During 2011, S&P downgraded the credit rating of the United States to AA+ from AAA. In November 2012, Moody’s downgraded France’s sovereign debt rating to Aa1 from AAA and, in February 2013, Moody’s downgraded the U.K. government debt to Aa1 from AAA as well. The global ratings agencies continue to have a number of western sovereign issuers on negative watch as governments have struggled to resolve their fiscal obligations. These events have led to continued volatility in the capital markets.

Properties

As of March 31, 2013, our portfolio included the 20 properties below, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of 2,035,402 square feet of single- and multi-tenant, commercial retail space located in 14 states, which we purchased for an aggregate purchase price of $263,998,000.

First Quarter 2013 Highlights

Results of Operations

Comparison of the three months ended March 31, 2013 versus the three months ended March 31, 2012

The following table provides summary information about our results of operations for the three months ended March 31, 2013 and 2012:

Our results of operations for the three months ended March 31, 2013 are not indicative of those expected in future periods.

Revenue

Revenues increased by $4,107,000 to $8,039,000 during the three months ended March 31, 2013 compared to $3,932,000 for the three months ended March 31, 2012. The increase was primarily due to five additional property acquisitions since March 31, 2012 and a full quarter of operations for the five properties acquired in the first quarter of 2012. The occupancy rate for our property portfolio was 88%, based on 2,035,402 rentable square feet, as of March 31, 2013 compared to 84%, based on 1,389,870 rentable square feet, as of March 31, 2012.

Operating and maintenance expenses

Operating and maintenance expense increased by $1,717,000 to $2,997,000 during the three months ended March 31, 2013 compared to $1,280,000 for the three months ended March 31, 2012. The increase was primarily due to five additional property acquisitions since March 31, 2012 and a full quarter of operations for the five properties acquired in the first quarter of 2012. Included in operating and maintenance expenses are property management fees paid to an affiliate of our advisor of $295,000 and $233,000 for the three months ended March 31, 2013 and 2012, respectively.

General and administrative expenses

General and administrative expenses increased by $967,000 to $1,598,000 during the three months ended March 31, 2013 compared to $631,000 for the three months ended March 31, 2012. General and administrative expenses consisted primarily of legal fees, audit fees, restricted stock compensation, directors’ fees, salaries, tax fees, abandoned project costs and administrative expenses reimbursable to our advisor. The increase primarily relates to higher legal, audit and consulting costs during the current quarter including monthly consulting fees of $75,000 to Glenborough.

Depreciation and amortization expense

Depreciation and amortization expense increased by $1,432,000 to $3,182,000 during the three months ended March 31, 2013 compared to $1,750,000 for the three months ended March 31, 2012. The increase was primarily due to five additional property acquisitions since March 31, 2012 and a full quarter of depreciation and amortization for the five properties acquired in the first quarter of 2012.

Transaction expenses

Transaction expenses decreased by $1,849,000 to $51,000 during the three months ended March 31, 2013 compared to $1,900,000 for the three months ended March 31, 2012. We incurred transaction expenses for five properties acquired during the first quarter of 2012 and had no acquisitions during the first quarter of 2013.

Interest expense

Interest expense increased by $880,000 to $3,669,000 during the three months ended March 31, 2013 compared to $2,789,000 for the three months ended March 31, 2012. The increase was primarily due to the increased debt levels associated with the acquisition of five additional properties since March 31, 2012 and a full quarter of interest for the five properties acquired in the first quarter of 2012 and was partially offset by the write-off of deferred financing costs in the prior year period. Interest expense for the three months ended March 31, 2012 included the amortization and write-off of deferred financing costs of $838,000. The write-off of approximately $540,000 of unamortized deferred financing costs was as a result of the refinancing of the four properties from our credit agreement onto a new term loan completed during the three months ended March 31, 2012.

Income from discontinued operations

Income from discontinued operations increased by $4,588,000 to $4,641,000 during the three months ended March 31, 2013 compared to $53,000 for the three months ended March 31, 2012. The increase during the three months ended March 31, 2013 is primarily attributed to the gain on sale of the Waianae Mall which was sold in January 2013. Income from discontinued operations for the three months ended March 31, 2012 includes the net operating results of Waianae Mall, the office building at the Aurora Commons property, the KFC parcel at Morningside Marketplace, which was sold in February 2012, and the Chase and Chevron parcels at Morningside Marketplace, which were sold in April 2012.

