Strategic Realty Trust, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________

FORM 10-Q

_________________________________

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-54376

_________________________________

STRATEGIC REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)

_________________________________



Maryland	90-0413866
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

66 Bovet Road, Suite 100 San Mateo, California, 94402	(650) 343-9300
(Address of Principal Executive Offices; Zip Code)	(Registrant’s Telephone Number, Including Area Code)

_________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

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

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



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	ý

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of August 6, 2018, there were 10,963,416 shares of the registrant’s common stock issued and outstanding.

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



		Page


PART I — FINANCIAL INFORMATION		3

Item 1.	Unaudited Condensed Consolidated Financial Statements	4

	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	4

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	5

	Condensed Consolidated Statement of Equity for the six months ended June 30, 2018	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	35

Item 6.	Exhibits	36

Signatures		37

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PART I

FINANCIAL INFORMATION

The accompanying interim unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2018, have been prepared by Strategic Realty Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2017, as filed with the SEC on March 23, 2018 (the “2017 Annual Report on Form 10-K”). The interim unaudited condensed consolidated financial statements herein should also be read in conjunction with the Notes to Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended June 30, 2018, are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, equity, and cash flows reflects all adjustments that, in management’s opinion, are necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.

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ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share amounts)

(unaudited)



	June 30,			December 31,
	2018			2017
ASSETS
Investments in real estate
Land	$	13,801		$	14,020
Building and improvements	29,447			30,825
Tenant improvements	1,307			1,188
	44,555			46,033
Accumulated depreciation	(2,845		)	(2,579		)
Investments in real estate, net	41,710			43,454
Properties under development and development costs
Land	25,851			25,851
Buildings	578			585
Development costs	11,808			9,609
Properties under development and development costs	38,237			36,045
Cash, cash equivalents and restricted cash	3,989			3,902
Prepaid expenses and other assets, net	269			200
Tenant receivables, net of $23 and $0 bad debt reserve	693			1,007
Investments in unconsolidated joint ventures	2,626			2,705
Lease intangibles, net	1,839			2,061
Assets held for sale	21,083			20,646
Deferred financing costs, net	979			1,258
TOTAL ASSETS ⁽¹⁾	$	111,425		$	111,278
LIABILITIES AND EQUITY
LIABILITIES
Notes payable, net	$	40,081		$	42,223
Accounts payable and accrued expenses	2,204			2,006
Amounts due to affiliates	21			21
Other liabilities	307			387
Liabilities related to assets held for sale	14,172			13,017
Below-market lease liabilities, net	402			438
Deferred gain on sale of properties to unconsolidated joint venture	—			668
TOTAL LIABILITIES ⁽¹⁾	57,187			58,760
Commitments and contingencies (Note 13)
EQUITY
Stockholders’ equity
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.01 par value; 400,000,000 shares authorized; 10,963,416 and 10,988,438 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	111			111
Additional paid-in capital	95,940			96,097
Accumulated deficit	(42,890		)	(44,741		)
Total stockholders’ equity	53,161			51,467
Non-controlling interests	1,077			1,051
TOTAL EQUITY	54,238			52,518
TOTAL LIABILITIES AND EQUITY	$	111,425		$	111,278

(1)

As of June 30, 2018 and December 31, 2017, includes approximately $39.3 million and $37.2 million, respectively, of assets related to consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities and approximately $18.2 million and $19.6 million, respectively, of liabilities of consolidated variable interest entities for which creditors do not have recourse to the general credit of the Company. Refer to Note 5. “Variable Interest Entities”.

See accompanying notes to condensed consolidated financial statements.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shares and per share amounts)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenue:
Rental and reimbursements	$	1,834		$	2,225		$	3,587		$	4,865

Expense:
Operating and maintenance	615			760			1,265			1,706
General and administrative	449			500			896			995
Depreciation and amortization	341			824			699			1,786
Transaction expense	30			3			32			85
Interest expense	249			481			520			1,056
	1,684			2,568			3,412			5,628
Operating income (loss)	150			(343		)	175			(763		)

Other income (loss):
Equity in loss of unconsolidated joint ventures	(43		)	(37		)	(45		)	(5		)
Net gain on disposal of real estate	2,448			2,545			2,448			9,131
Loss on extinguishment of debt	—			(80		)	—			(80		)
Income before income taxes	2,555			2,085			2,578			8,283
Income taxes	(24		)	(83		)	(24		)	(102		)
Net income	2,531			2,002			2,554			8,181
Net income attributable to non-controlling interests	53			76			54			306
Net income attributable to common stockholders	$	2,478		$	1,926		$	2,500		$	7,875

Earnings per common share - basic and diluted	$	0.23		$	0.18		$	0.23		$	0.72

Weighted average shares outstanding used to calculate earnings per common share - basic and diluted	10,977,718			10,905,453			10,982,892			10,921,364

See accompanying notes to condensed consolidated financial statements.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in thousands, except shares)

(unaudited)



	Number of Shares		Par Value		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
BALANCE — December 31, 2017	10,988,438		$	111	$	96,097		$	(44,741	)	$	51,467		$	1,051		$	52,518
Redemption of common shares	(25,022	)	—		(157		)	—			(157		)	—			(157		)
Quarterly distributions	—		—		—			(1,317		)	(1,317		)	(28		)	(1,345		)
Cumulative effect from change in accounting principle (Note 2)	—		—		—			668			668			—			668
Net income	—		—		—			2,500			2,500			54			2,554
BALANCE — June 30, 2018	10,963,416		$	111	$	95,940		$	(42,890	)	$	53,161		$	1,077		$	54,238

See accompanying notes to condensed consolidated financial statements.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	2,554		$	8,181
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on disposal of real estate	(2,448		)	(9,131		)
Loss on extinguishment of debt	—			80
Equity in loss of unconsolidated joint ventures	45			5
Straight-line rent	(70		)	(90		)
Amortization of deferred costs	292			260
Depreciation and amortization	699			1,786
Amortization of above and below-market leases	(29		)	(104		)
Bad debt expense	39			31
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(69		)	837
Tenant receivables	316			378
Accounts payable and accrued expenses	(47		)	(490		)
Amounts due to affiliates	—			(111		)
Other liabilities	(80		)	106
Net cash provided by operating activities	1,202			1,738

Cash flows from investing activities:
Net proceeds from the sale of real estate	3,928			32,398
Acquisition of real estate	—			(17,812		)
Investment in properties under development and development costs	(2,180		)	(2,339		)
Improvements, capital expenditures, and leasing costs	(126		)	(790		)
Investments in unconsolidated joint ventures	(77		)	—
Distributions from unconsolidated joint ventures	111			1,998
Net cash provided by investing activities	1,656			13,455

Cash flows from financing activities:
Redemption of common shares	(157		)	(443		)
Quarterly distributions	(1,346		)	(1,361		)
Proceeds from notes payable	4,100			28,700
Repayment of notes payable	(4,978		)	(41,889		)
Payment of penalties associated with early repayment of notes payable	—			(1		)
Payment of loan fees from investments in consolidated variable interest entities	(377		)	(197		)
Payment of loan fees and financing costs	(13		)	(1,314		)
Net cash used in financing activities	(2,771		)	(16,505		)