Net income (loss)

Net income for the three months ended March 31, 2013 was $1,183,000 compared to a net loss of $4,365,000 for the same period in 2012. The change from a net loss for the three months ended March 31, 2012 to net income for the three months ended March 31, 2013 is primarily attributed to higher revenues, the gain on sale of real estate in the quarter and the reduction in non-recurring transaction expenses.

Liquidity and Capital Resources

As of March 31, 2013, we owned 20 real estate properties with a net carrying value aggregating $224.1 million. Our principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses and interest on our outstanding indebtedness and the payment of distributions to our stockholders. On February 7, 2013, as a result of the expiration of our initial public offering, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. Additionally, we filed an application on March 1, 2013 with the SEC to withdraw the registration statement on Form S-11 for our follow-on offering that was initially filed with the SEC on June 15, 2012. As a result of the termination of our initial public offering and our withdrawal of the registration statement for our follow-on offering, offering proceeds are not currently available to fund our cash needs, and will not be available until we are able to successfully engage in an offering of our securities. We expect our future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to us from any offering of our securities that we conduct in the future. We also expect our investment activity will be reduced until we are able to engage in an offering of our securities or are able to identify other significant sources of financing. Due to the decrease in capital resources, we have suspended our share redemption program, including redemptions for death and disability, effective January 15, 2013. We intend to reevaluate our ability to resume share redemptions pursuant to our share redemption program after transitioning to a new advisor and addressing our liquidity issues. Our ability to resume share redemptions will be determined by our board of directors based on our liquidity and cash needs.

On August 2, 2012, we, our operating partnership and our advisor entered into an amendment to our amended and restated advisory agreement, effective as of August 7, 2012, which, among other things, establishes a requirement that we maintain at all times a cash reserve of at least $4,000,000 and provides that our advisor may deploy any cash proceeds in excess of the cash reserve for our business pursuant to the terms of the advisory agreement. As a result of the significant cash required to complete the acquisition of Lahaina Gateway on November 9, 2012 and the additional cash required by the mortgage lender for the Lahaina Gateway acquisition for reserves and mandatory principal payments, our cash and cash equivalents have fallen to approximately $1,126,000 at March 31, 2013. Our restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs) has increased to $5,410,000 at March 31, 2013. For properties with such lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.

On April 1, 2013, we entered into a forbearance agreement relating to our credit agreement with KeyBank (for additional discussion see “– KeyBank Credit Facility” below). On or before the expiration of the forbearance period, we currently intend to (1) refinance the credit agreement on or before the expiration of the forbearance agreement with KeyBank or with another lender; or (2) refinance a portion of the credit agreement on or before the expiration of the forbearance agreement with KeyBank or with another lender and paydown of a portion of the balance of the credit agreement with proceeds from disposition of certain properties securing the credit agreement.

As of March 31, 2013, our borrowings exceeded 300% of the value of our net assets due to the exclusion from total assets of intangible assets that were acquired with the acquisition of our properties. Because these intangible assets were part of the purchase price and because our overall indebtedness was less than 75% of the book value of our assets at March 31, 2013, the excess over the borrowing limitation has been approved by our independent directors. As of December 31, 2012, our borrowings exceeded 300% of the value of our net assets due to the exclusion from total assets of intangible assets that were acquired with the acquisition of our properties. Because these intangible assets were part of the purchase price and because our overall indebtedness was less than 75% of the book value of our assets at December 31, 2012, the excess over the borrowing limitation has been approved by our independent directors.

Cash Flows from Operating Activities

During the three months ended March 31, 2013, net cash used in operating activities from continuing operations was $2,432,000 compared to net cash provided by operating activities of $97,000 during the three months ended March 31, 2012, a negative net change in cash flows from operating activities of $2,529,000. The negative change in cash flows from operating activities during the three months ended March 31, 2013 was primarily due to negative net changes in operating asset and liability balances involving prepaid expenses, tenant receivables and other liabilities which were partially offset by favorable changes in loss from continuing operations adjusted by non-cash depreciation and amortization charges. Prepaid expense balances increased in the three months ended March 31, 2013 compared to a decrease in prepaid expense balances for the prior year period resulting in a negative impact to cash flows from operating activities of $2,900,000. Tenant receivable balances increased in the three months ended March 31, 2013 compared to the prior year period resulting in a negative impact to cash flows from operating activities of $995,000. Other liability balances decreased in the three months ended March 31, 2013 compared to the prior year period resulting in a negative impact to cash flows from operating activities of $1,760,000. These negative impacts to cash flows from operating activities during the three months ended March 31, 2013 were partially offset by a reduced loss from continuing operations (reduced by $960,000) and higher non-cash depreciation and amortization adjustments of $1,432,000.

Cash Flows from Investing Activities

Our most significant component of cash used in investing activities involves our expenditures for real estate acquisitions. During the three months ended March 31, 2013, net cash used in investing activities from continuing operations was $1,346,000 compared to $46,401,000 during the three months ended March 31, 2012. The decrease was primarily attributed to the acquisition of five properties during 2012 for an aggregate purchase price of $48,325,000. No property acquisitions were completed in the three months ended March 31, 2013. Net cash provided by investing activities from discontinued operations was $9,702,000 representing the net proceeds on the Waianae Sale and the sale of the McDonalds pad at Willow Run.

Cash Flows from Financing Activities

Our cash flows from financing activities consist primarily of proceeds from our initial public offering, debt financings and distributions paid to our stockholders. During the three months ended March 31, 2013, net cash used in financing activities from continuing operations was $4,716,000, compared to net cash provided by financing activities of $50,143,000 during the three months ended March 31, 2012. The primary components of net cash used in financing activities from continuing operations for the three months ended March 31, 2013 were repayments of notes payable ($4,271,000) and cash distributions ($415,000). For the three months ended March 31, 2012, net cash provided by financing activities primarily related to proceeds received from our initial public offering ($18,956,000) and proceeds from the issue of notes payable related to our property acquisitions and refinancing of debt during the period ($159,037,000), net of repayments on our notes payable ($123,325,000).

Short-term Liquidity and Capital Resources

Our principal short-term demand for funds will be for the payment of operating expenses and the payment of principal and interest on our outstanding indebtedness. To date, our cash needs for operations have been covered from cash provided by property operations and the sale of shares of our common stock. Due to the termination of our initial public offering on February 7, 2013, we intend to fund our short-term operating cash needs from operations. Operating cash flows are expected to increase as operations in our existing portfolio stabilize and efficiencies are gained. Additionally, offering and organization costs associated with our initial public offering have been eliminated due to the termination of our initial public offering on February 7, 2013. Effective January 15, 2013, our monthly distributions have been suspended. Currently, our board of directors will evaluate our ability to make quarterly distributions on a quarterly basis based on our other operational cash needs. Our board of directors has determined that quarterly distributions for the quarter ended March 31, 2013 will not be made based on our current liquidity and operational cash needs.

Long-term Liquidity and Capital Resources

On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders (currently suspended), future redemptions of shares (currently suspended) and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations. Until the termination of our initial public offering on February 7, 2013, our cash needs for acquisitions were satisfied from the net proceeds of the public offering and from debt financings. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. When market conditions improve, we may consider future public offerings or private placements of equity, as well as additional borrowings. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” and “Note 7. DEBT” to our consolidated financial statements included in our Annual Report for additional information on the maturity dates and terms of our outstanding indebtedness.

KeyBank Credit Facility

On December 17, 2010, we, through our wholly owned subsidiary, TNP SRT Secured Holdings, LLC, or TNP SRT Holdings, entered into the Credit Facility with KeyBank and certain other lenders, which we collectively refer to as the “lenders,” to establish a revolving credit facility with an initial maximum aggregate commitment of $35,000,000. The Credit Facility initially consisted of an A tranche, or “Tranche A,” with an initial aggregate commitment of $25 million, and a B tranche, or “Tranche B,” with an initial aggregate commitment of $10 million. Tranche B under the Credit Facility terminated as of June 30, 2011. The aggregate commitment under Tranche A was subsequently increased on multiple occasions and as of March 31, 2013 the aggregate commitment was $45 million. As discussed below, due to our default under the credit facility, we entered into the Forbearance Agreement with KeyBank which, among other things, converts the entire outstanding principal amount under Tranche A into a term loan which is due and payable in full on July 31, 2013. As of March 31, 2013, the Credit Facility had an outstanding balance of $36,455,000.