Net increase (decrease) in cash, cash equivalents and restricted cash	87			(1,312		)
Cash, cash equivalents and restricted cash – beginning of period	3,902			7,858
Cash, cash equivalents and restricted cash – end of period	$	3,989		$	6,546

Supplemental disclosure of non-cash investing and financing activities and other cash flow information:
Distributions declared but not paid	$	672		$	677
Change in accrued liabilities capitalized to investment in development	(256		)	5
Change to accrued mortgage note payable interest capitalized to investment in development	(5		)	2
Amortization of deferred loan fees capitalized to investment in development	268			296
Changes in capital improvements, accrued but not paid	502			—
Cumulative effect from change in accounting principle	668			—
Cash paid for interest, net of amounts capitalized	222			818

See accompanying notes to condensed consolidated financial statements.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION AND BUSINESS

Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008, as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations.

Since the Company’s inception, its business has been managed by an external advisor. The Company has no direct employees and all management and administrative personnel responsible for conducting the Company’s business are employed by its advisor. Currently, the Company is externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2018. The current term of the Advisory Agreement terminates on August 10, 2019. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.

Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (the “OP”). During the Company’s initial public offering (“Offering”), as the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. The Company is the sole general partner of the OP. As of both June 30, 2018 and December 31, 2017, the Company owned 97.9% of the limited partnership interests in the OP.

The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders, and investments in unconsolidated joint ventures as well as development of properties. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.

The Company invests in and manages a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on grocery anchored multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. During the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development.

As of June 30, 2018, in addition to the development projects, the Company’s portfolio of properties was comprised of 10 properties, including three properties held for sale, with approximately 295,000 rentable square feet of retail space located in four states. As of June 30, 2018, the rentable space at the Company’s retail properties was 94% leased.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Regulation S-X.

The interim unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

present fairly the Company’s condensed consolidated 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 Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of June 30, 2018 and December 31, 2017, the Company held ownership interests in two unconsolidated joint ventures. Refer to Note 4. “Investments in Unconsolidated Joint Ventures” for additional information. As of June 30, 2018 and December 31, 2017, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 5. “Variable Interest Entities” for additional information.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents represent current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.

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

In November 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash, which amends (Topic 230), Statement of Cash Flows (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explains the change during the reporting period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 requires adoption using a retrospective transition method. The Company adopted ASU 2016-18 on January 1, 2018. As a result of adopting ASU 2016-18, the Company revised the presentation of cash, cash equivalents and restricted cash on the condensed consolidated balance sheets and condensed consolidated statements of cash flows for all the periods presented. Upon adoption of ASU 2016-18, the Company recorded a decrease of $0.3 million in net cash provided by operating activities and $0.7 million in net cash provided by investing activities for the six months ended June 30, 2017, related to reclassifying the changes in the restricted cash balance from operating activities and investing activities to the cash, cash equivalents and restricted cash balances on the condensed consolidated statements of cash flows.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the condensed consolidated balance sheet that sum to the total of the same such amounts shown on the condensed consolidated statement of cash flows (amounts in thousands):



	June 30, 2018		December 31, 2017
Cash and cash equivalents	$	3,126	$	3,086
Restricted cash	863		816
Total cash, cash equivalents, and restricted cash	$	3,989	$	3,902

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:


•	whether the lease stipulates how a tenant improvement allowance may be spent;


•	whether the amount of a tenant improvement allowance is in excess of market rates;


•	whether the tenant or landlord retains legal title to the improvements at the end of the lease term;


•	whether the tenant improvements are unique to the tenant or general-purpose in nature; and

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)


•	whether the tenant improvements are expected to have any residual value at the end of the lease.

For leases with minimum scheduled rent increases, the Company recognizes 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 (not including receivables on property held for sale), which is included in tenant receivables, net, on the condensed consolidated balance sheets, was approximately $0.5 million at both June 30, 2018 and December 31, 2017.

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, insurance and CAM is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was added to the ASC under Topic 606 (“ASC 606”). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. As the Company’s revenues are primarily generated through leasing arrangements, the Company’s revenues fall outside the scope of this standard. As part of ASU 2014-09, ASC 610-20, Gains and Losses from Derecognition of Nonfinancial Assets, (“ASC 610-20”) was issued. ASC 610-20 provided guidance for recognizing gains and losses from the transfer of nonfinancial assets, which includes the sale of real estate.

In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses for the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 amends the guidance on nonfinancial assets in ASC 610-20. The amendments clarify that (i) a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset and may include nonfinancial assets transferred within a legal entity to a counter-party, (ii) an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counter-party and de-recognize each asset when a counter-party obtains control of it, and (iii) an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. Further, ASU 2017-05 provides guidance on accounting for partial sales of nonfinancial assets.

Effective January 1, 2018, the Company applied the provisions of ASC 610-20, for gains on sale of real estate, and recognizes any gains at the time control of a property is transferred and when it is probable that substantially all of the related consideration will be collected. As a result of adopting ASC 610-20, using the modified retrospective method, the sales criteria in ASC 360, Property, Plant, and Equipment, no longer applied. As such, the Company recognized $0.7 million of deferred gains related to sales of properties to the SGO Joint Venture through a cumulative effect adjustment to accumulated deficit. Other than the cumulative effect adjustment relating to such deferred gains, the adoption of ASC 606 and ASC 610-20 did not have an impact on the Company’s condensed consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform with current period’s presentation as a result of adoption of ASU 2016-18. See Cash, Cash Equivalents and Restricted Cash section above for discussion of the impact of these reclassifications.

Recent Accounting Pronouncements

The FASB issued the following ASUs which could have potential impact to the Company’s condensed consolidated financial statements:

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 will require adoption on a retrospective basis. The Company

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

adopted ASU 2016-15 on January 1, 2018. Adoption of ASU 2016-15 did not have an impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Adjustments resulting from adopting ASU 2016-13 shall be applied through a cumulative-effect adjustment to retained earnings. The adoption of ASU 2016-13 will not have an impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the consolidated balance sheet and disclose key information about leasing arrangements. The guidance retains a distinction between finance leases and operating leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous guidance. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. On January 5, 2018, the FASB also issued an Exposure Draft proposing to amend ASU 2016-02, which would provide lessors with a practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease component, if certain criteria are met. The amendments in this guidance and the related Exposure Draft are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company believes that the adoption of ASU 2016-02 will not change the accounting for operating leases on its condensed consolidated balance sheets. The Company expects to utilize the practical expedients proposed in the Exposure Draft as part of its adoption of ASU 2016-02.

3. REAL ESTATE INVESTMENTS

Sale of Property

On June 21, 2018, the Company consummated the disposition of a portion of Topaz Marketplace, located in Hesperia, California, for a sales price of approximately $4.2 million in cash. The Company used the net proceeds from the sale of a portion of Topaz Marketplace to repay $4.0 million of the outstanding balance on its line of credit. The sale of the property did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and its results of operations were not reported as discontinued operations on the Company’s condensed consolidated financial statements. The disposition of a portion of Topaz Marketplace resulted in a gain of $2.4 million, which was included on the Company’s condensed consolidated statement of operations.

The following table summarizes net operating income related to the disposed portion of Topaz Marketplace, which is included in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (amounts in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Operating income	$	51	$	47	$	97	$	86

Assets Held for Sale and Liabilities Related to Assets Held for Sale

At June 30, 2018 and December 31, 2017, Florissant Marketplace, located in Florissant, Missouri, Ensenada Square, located in Arlington, Texas, and Shops at Turkey Creek, located in Knoxville, Tennessee, were classified as held for sale in the condensed consolidated balance sheets.

Since the sale of these properties does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations of these properties were not reported as discontinued operations in the Company’s condensed consolidated financial statements. Initially, the Company intends to use the net proceeds from the sales of these properties to repay a portion of the outstanding balance on its line of credit. The Company anticipates the sales of these properties will occur within one year from June 30, 2018. The Company’s condensed consolidated statements of operations include net operating income of approximately $0.5 million and $4 thousand for the three months ended June 30,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2018 and 2017, respectively, and $1.0 million and $0.1 million for the six months ended June 30, 2018 and 2017, related to the assets held for sale.

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



	June 30,			December 31,
	2018			2017
ASSETS
Investments in real estate
Land	$	5,248		$	5,248
Building and improvements	17,544			17,522
Tenant improvements	1,607			1,189
	24,399			23,959
Accumulated depreciation	(5,178		)	(5,178		)
Investments in real estate, net	19,221			18,781
Tenant receivables, net	226			248
Lease intangibles, net	1,636			1,617
Assets held for sale	$	21,083		$	20,646
LIABILITIES
Notes payable	$	11,904		$	10,749
Below-market lease intangibles, net	2,268			2,268
Liabilities related to assets held for sale	$	14,172		$	13,017

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

4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The following table summarizes the Company’s investments in unconsolidated joint ventures as of June 30, 2018 and December 31, 2017 (amounts in thousands):



		Ownership Interest				Investment
Joint Venture	Date of Investment	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
SGO Retail Acquisitions Venture, LLC	3/11/2015	19	%	19	%	$	991	$	978
SGO MN Retail Acquisitions Venture, LLC	9/30/2015	10	%	10	%	1,635		1,727
Total						$	2,626	$	2,705

The Company’s off-balance sheet arrangements consist primarily of investments in the joint ventures as set forth in the table above. The joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture members, and do not represent a liability of the members other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of June 30, 2018 and December 31, 2017, the Company has provided carve-out guarantees in connection with the two aforementioned unconsolidated joint ventures; in connection with those carve-out guarantees, the Company has certain rights of recovery from the joint venture members.

5. VARIABLE INTEREST ENTITIES

The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in (i) the Gelson’s Joint Venture and (ii) the 3032 Wilshire Joint Venture (both as defined below). The Company has consolidated the accounts of these variable interest entities.

On April 27, 2018, the Company made an additional contribution of $0.8 million to the Gelson’s Joint Venture.

On April 23, 2018, the Company made an additional contribution of $1.0 million to the Gelson’s Joint Venture.

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(unaudited)

On March 21, 2018, the Company made an additional contribution of $0.9 million to the Wilshire Joint Venture.

The following reflects the aggregate assets and liabilities of the Gelson’s Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of June 30, 2018 and December 31, 2017 (amounts in thousands):



	June 30,		December 31,
	2018		2017
ASSETS
Properties under development and development costs:
Land	$	25,851	$	25,851
Buildings	578		585
Development costs	11,808		9,609
Properties under development and development costs	38,237		36,045
Cash, cash equivalents and restricted cash	1,018		1,099
Prepaid expenses and other assets, net	3		9
Lease intangibles, net	4		—
TOTAL ASSETS ⁽¹⁾	$	39,262	$	37,153

LIABILITIES
Notes payable, net ⁽²⁾	$	18,007	$	19,116
Accounts payable and accrued expenses	217		478
Amounts due to affiliates	9		9
Other liabilities	9		9
TOTAL LIABILITIES	$	18,242	$	19,612


(1)	The assets of the Gelson’s Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.


(2)	As of June 30, 2018 and December 31, 2017, includes reclassification of approximately $0.2 million and $0.1 million, respectively, of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the consolidated joint ventures are not guaranteed by the Company.

6. 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 June 30, 2018, the leases at the Company’s properties, excluding properties classified as held for sale, have remaining terms (excluding options to extend) of up to 13.4 years with a weighted-average remaining term (excluding options to extend) of approximately 5.9 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 approximately $0.2 million as of both June 30, 2018 and December 31, 2017.

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(unaudited)

As of June 30, 2018, the future minimum rental income from the Company’s properties under non-cancelable operating leases, excluding properties classified as held for sale, was as follows (amounts in thousands):



Remainder of 2018	$	1,166
2019	2,395
2020	2,229
2021	1,989
2022	2,006
Thereafter	8,215
Total	$	18,000

7. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET

As of June 30, 2018 and December 31, 2017, the Company’s acquired lease intangibles and below-market lease liabilities were as follows (amounts in thousands):



	Lease Intangibles						Below-Market Lease Liabilities
	June 30, 2018			December 31, 2017			June 30, 2018			December 31, 2017
Cost	$	2,494		$	2,783		$	(526	)	$	(571	)
Accumulated amortization	(655		)	(722		)	124			133
Total	$	1,839		$	2,061		$	(402	)	$	(438	)

The Company’s amortization of lease intangibles and below-market lease liabilities for the three and six months ended June 30, 2018 and 2017, were as follows (amounts in thousands):



	Lease Intangibles						Below-Market Lease Liabilities
	Three Months Ended June 30,						Three Months Ended June 30,
	2018			2017			2018		2017
Amortization	$	(75	)	$	(225	)	$	16	$	57


	Lease Intangibles						Below-Market Lease Liabilities
	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018		2017
Amortization	$	(158	)	$	(596	)	$	33	$	136

8. NOTES PAYABLE, NET

Line of Credit

The Company’s line of credit is a revolving credit facility with an initial maximum aggregate commitment of $30.0 million. Effective February 15, 2017, the Company’s line of credit was refinanced to increase the maximum aggregate commitment under the credit facility from $30.0 million to $60.0 million. The credit facility matures on February 15, 2020. Each loan made pursuant to the credit facility will be either a LIBOR rate loan or a base rate loan, at the election of the Company, plus an applicable margin, as defined. Monthly payments are interest only with the entire principal balance and all outstanding interest due at maturity. The Company will pay the lender an unused commitment fee, quarterly in arrears, which will accrue at 0.30% per annum, if the usage under the the Company’s line of credit is less than or equal to 50% of the line of credit amount, and 0.20% per annum if the usage under the Company’s line of credit is greater than 50% of the line of credit amount. The Company is providing a guaranty of all of its obligations under the Company’s line of credit and all other loan documents.

As of June 30, 2018 and December 31, 2017, the Company’s line of credit had an outstanding principal balance of $22.1 million and $23.1 million, respectively. These balances exclude $11.9 million and $10.7 million which have been classified as held for sale as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, the

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(unaudited)

Company’s line of credit was secured by Topaz Marketplace, 8 Octavia Street, 400 Grove Street, the Fulton Shops, 450 Hayes, 388 Fulton, Silver Lake, Florissant Marketplace, Ensenada Square and The Shops at Turkey Creek.

Mortgage Loans Secured by Properties Under Development

In connection with the Company’s investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property, the Company has consolidated borrowings of $8.5 million (the “Wilshire Loan”). The Wilshire Loan bears interest at a rate of 9.5% plus 30-day LIBOR with a minimum of 10.0% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on March 7, 2017, with an option for two additional six-month periods, subject to certain conditions as stated in the loan agreement. All conditions to extensions were met, and on March 7, 2017, the Company exercised the option to extend the loan until September 7, 2017. On August 29, 2017, the Company exercised the remaining option to extend the loan for an additional six months. The extension was scheduled to mature on March 7, 2018. The Company extended the loan, with the same terms, for an additional six months, effective March 7, 2018. The new maturity date is September 7, 2018. The Company intends to explore all available financing options, including a further extension of the loan with the current lender prior to its maturity date. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.

In connection with the Company’s investment in the Gelson’s Joint Venture and the acquisition of the Gelson’s Property, the Company has consolidated borrowings of $9.7 million (the “Gelson’s Loan”). The Gelson’s Loan bears interest at a rate of 9.25% plus 30-day LIBOR with a minimum of 9.5% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. Those conditions were not met, but the Company negotiated a six month extension of the term on January 27, 2017 to mature on July 27, 2017. The Company negotiated a nine month extension of the term on July 27, 2017. The extension was scheduled to mature on April 27, 2018. On April 23, 2018, the Company made a mandatory principal payment of $1.0 million. The Company extended the loan, for an additional six months, effective April 26, 2018. The new maturity date is October 27, 2018. The Company intends to explore all available financing options, including a further extension of the loan with the current lender prior to its maturity date. The loan is secured by, among other things, a lien on the Gelson’s development project and other joint venture collateral as defined in the loan agreement.

The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of June 30, 2018 (amounts in thousands):



Remainder of 2018	$	18,200
2019	—
2020	33,978
Total ⁽¹⁾	$	52,178


(1)	Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $0.2 million deferred financing costs, net.

During the three months ended June 30, 2018 and 2017, the Company incurred and expensed approximately $0.2 million and $0.5 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.1 million for each period. Also during each of the three months ended June 30, 2018 and 2017, the Company incurred and capitalized approximately $1.0 million of interest expense related to the variable interest entities, which included the amortization of deferred financing costs of approximately $0.2 million for each period.

During the six months ended June 30, 2018 and 2017, the Company incurred and expensed approximately $0.5 million and $1.1 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.3 million for each period. Also during the six months ended June 30, 2018 and 2017, the Company incurred and capitalized approximately $1.9 million and $1.6 million, respectively, of interest expense related to the variable interest entities, which included amortization of deferred financing costs of approximately $0.3 million for each period.

As of both June 30, 2018 and December 31, 2017, interest expense payable was approximately $0.3 million, including an amount related to the variable interest entities of approximately $0.2 million for each period.

9. FAIR VALUE DISCLOSURES

Certain financial assets and liabilities are measured at fair value on a recurring basis. The Company determines fair value using the following hierarchy:

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(unaudited)


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement.

The Company believes the total carrying values reflected on its condensed consolidated balance sheets for cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to affiliates, mortgage loans secured by properties under development, and the Company’s line of credit reasonably approximate their fair values due to their short-term nature.

As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.

For both the three and six months ended June 30, 2018 and June 30, 2017, the Company did not record any impairment losses.

10. EQUITY

Share Redemption Program

On April 1, 2015, the Company’s board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “SRP”). The SRP was subsequently amended on August 7, 2015 and August 10, 2016.

On October 5, 2016, the board of directors approved, pursuant to Section 3(a) of the SRP, an additional $0.5 million of funds available for the redemption of shares in connection with the death of a stockholder.

On August 2, 2017, the board of directors of the Company approved, pursuant to Section 3(a) of the SRP, an additional $1.0 million of funds available for the redemption of shares in connection with the death of a stockholder.

The following table summarizes share redemption activity during the three and six months ended June 30, 2018 and 2017 (amounts in thousands, except shares):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Shares of common stock redeemed	14,710		37,820		25,022		69,695
Purchase price	$	92	$	241	$	157	$	443

Cumulatively, through June 30, 2018, the Company has redeemed 637,137 shares sold in the Offering and/or its dividend reinvestment plan for $4.7 million.

Quarterly Distributions

In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.

Under the terms of the amended Key Bank credit facility, the Company may pay distributions to its investors so long as the total amount paid does not exceed 100% of the cumulative Adjusted Funds From Operations plus up to an additional $2.0 million of the Company’s net proceeds from property dispositions, as defined in the amended Company’s line of credit; provided, however, that the Company is not restricted from making any distributions necessary in order to maintain its status as a REIT. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.

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(unaudited)

The following tables set forth the quarterly distributions declared to the Company’s common stockholders and Common Unit holders for the six months ended June 30, 2018, and the year ended December 31, 2017 (amounts in thousands, except per share amounts):



	Distribution Record Date	Distribution Payable Date	Distribution Per Share of Common Stock / Common Unit		Total Common Stockholders Distribution		Total Common Unit Holders Distribution		Total Distribution
First Quarter 2018	3/31/2018	4/30/2018	$	0.06	$	659	$	14	$	673
Second Quarter 2018	6/30/2018	7/31/2018	0.06		658		14		672
Total					$	1,317	$	28	$	1,345



	Distribution Record Date	Distribution Payable Date	Distribution Per Share of Common Stock / Common Unit		Total Common Stockholders Distribution		Total Common Unit Holders Distribution		Total Distribution
First Quarter 2017	3/31/2017	4/28/2017	$	0.06	$	655	$	25	$	680
Second Quarter 2017	6/30/2017	7/31/2017	0.06		652		25		677
Third Quarter 2017	9/30/2017	10/31/2017	0.06		660		16		676
Fourth Quarter 2017	12/31/2017	1/31/2018	0.06		659		14		673
Total					$	2,626	$	80	$	2,706

11. EARNINGS PER SHARE

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 shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. There was no unvested stock as of June 30, 2018. 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 earnings (loss) per share for the three and six months ended June 30, 2018 and 2017 (amounts in thousands, except shares and per share amounts):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Numerator - basic and diluted
Net income	$	2,531	$	2,002	$	2,554	$	8,181
Net income attributable to non-controlling interests	53		76		54		306
Net income attributable to common shares	$	2,478	$	1,926	$	2,500	$	7,875
Denominator - basic and diluted
Basic weighted average common shares	10,977,718		10,905,453		10,982,892		10,921,364
Common Units ⁽¹⁾	—		—		—		—
Diluted weighted average common shares	10,977,718		10,905,453		10,982,892		10,921,364
Earnings per common share - basic and diluted
Net earnings attributable to common shares	$	0.23	$	0.18	$	0.23	$	0.72


(1)	The effect of 235,194 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive.

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(unaudited)

12. RELATED PARTY TRANSACTIONS

On August 7, 2013, the Company entered into the Advisory Agreement with the Advisor. The Advisory Agreement with the Advisor was renewed for an additional 12 months, beginning on August 10, 2018. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.

On March 11, 2015, the Company, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC to form the SGO Joint Venture. On September 30, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC to form the SGO MN Joint Venture. For additional information regarding the SGO Joint Venture and the SGO MN Joint Venture, refer to Note 4. “Investments in Unconsolidated Joint Ventures.”

Summary of Related Party Fees

The following table sets forth the Advisor related party costs incurred and payable by the Company for the periods presented (amounts in thousands):



	Incurred								Payable as of
	Three Months Ended June 30,				Six Months Ended June 30,				June 30,		December 31,
Expensed	2018		2017		2018		2017		2018		2017
Financing coordination fees	$	30	$	—	$	30	$	—	$	—	$	—
Asset management fees	188		205		379		435		—		—
Reimbursement of operating expenses	36		57		81		99		—		—
Property management fees	67		87		147		200		21		21
Disposition fees	52		186		54		430		—		—
Total	$	373	$	535	$	691	$	1,164	$	21	$	21

Capitalized
Acquisition fees	$	18	$	—	$	46	$	194	$	—	$	—
Leasing fees	2		8		4		65		—		—
Legal leasing fees	3		23		8		51		—		—
Construction management fees	4		—		5		—		—		—
Financing coordination fees	97		—		182		707		—		—
Total	$	124	$	31	$	245	$	1,017	$	—	$	—

Acquisition Fees

Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. An acquisition fee is capitalized by the Company when the related transaction does not qualify as a business combination; otherwise an acquisition fee is expensed.

Financing Coordination Fees

Under the Advisory Agreement, the Advisor is entitled to receive a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by the Company or the OP and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by the Company or the OP.

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Asset Management Fees

Under the Advisory Agreement, the Advisor is entitled to receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments, or (2) the fair market value of the Company’s investments (before non-cash reserves and depreciation) if the board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.

Reimbursement of Operating Expenses

The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described below) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors.

For the three and six months ended June 30, 2018 and 2017, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.

Property Management Fees

Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive property management fees calculated at a maximum of up to 4% of the properties’ gross revenue. The property management agreements with Glenborough have been renewed for an additional 12 months, beginning on August 10, 2018. Property management agreements with Glenborough automatically renew every year, unless expressly terminated.

Disposition Fees

Under the Advisory Agreement, if the Advisor or its affiliates provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, the Advisor or its affiliates may be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold.

Leasing Fees

Under the property management agreements, Glenborough is entitled to receive a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.

Legal Leasing Fees

Under the property management agreements, Glenborough is entitled to receive a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.

Construction Management Fees

In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and is entitled to receive a fee equal to 5% of the hard costs for the project in question.

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(unaudited)

Related-Party Fees Paid by the Unconsolidated Joint Ventures

The unconsolidated joint ventures are party to certain agreements with Glenborough for services related to the investment of funds and management of the joint ventures’ investments, as well as the day-to-day management, operation and maintenance of the properties owned by the joint ventures. The joint ventures pay fees to Glenborough for these services. For the three months ended June 30, 2018 and 2017, the SGO Joint Venture recognized related party fees and reimbursements of $84 thousand and $48 thousand, respectively. For both the six months ended June 30, 2018 and 2017, the SGO Joint Venture recognized related party fees and reimbursements of $0.1 million. For both the three months ended June 30, 2018 and 2017, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.2 million. For the six months ended June 30, 2018 and 2017, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.5 million and $0.4 million, respectively.The related-party amounts consist of property management, asset management, leasing commission, legal leasing, construction management fees and salary reimbursements.

13. COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.

Environmental

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

14. SUBSEQUENT EVENTS

Sale of Held for Sale Property

On July 17, 2018, the Company consummated the disposition of Ensenada Square, located in Arlington, Texas, for a sales price of approximately $5.8 million in cash. A portion of the proceeds was used to pay down amounts outstanding under the Company’s line of credit.

Distributions

On May 10, 2018, the Company’s board of directors declared a second quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of June 30, 2018. The distribution was paid on July 31, 2018.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission, or SEC, on March 23, 2018, which we refer to herein as our “2017 Annual Report on Form 10-K.”

As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.

Special Note Regarding Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

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

•

Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor’s compensation arrangements with us and conflicts in allocating time among us and other programs and business activities.


•	We are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected.

•

We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders.

•

Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders.


•	Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

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All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our 2017 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 2017 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.

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Overview

We are a Maryland corporation that was formed on September 18, 2008, to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we have operated and intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership.

Since our inception, our business has been managed by an external advisor. We do not have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2018. The current term of the Advisory Agreement terminates on August 10, 2019. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.

Property Portfolio

As of June 30, 2018, our property portfolio included 10 retail properties, including three properties held for sale, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 295,000 square feet of single- and multi-tenant, commercial retail space located in four states. We purchased our properties for an aggregate purchase price of approximately $71.7 million. As of June 30, 2018 and December 31, 2017, approximately 94% and 96% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately 5.9 years and 7.0 years, respectively.



(dollars in thousands)		Rentable Square Feet ⁽¹⁾	Percent Leased ⁽²⁾		Effective Rent ⁽³⁾ (Sq. Foot)		Date Acquired	Original Purchase Price ^{(4) (5)}
Property Name	Location	Rentable Square Feet ⁽¹⁾	Percent Leased ⁽²⁾		Effective Rent ⁽³⁾ (Sq. Foot)		Date Acquired	Original Purchase Price ^{(4) (5)}
Topaz Marketplace	Hesperia, CA	43,199	80	%	$	20.20	9/23/2011	$	11,880
400 Grove Street	San Francisco, CA	2,000	100	%	60.00		6/14/2016	2,890
8 Octavia Street	San Francisco, CA	3,640	47	%	43.95		6/14/2016	2,740
Fulton Shops	San Francisco, CA	3,758	100	%	56.51		7/27/2016	4,595
450 Hayes	San Francisco, CA	3,724	100	%	89.82		12/22/2016	7,567
388 Fulton	San Fancisco, CA	3,110	100	%	64.22		1/4/2017	4,195
Silver Lake	Los Angeles, CA	10,497	100	%	64.85		1/11/2017	13,300
		69,928						47,167

Properties Held for Sale
Ensenada Square	Arlington, TX	62,628	100	%	7.72		2/27/2012	5,025
Florissant Marketplace	Florissant, MO	146,257	95	%	10.25		5/16/2012	15,250
Shops at Turkey Creek	Knoxville, TN	16,324	100	%	27.94		3/12/2012	4,300
		225,209						24,575
		295,137						$	71,742


(1)	Square feet includes improvements made on ground leases at the property.


(2)	Percentage is based on leased rentable square feet of each property as of June 30, 2018.

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(3)	Effective rent per square foot is calculated by dividing the annualized June 2018 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries.


(4)	The purchase price for Shops at Turkey Creek includes the issuance of common units in our operating partnership to the sellers.


(5)	The original purchase price for Topaz Marketplace was reduced to reflect a pad sale during the second quarter of 2018.

Properties Under Development

As of June 30, 2018, we had two properties under development. The properties are identified in the following table (dollar amounts in thousands):



Properties Under Development	Location	Estimated Completion Date	Estimated Expected Square Feet	Debt
Wilshire Property	Santa Monica, CA	February, 2019	12,500	$	8,500
Gelson’s Property	Hollywood, CA	December, 2019	37,000	9,700
Total			49,500	$	18,200

Unconsolidated Joint Ventures

As of June 30, 2018, our portfolio included investments in two unconsolidated joint ventures, which own, in aggregate, seven retail centers, comprising an aggregate of approximately 591,000 square feet and located in four states.

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Results of Operations

Comparison of the three and six months ended June 30, 2018, versus the three and six months ended June 30, 2017.

The following table provides summary information about our results of operations for the three and six months ended June 30, 2018 and 2017 (amounts in thousands):



	Three Months Ended June 30,
	2018			2017			$ Change			% Change
Rental revenue and reimbursements	$	1,834		$	2,225		$	(391	)	(17.6	)%
Operating and maintenance expenses	615			760			(145		)	(19.1	)%
General and administrative expenses	449			500			(51		)	(10.2	)%
Depreciation and amortization expenses	341			824			(483		)	(58.6	)%
Transaction expense	30			3			27			900.0	%
Interest expense	249			481			(232		)	(48.2	)%
Operating income (loss)	150			(343		)	493			(143.7	)%
Other income, net	2,405			2,428			(23		)	(0.9	)%
Income taxes	(24		)	(83		)	59			(71.1	)%
Net income	$	2,531		$	2,002		$	529		26.4	%

	Six Months Ended June 30,
	2018			2017			$ Change			% Change
Rental revenue and reimbursements	$	3,587		$	4,865		$	(1,278	)	(26.3	)%
Operating and maintenance expenses	1,265			1,706			(441		)	(25.8	)%
General and administrative expenses	896			995			(99		)	(9.9	)%
Depreciation and amortization expenses	699			1,786			(1,087		)	(60.9	)%
Transaction expense	32			85			(53		)	(62.4	)%
Interest expense	520			1,056			(536		)	(50.8	)%
Operating loss	175			(763		)	938			(122.9	)%
Other income, net	2,403			9,046			(6,643		)	(73.4	)%
Income taxes	(24		)	(102		)	78			(76.5	)%
Net income (loss)	$	2,554		$	8,181		$	(5,627	)	(68.8	)%

Our results of operations for the three and six months ended June 30, 2018, are not necessarily indicative of those expected in future periods.

Revenue

The decrease in revenue during the three and six months ended June 30, 2018, compared to the same periods in 2017, was primarily due to the sales of Woodland West Marketplace in April 2017, Cochran Bypass in October 2017 and Morningside Marketplace in November 2017.

Operating and maintenance expenses

Operating and maintenance expenses decreased during the three and six months ended June 30, 2018, when compared to the same periods in 2017, which corresponds to the decrease in revenue.

General and administrative expenses

General and administrative expenses decreased during the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to lower asset management fees, lower professional tax fees and lower audit fees.

Depreciation and amortization expenses

Depreciation and amortization expenses decreased during the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to the classification of Ensenada Square, Florissant Marketplace, and Shops at Turkey

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Creek as held for sale during the fourth quarter of 2017. The sales of a portion of Topaz Marketplace, Cochran Bypass and Morningside Marketplace also contributed to the decrease.

Transaction expense

Transaction expense incurred during the three and six months ended June 30, 2018, as compared to the same period in 2017 was primarily due to payment of financing fees related to the extension of a loan held by one of our unconsolidated joint ventures.

Interest expense

Interest expense decreased during the three and six months of 2018, compared to the same periods in 2017, due to decreases in debt balances as a result of using the proceeds from property dispositions activities to repay debt.

Other income (loss), net

Other income, net for the three and six months ended June 30, 2018, primarily consisted of approximately $2.4 million related to the gain on sale of a portion of Topaz Marketplace in June 2018. Other income, net for the three months ended June 30, 2017, primarily consisted of approximately $2.5 million related to the gain on sale of Woodland West Marketplace in April 2017. For the six months ended June 30, 2017, other income, net, primarily consisted of approximately $9.1 million related to the gain on sale of Pinehurst Square East in January 2017 and Woodland West Marketplace in April 2017, as well as the recognition of deferred gain resulting from the first quarter of 2017 sale by SGO Retail Acquisitions Venture, LLC (“SGO Joint Venture”) of Aurora Commons.

Income taxes

In addition to various state tax payments, we may from time-to-time incur federal tax, due to our election to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal Revenue Code. A TRS is subject to federal and state income taxes.

Liquidity and Capital Resources

Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.

As of June 30, 2018, our cash and cash equivalents were approximately $3.1 million and our restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs) was approximately $0.9 million. For properties with lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.

Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of June 30, 2018 and December 31, 2017, our borrowings were approximately 88.7% and 93.7%, respectively, of the carrying value of our net assets.

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The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (amounts in thousands):



	Six Months Ended June 30,
	2018			2017			$ Change
Net cash provided by (used in):
Operating activities	$	1,202		$	1,738		$	(536	)
Investing activities	1,656			13,455			(11,799		)
Financing activities	(2,771		)	(16,505		)	13,734
Net increase (decrease) in cash, cash equivalents and restricted cash	$	87		$	(1,312	)

Cash Flows from Operating Activities

The decrease in cash flows from operating activities was primarily due to a significant decrease in deposit balances resulting from the closing of the acquisitions of 388 Fulton and Silver Lake during the first quarter of 2017, which was partially offset by an increase in accrued expenses due to tenant improvement reimbursements that were accrued during the second quarter of 2018.

Cash Flows from Investing Activities

Cash flows from investing activities during the six months ended June 30, 2018, primarily consisted of proceeds from the disposition of a portion of Topaz Marketplace of approximately $3.9 million, partially offset by our aggregate additional $2.2 million investments in the Wilshire and Gelson’s Joint Ventures. Cash flows from investing activities during the six months ended June 30, 2017, primarily consisted of proceeds from the disposition of Pinehurst Square East and Woodland West Marketplace of approximately $32.4 million, partially offset by our aggregate $17.8 million in acquisitions of 388 Fulton and Silver Lake in January 2017.

Cash Flows from Financing Activities

Cash flows used in financing activities during the six months ended June 30, 2018, primarily consisted of repayment of our debt balances and our quarterly dividend payments of approximately $5.0 million and $1.3 million, respectively, partially offset by proceeds of approximately $4.1 million from draws on our line of credit. Cash flows used in financing activities during the six months ended June 30, 2017, primarily consisted of repayment of our debt balances of approximately $41.9 million, partially offset by proceeds of approximately $28.7 million from draws on our line of credit.

Short-term Liquidity and Capital Resources

Our principal short-term demand for funds is for the payment of operating expenses, the payment of principal and interest on our outstanding indebtedness and distributions. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties and the sale of shares of our common stock. We may fund our short-term operating cash needs from operations, from the sales of properties and from debt.

Long-term Liquidity and Capital Resources

On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 8. “Notes Payable, Net” to our interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness.

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Mortgage Loans Secured by Properties Under Development

In connection with our investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property, we have consolidated borrowings of $8.5 million (the “Wilshire Loan”). The Wilshire Loan bears interest at a rate of 9.5% plus 30-day LIBOR with a minimum of 10.0% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on March 7, 2017, with an option for two additional six-month periods, subject to certain conditions as stated in the loan agreement. All conditions to extensions were met, and on March 7, 2017, we exercised the option to extend the loan until September 7, 2017. On August 29, 2017, we exercised the remaining option to extend the loan for an additional six months. The extension was scheduled to mature on March 7, 2018. We extended the loan, with the same terms, for an additional six months, effective March 7, 2018. The new maturity date is September 7, 2018. We intend to explore all available financing options, including a further extension of the loan with the current lender prior to its maturity date. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.

In connection with our investment in the Gelson’s Joint Venture and the acquisition of the Gelson’s Property, we have consolidated borrowings of $9.7 million (the “Gelson’s Loan”). The Gelson’s Loan bears interest at a rate of 9.25% plus 30-day LIBOR with a minimum of 9.5% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. Those conditions were not met, but we negotiated a six month extension of the term on January 27, 2017 to mature on July 27, 2017. We negotiated a nine month extension of the term on July 27, 2017. The extension was scheduled to mature on April 27, 2018. On April 23, 2018, we made a mandatory principal payment of $1.0 million. We extended the loan, for an additional six months, effective April 26, 2018. The new maturity date is October 27, 2018. We intend to explore all available financing options, including a further extension of the loan with the current lender prior to its maturity date. The loan is secured by, among other things, a lien on the Gelson’s development project and other joint venture collateral as defined in the loan agreement.

Interim Financial Information

The financial information as of and for the period ended June 30, 2018, included in this Quarterly Report on Form 10-Q is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three and six months ended June 30, 2018. 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 2017 Annual Report on Form 10-K.

Guidelines on Total Operating Expenses

We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the six months ended June 30, 2018 and 2017, our total operating expenses did not exceed the 2%/25% Guidelines.

On August 2, 2018, we entered into the Sixth Amendment to the Advisory Agreement. The Advisory Agreement Amendment provides that the Advisor shall not be required to reimburse to us any operating expenses incurred during a given period that exceed the applicable limit on “Total Operating Expenses” (as defined in the Advisory Agreement) to the extent that such excess operating expenses are incurred as a result of certain unusual and non-recurring factors approved by our board of directors, including some related to the execution of our investment strategy as directed by our board of directors.

Inflation

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

REIT Compliance

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

Quarterly Distributions

As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders.

Under the terms of the Key Bank credit facility, we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds specified in the Key Bank credit facility; provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.

Some or all of our distributions have been paid, and in the future may continue to be paid, from sources other than cash flows from operations.

The following tables set forth the quarterly distributions declared to our common stockholders and common unit holders for the six months ended June 30, 2018 and the year ended December 31, 2017 (amounts in thousands, except per share amounts):



	Distribution Record Date	Distribution Payable Date	Distribution Per Share of Common Stock / Common Unit		Total Common Stockholders Distribution		Total Common Unit Holders Distribution		Total Distribution
First Quarter 2018	3/31/2018	4/30/2018	$	0.06	$	659	$	14	$	673
Second Quarter 2018	6/30/2018	7/31/2018	0.06		658		14		672
Total					$	1,317	$	28	$	1,345



	Distribution Record Date	Distribution Payable Date	Distribution Per Share of Common Stock / Common Unit		Total Common Stockholders Distribution		Total Common Unit Holders Distribution		Total Distribution
First Quarter 2017	3/31/2017	4/28/2017	$	0.06	$	655	$	25	$	680
Second Quarter 2017	6/30/2017	7/31/2017	0.06		652		25		677
Third Quarter 2017	9/30/2017	10/31/2017	0.06		660		16		676
Fourth Quarter 2017	12/31/2017	1/31/2018	0.06		659		14		673
Total					$	2,626	$	80	$	2,706

Funds From Operations

Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of a real estate company’s operating performance. The National Association of Real Estate Investment Trusts, or “NAREIT”, an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.

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We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows (amounts in thousands, except shares and per share amounts):



	Three Months Ended June 30,						Six Months Ended June 30,
FFO	2018			2017			2018			2017
Net income	$	2,531		$	2,002		$	2,554		$	8,181
Adjustments:
Gain on disposal of assets	(2,448		)	(2,545		)	(2,448		)	(9,131		)
Adjustment to reflect FFO of unconsolidated joint ventures	107			132			183			212
Depreciation of real estate	267			615			545			1,222
Amortization of in-place leases and leasing costs	74			209			154			564
FFO attributable to common shares and Common Units ⁽¹⁾	$	531		$	413		$	988		$	1,048

FFO per share and Common Unit ⁽¹⁾	$	0.05		$	0.04		$	0.09		$	0.09

Weighted average common shares and units outstanding ⁽¹⁾	11,212,912			11,327,761			11,218,086			11,343,672


(1)	Our common units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to common units in the computation of FFO and including the common units together with weighted average shares outstanding for the computation of FFO per share and common unit.

Related Party Transactions and Agreements

We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 12. “Related Party Transactions” to our interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist primarily of our investments in joint ventures and are described in Note 4. “Investments in Unconsolidated Joint Ventures” in the notes to the interim unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Our joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture partners, and do not represent a liability of the partners other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of June 30, 2018, we have provided carve-out guarantees in connection with our two unconsolidated joint ventures; in connection with those carve-out guarantees we have certain rights of recovery from our joint venture partners.

Critical Accounting Policies

Our interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Other than the critical accounting policy discussed below, a discussion of additional accounting policies that

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management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2017 Annual Report on Form 10-K.

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, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical 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:


•	whether the lease stipulates how a tenant improvement allowance may be spent;


•	whether the amount of a tenant improvement allowance is in excess of market rates;


•	whether the tenant or landlord retains legal title to the improvements at the end of the lease term;


•	whether the tenant improvements are unique to the tenant or general-purpose in nature; and


•	whether the tenant improvements are expected to have any residual value at the end of the lease term.

For leases with minimum scheduled rent increases, we recognize 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 reported revenue amounts which differ from those that are contractually due from tenants. If we determine that collectability of straight-line rents is not reasonably assured, we limit future recognition to amounts contractually owed and paid, and, when appropriate, establish an allowance for estimated losses.

We maintain 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. We monitor the liquidity and creditworthiness of our tenants on an ongoing basis. For straight-line rent amounts, our assessment is based on amounts estimated to be recoverable over the term of the lease.

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.

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. As our revenues are primarily generated through leasing arrangements, our revenues fall out of the scope of this standard. Effective January 1, 2018, we applied the provisions of Accounting Standards Codification 610-20, Gains and Losses From the Derecognition of Nonfinancial Assets (“ASC 610-20”), for gains on sale of real estate, and recognizes any gains at the time control of a property is transferred and when it is probable that substantially all of the related consideration will be collected. As a result of adopting ASC 610-20, using the modified retrospective method, the sales criteria in ASC 360, Property, Plant, and Equipment, no longer applied. As such, we recognized $0.7 million of deferred gains relating to sales of properties to the SGO Joint Venture through a cumulative effect adjustment to accumulated deficit. Other than the cumulative effect adjustment relating to such deferred gains, the adoption of Accounting Standards Codification 606, Revenue From Contracts with Customers (“ASC 606”) and ASC 610-20 did not have an impact on our condensed consolidated financial statements.

Subsequent Events

Sale of Held for Sale Property

On July 17, 2018, we consummated the disposition of Ensenada Square, located in Arlington, Texas, for a sales price of approximately $5.8 million in cash. A portion of the proceeds was used to pay down amounts outstanding under our line of credit.

Distributions

On May 10, 2018, our board of directors declared a second quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of June 30, 2018. The distribution was paid on July 31, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Omitted as permitted under rules applicable to smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period covered by this Quarterly Report on Form 10-Q, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended.

Share Redemption Program

On April 1, 2015, our board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “SRP”). Under the SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder are eligible for repurchase by us. The number of shares to be redeemed is limited to the lesser of (i) a total of $2.0 million for redemptions sought upon a stockholder’s death and a total of $1.0 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the number of shares of our common stock outstanding during the prior calendar year. Share repurchases pursuant to the SRP are made at our sole discretion. We reserve the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.

The redemption price for shares that are redeemed is 100% of our most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or disability, unless such death or disability occurred between January 15, 2013 and April 1, 2015, when the share redemption program was suspended. Redemption requests due to the death or disability of a stockholder that occurred during such time period, were required to be submitted on or before April 1, 2016.

The SRP provides that any request to redeem less than $5 thousand worth of shares will be treated as a request to redeem all of the stockholder’s shares. If we cannot honor all redemption requests received in a given quarter, all requests, including death and disability redemptions, will be honored on a pro rata basis. If we do not completely satisfy a redemption request in one quarter, we will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. We may increase or decrease the amount of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.

The other material terms of the SRP are consistent with the terms of the share redemption program that was in effect immediately prior to January 15, 2013.

On August 7, 2015, the board of directors approved the amendment and restatement of the SRP (the “First A&R SRP”). Under the First A&R SRP, the redemption date with respect to third quarter 2015 redemptions was November 10, 2015 or the next practicable date as the Chief Executive Officer determined so that redemptions with respect to the third quarter of 2015 were delayed until after the payment date for a special distribution. With this revision, stockholders who were to have 100% of their shares redeemed were not left holding a small number of shares from the Special Distribution after the date of the redemption of their shares. The other material terms of the First A&R SRP were consistent with the terms of the SRP.

On August 10, 2016, our board of directors authorized our management to prepare and implement an amendment and restatement of the SRP (the “Second A&R SRP”) to revise the definition of disability under the SRP. The Second A&R SRP became effective August 26, 2016. Under the Second A&R SRP, a person is deemed to be disabled and therefore eligible to redeem shares pursuant to the Second A&R SRP if they are disabled pursuant to the definition of “disability” in the Internal Revenue Code of 1986, as amended, at the time that the person’s written redemption request is received by us. The other material terms of the Second A&R SRP are consistent with the terms of the First A&R SRP.

On August 2, 2017, our board of directors approved, pursuant to Section 3(a) of the SRP, an additional $1.0 million of funds available for the redemption of shares in connection with the death of a stockholder.

During the quarter ended June 30, 2018, we redeemed shares as follows:



Period	Total Number of Shares Redeemed ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Approximate Dollar Value of Shares That May Yet be Redeemed Under the Program ⁽²⁾
April 2018	—	$	—	—	$	985,737
May 2018	—	—		—	985,737
June 2018	14,710	6.27		14,710	893,504
Total	14,710			14,710


(1)	All of our purchases of equity securities during the quarter ended June 30, 2018, were made pursuant to the SRP.


(2)	We currently limit the dollar value and number of shares that may yet be repurchased under the SRP as described above.

Cumulatively, through June 30, 2018, we have redeemed 637,137 shares for $4.7 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

As of the three months ended June 30, 2018, all items required to be disclosed under Form 8-K were reported under Form 8-K.

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ITEM 6. EXHIBITS

The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 10, 2018.



	Strategic Realty Trust, Inc.

	By:	/s/ Andrew Batinovich
		Andrew Batinovich
		Chief Executive Officer, Corporate Secretary and Director (Principal Executive Officer)

	By:	/s/ Terri Garnick
		Terri Garnick
		Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the six months ended June 30, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).



			Incorporated by Reference
Exhibit No.	Description	Filed Herewith	Form/File No.	Filing Date

3.1.1	Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc.		S-11/ No. 333-154975	7/10/2009

3.1.2	Articles of Amendment, dated August 22, 2013		8-K	8/26/2013

3.1.3	Articles Supplementary, dated November 1, 2013		8-K	11/4/2013

3.1.4	Articles Supplementary, dated January 22, 2014		8-K	1/28/2014

3.2	Third Amended and Restated Bylaws of Strategic Realty Trust, Inc.		8-K	1/28/2014

10.1	Letter Agreement with Buchanan Mortgage, dated April 20, 2018	X

10.2	The Purchase and Sale Agreement by and between Ginger Investors, LLC and SRT Secured Topaz, LLC, dated May 18, 2018	X

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

99.1	Strategic Realty Trust, Inc. Amended and Restated Share Redemption Program Adopted August 26, 2016		8-K	8/30/2016

99.2	Fifth Amendment to the Advisory Agreement, dated July 19, 2018		8-K	7/20/2018

99.3	Sixth Amendment to the Advisory Agreement, dated August 2, 2018		8-K	8/3/2018

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X