Under the Credit Facility, we are required to comply with certain restrictive and financial covenants. In January 2013, we became aware of a number of events of default under the Credit Facility relating to, among other things, our failure to use the net proceeds from our sale of our shares in our public offering and the sale of our assets to repay our borrowings under the Credit Facility and our failure to satisfy certain financial covenants under the Credit Facility, which we collectively refer to as the “existing events of default.” We also did not comply with certain financial covenants at March 31, 2013. Due to the existing events of default, KeyBank and the other lenders became entitled to exercise all of their rights and remedies under the Credit Facility and applicable law.

On April 1, 2013, our operating partnership, certain subsidiaries of our operating partnership which are borrowers under the Credit Facility (the “Borrowers”) and KeyBank, as lender and agent for the other lenders, entered into the Forbearance Agreement which amended the terms of the Credit Facility and provided for certain additional agreements with respect to the existing events of default. Pursuant to the terms of the Forbearance Agreement, KeyBank and the other lenders agreed to forbear the exercise of their rights and remedies with respect to the existing events of default until the earliest to occur of (1) July 31, 2013, (2) our default under or breach of any of the representations or covenants under the Forbearance Agreement or (3) the date any additional events of defaults (other than the existing events of default) under the Credit Facility occur or become known to KeyBank or any other lender, which we refer to as the “forbearance expiration date.” Upon the forbearance expiration date, all forbearances, deferrals and indulgences granted by the lenders pursuant to the Forbearance Agreement will automatically terminate and the lenders will be entitled to enforce, without further notice of any kind, any and all rights and remedies available to them as creditors at law, in equity, or pursuant to the Credit Facility or any other agreement as a result of the existing events of default or any additional events of default which occur or come to light following the date of the Forbearance Agreement.

The Forbearance Agreement converted the entire outstanding principal balance under the Credit Facility, and all interest and other amounts payable under the Credit Facility, which we refer to as the “outstanding loan,” into a term loan which is due and payable in full on July 31, 2013. Pursuant to the Forbearance Agreement, we, our operating partnership and every other borrower under the Credit Facility must apply 100% of the net proceeds from, among other things, (1) the sale of our shares in our completed public offering or any other sale of securities by us, our operating partnership or any other borrower, (2) the sale or refinancing of any of our properties or other assets, and (3) the collection of insurance or condemnation proceeds due to any damage or destruction of our properties or any condemnation for public use of any of our properties, to the repayment of the outstanding loan. The Forbearance Agreement provides that all commitments under the Credit Facility will terminate of July 31, 2013 and that, effective as of the date of the Forbearance Agreement, the lenders have no further obligation whatsoever to advance any additional loans or amounts under the Credit Facility. The Forbearance Agreement also provides that neither we, our operating partnership or any other borrower under the Credit Facility may, without KeyBank’s prior written consent, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any indebtedness other than the existing indebtedness specified in the Forbearance Agreement and any refinancing of such existing indebtedness which do not materially modify the terms of such existing indebtedness in a manner adverse to us or the lenders.

Pursuant to the Forbearance Agreement we, our operating partnership and all of the Borrowers under the Credit Facility have jointly and severally agreed to pay to KeyBank (1) any and all out-of-pocket costs or expenses (including legal fees and disbursements) incurred or sustained by the lenders in connection with the preparation of the Forbearance Agreement and all related matters and (2) from time to time after the occurrence of any default under the Forbearance Agreement any out-of-pocket costs or expenses (including legal fees and consulting and other similar professional fees and expenses) incurred by the lenders in connection with the preservation of or enforcement of any rights of the lenders under the Forbearance Agreement and the Credit Facility. In connection with the execution of the Forbearance Agreement, we also agreed to pay a forbearance fee of $192,000 to KeyBank, with 50% of such fee paid upon the execution of the Forbearance Agreement and the remaining 50% to be paid upon the earlier of the forbearance expiration date or the date the outstanding loan is repaid in full.

Under the Forbearance Agreement, we are not permitted to make, without the lender’s consent, certain restricted payments (as defined in the Credit Facility) which includes the payment of distributions that are not required to maintain our REIT status.

Contractual Commitments and Contingencies

As of March 31, 2013, there have been no material changes in our enforceable and legally binding obligations, contractual obligations, and commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Interim Financial Information

The financial information as of and for the period ended March 31, 2013 included in this quarterly report is unaudited, but includes all adjustments consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three months ended March 31, 2013. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete consolidated financial statements. Interim results of operations are not necessarily indicative of the results to be expected for the full year; and such results may be less favorable. Our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Limitation on Total Operating Expenses

We reimburse our advisor for all expenses paid or incurred by our advisor in connection with the services provided to us, except that we will not reimburse our advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter, and (2) 25% of our net income, as defined in our charter, or the 2/25 Limit, unless a majority of our independent directors determines that such excess expenses are justified based on unusual and nonrecurring factors. For the twelve months ended March 31, 2013, our total operating expenses represented approximately 2.0% of our average invested assets, as defined in our charter. As a result, during the twelve months ended March 31, 2013, our total operating expenses did not exceed the 2/25 Limit.

Inflation

The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.

REIT Compliance

To qualify as a REIT for tax purposes, we are required to distribute at least 90% of our REIT taxable income to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of March 31, 2013, we believe we are in compliance with the REIT qualification requirements.

Distributions

In order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. Prior to the termination of our initial public offering on February 7, 2013, we funded all of our cash distributions from proceeds from our initial public offering of common stock. Following the termination of our initial public offering, we may not be able to pay distributions from our cash from operations, in which case distributions may be paid in part from debt financing or from other sources.

Effective January 15, 2013, we announced that we will no longer be making monthly distributions. Quarterly distributions will be considered by our board of directors for 2013. On March 19, 2013, we announced that we will not be making a quarterly distribution for the quarter ended March 31, 2013.

The following table sets forth the distributions declared and paid to our common stockholders and holders of common units in our OP for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively:

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property but including asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO, and MFFO as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that public, non-listed REITs, like us, are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Our board of directors will determine to pursue a liquidity event when it believes that the then-current market conditions are favorable. However, our board of directors does not anticipate evaluating a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our company or another similar transaction) until 2015. Thus, as a limited life REIT we will not continuously purchase assets and will have a limited life.

Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a public, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we rely on our advisor for managing interest rate, hedge and foreign exchange risk, we do not retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. In the event that proceeds from our initial public offering are not available to fund our reimbursement of acquisition fees and expenses incurred by our advisor, such fees and expenses will need to be reimbursed to our advisor from other sources, including debt, operational earnings or cash flow, net proceeds from the sale of properties, or from ancillary cash flows. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to our stockholders. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

Our management uses MFFO and the adjustments used to calculate MFFO in order to evaluate our performance against other public, non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate MFFO allow us to present our performance in a manner that reflects certain characteristics that are unique to public, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance to that of other public, non-listed REITs, although it should be noted that not all public, non-listed REITs calculate FFO and MFFO the same way, so comparisons with other public, non-listed REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure where the price of a share of common stock during the offering stage was a stated value and there was no regular net asset value determinations during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO.

We also present MFFO, calculated as discussed above, adjusted for the non-cash amortization of deferred financing costs and non-recurring non-cash allocations of organizational costs, or adjusted MFFO. We opted to use substantial short-term and medium-term borrowings to acquire properties in advance of raising equity proceeds under our initial public offering in order to more quickly build a larger and more diversified portfolio. Noncash interest expense represents amortization of financing costs paid to secure short-term and medium-term borrowings. GAAP requires these items to be recognized over the remaining term of the respective debt instrument, which may not correlate with the ongoing operations of our real estate portfolio. Management believes that the measure resulting from an adjustment to MFFO for noncash interest expense, provides supplemental information that allows for better comparability of reporting periods. We also believe that adjusted MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisition stages are completed with the sustainability of the operating performance of other real estate companies that are not as involved in significant acquisition and short-term borrowing activities. Like FFO and MFFO, adjusted MFFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. Further, adjusted MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO, MFFO or Adjusted MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO, MFFO or Adjusted MFFO accordingly.

Our calculation of FFO, MFFO and Adjusted MFFO and the reconciliation to net income (loss) is presented in the following table for the three months ended March 31, 2013 and 2012: