Strategic Realty Trust, Inc. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 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.) | |||||||||||||
| 550 W Adams St, Suite 200 | ||||||||||||||
| Chicago, | Illinois | 60661 | ||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
(312) 878-4860
(Registrant’s Telephone Number, Including Area Code)
_________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| None | None | None | ||||||||||||
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ý | Smaller reporting company | ☒ | ||||||||
| 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 November 8, 2021, there were 10,739,814 shares of the registrant’s common stock issued and outstanding.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I
FINANCIAL INFORMATION
The accompanying interim unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021, 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, 2020, as filed with the SEC on March 26, 2021 (the “2020 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 nine months ended September 30, 2021, 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.
3
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)
| September 30, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Investments in real estate | |||||||||||
| Land | $ | 25,400 | $ | 25,400 | |||||||
| Building and improvements | 27,306 | 32,165 | |||||||||
| Tenant improvements | 1,753 | 2,199 | |||||||||
| 54,459 | 59,764 | ||||||||||
| Accumulated depreciation | (4,878) | (3,797) | |||||||||
| Investments in real estate, net | 49,581 | 55,967 | |||||||||
| Properties under development and development costs | |||||||||||
| Land | 12,958 | 12,958 | |||||||||
| Development costs | 3,973 | 2,441 | |||||||||
| Properties under development and development costs | 16,931 | 15,399 | |||||||||
| Cash, cash equivalents and restricted cash | 2,647 | 2,622 | |||||||||
| Prepaid expenses and other assets | 183 | 106 | |||||||||
Tenant receivables, net of $224 and $708 bad debt reserve | 616 | 566 | |||||||||
| Lease intangibles, net | 793 | 1,176 | |||||||||
| Assets held for sale | — | 3,224 | |||||||||
TOTAL ASSETS (1) | $ | 70,751 | $ | 79,060 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Notes payable, net | $ | 38,741 | $ | 38,339 | |||||||
| Accounts payable and accrued expenses | 872 | 674 | |||||||||
| Amounts due to affiliates | 52 | 11 | |||||||||
| Other liabilities | 201 | 134 | |||||||||
| Below-market lease liabilities, net | 136 | 247 | |||||||||
TOTAL LIABILITIES (1) | 40,002 | 39,405 | |||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| 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; 10,739,814 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 110 | 110 | |||||||||
| Additional paid-in capital | 94,602 | 94,602 | |||||||||
| Accumulated deficit | (64,500) | (55,771) | |||||||||
| Total stockholders’ equity | 30,212 | 38,941 | |||||||||
| Non-controlling interests | 537 | 714 | |||||||||
| TOTAL EQUITY | 30,749 | 39,655 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 70,751 | $ | 79,060 | |||||||
(1)As of September 30, 2021 and December 31, 2020, includes approximately $35.4 million and $39.8 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 $21.4 million and $21.1 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 4. “Variable Interest Entities”.
See accompanying notes to condensed consolidated financial statements.
4
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental and reimbursements | $ | 493 | $ | 529 | $ | 1,934 | $ | 1,990 | |||||||||||||||
| Expense: | |||||||||||||||||||||||
| Operating and maintenance | 469 | 455 | 1,747 | 1,264 | |||||||||||||||||||
| General and administrative | 373 | 426 | 1,184 | 1,285 | |||||||||||||||||||
| Depreciation and amortization | 680 | 386 | 1,756 | 988 | |||||||||||||||||||
| Interest expense | 319 | 230 | 947 | 467 | |||||||||||||||||||
| Loss on impairment of real estate | 5,628 | — | 5,628 | — | |||||||||||||||||||
| 7,469 | 1,497 | 11,262 | 4,004 | ||||||||||||||||||||
| Operating loss | (6,976) | (968) | (9,328) | (2,014) | |||||||||||||||||||
| Other income: | |||||||||||||||||||||||
| Net gain on disposal of real estate | — | — | 422 | 947 | |||||||||||||||||||
| Net loss | (6,976) | (968) | (8,906) | (1,067) | |||||||||||||||||||
| Net loss attributable to non-controlling interests | (139) | (19) | (177) | (21) | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | (6,837) | $ | (949) | $ | (8,729) | $ | (1,046) | |||||||||||||||
| Loss per common share - basic and diluted | $ | (0.64) | $ | (0.09) | $ | (0.81) | $ | (0.10) | |||||||||||||||
| Weighted average shares outstanding used to calculate loss per common share - basic and diluted | 10,739,729 | 10,739,729 | 10,739,729 | 10,746,195 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except shares)
(unaudited)
| Nine Months Ended September 30, 2021 and 2020 | |||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| BALANCE — December 31, 2020 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (55,771) | $ | 38,941 | $ | 714 | $ | 39,655 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (8,729) | (8,729) | (177) | (8,906) | ||||||||||||||||||||||||||||||||||
| BALANCE — September 30, 2021 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (64,500) | $ | 30,212 | $ | 537 | $ | 30,749 | ||||||||||||||||||||||||||||
| BALANCE — December 31, 2019 | 10,759,721 | $ | 110 | $ | 94,719 | $ | (40,571) | $ | 54,258 | $ | 1,022 | $ | 55,280 | ||||||||||||||||||||||||||||
| Redemption of common shares | (19,907) | — | (117) | — | (117) | — | (117) | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (1,046) | (1,046) | (21) | (1,067) | ||||||||||||||||||||||||||||||||||
| BALANCE — September 30, 2020 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (41,617) | $ | 53,095 | $ | 1,001 | $ | 54,096 | ||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 and 2020 | |||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| BALANCE —June 30, 2021 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (57,663) | $ | 37,049 | $ | 676 | $ | 37,725 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (6,837) | (6,837) | (139) | (6,976) | ||||||||||||||||||||||||||||||||||
| BALANCE — September 30, 2021 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (64,500) | $ | 30,212 | $ | 537 | $ | 30,749 | ||||||||||||||||||||||||||||
| BALANCE — June 30, 2020 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (40,668) | $ | 54,044 | $ | 1,020 | $ | 55,064 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | (949) | (949) | (19) | (968) | ||||||||||||||||||||||||||||||||||
| BALANCE — September 30, 2020 | 10,739,814 | $ | 110 | $ | 94,602 | $ | (41,617) | $ | 53,095 | $ | 1,001 | $ | 54,096 | ||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (8,906) | $ | (1,067) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Net gain on disposal of real estate | (422) | (947) | |||||||||
| Loss on impairment of real estate | 5,628 | — | |||||||||
| Straight-line rent | (11) | 110 | |||||||||
| Amortization of deferred costs | 309 | 328 | |||||||||
| Depreciation and amortization | 1,756 | 988 | |||||||||
| Amortization of above and below-market leases | (80) | (34) | |||||||||
| Provision for losses on tenant receivable | 588 | 416 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Prepaid expenses and other assets | (77) | (30) | |||||||||
| Tenant receivables | (627) | (658) | |||||||||
| Accounts payable and accrued expenses | (41) | (1,610) | |||||||||
| Amounts due to affiliates | 41 | (123) | |||||||||
| Other liabilities | 67 | 117 | |||||||||
| Net cash used in operating activities | (1,775) | (2,510) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from the sale of real estate | 3,770 | 9,920 | |||||||||
| Investment in properties under development and development costs | (1,291) | (4,156) | |||||||||
| Improvements and capital expenditures | (410) | (511) | |||||||||
| Payments for leasing costs | (231) | (219) | |||||||||
| Net cash provided by investing activities | 1,838 | 5,034 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Redemption of common shares | — | (117) | |||||||||
| Quarterly distributions | — | (220) | |||||||||
| Proceeds from notes payable | 49 | 3,525 | |||||||||
| Repayment of notes payable | — | (8,926) | |||||||||
| Payment of loan fees from investments in consolidated variable interest entities | (87) | (174) | |||||||||
| Payment of loan fees and financing costs | — | (6) | |||||||||
| Net cash used in financing activities | (38) | (5,918) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 25 | (3,394) | |||||||||
| Cash, cash equivalents and restricted cash – beginning of period | 2,622 | 7,241 | |||||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 2,647 | $ | 3,847 | |||||||
| Supplemental disclosure of non-cash investing and financing activities and other cash flow information: | |||||||||||
| Change in accrued liabilities capitalized to investment in development | $ | 110 | $ | (725) | |||||||
| Amortization of deferred loan fees capitalized to investment in development | 131 | 208 | |||||||||
| Changes in capital improvements and leasing costs, accrued but not paid | 14 | 100 | |||||||||
| Cash paid for interest, net of amounts capitalized | 642 | 144 | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
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. As of September 30, 2021, the Company was 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 2022. The current term of the Advisory Agreement terminates on August 9, 2022. Effective April 1, 2021, the Advisor was acquired by PUR SRT Advisors LLC, an affiliate of PUR Management LLC, which is an affiliate of L3 Capital, LLC. L3 Capital, LLC is a real estate investment firm focused on institutional quality, value-add, prime urban retail and mixed-use investment within first tier U.S. metropolitan markets. As a result of this transaction, PUR SRT Advisors LLC, controls SRT Advisor, LLC. Previously, the Advisor was an affiliate of Glenborough, LLC (together with its affiliates, "Glenborough"), a privately held real estate investment and management company. Also effective April 1, 2021, Glenborough and PUR SRT Advisor LLC entered into an agreement pursuant to which PUR SRT Advisor LLC would perform the duties required and receive the benefits of the property management agreements between Glenborough and the Company, subject to Glenborough’s supervision. The above-mentioned transaction had no impact to the Company.
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 September 30, 2021 and December 31, 2020, the Company owned 98.0% 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 development of properties. Substantially all of the proceeds of the Offering, which terminated in February 2013, 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. 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 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. During the third quarter of 2020, construction of one of the development projects was completed and placed in service. As of September 30, 2021, this property had approximately 12,000 rentable square feet of retail space, which was 45% leased.
As of September 30, 2021, in addition to one development project and the property placed in service, the Company’s portfolio of wholly-owned properties was comprised of six properties, with approximately 27,000 rentable square feet of retail space located in one state, as well as an improved land parcel. As of September 30, 2021, the rentable space at the Company’s retail properties was 91% leased, excluding the property placed in service noted above.
8
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
COVID-19 Pandemic and Liquidity
Currently, a material risk and uncertainty facing the Company, the retail industry, the real estate industry and the economy generally is the adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. The Company continues to monitor the impact of the COVID-19 pandemic on all aspects of its business, including how the pandemic is impacting its tenants and business partners. A majority of the Company’s tenants requested rent deferral or rent abatement as a result of the pandemic. Recently, some of the tenants have resumed paying full or partial rent, as restrictions have been lifted in mid-June 2021. As such, the Company is unable to predict the full impact that the pandemic will have on its financial condition, results of operations and cash flows. The full extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants will depend on future developments, which are uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
Since the termination of the Offering in 2013, the Company’s cash flows have been primarily funded by cash provided by property operations and the sales of properties. The COVID-19 pandemic has had a material detrimental impact on the Company’s retail tenants and their ability to pay rent and consequently on the Company’s liquidity. As of September 30, 2021, the Company had approximately $1.7 million in cash and cash equivalents. In addition, the Company had approximately $1.0 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs). The Company has taken several steps to preserve capital and increase liquidity, such as:
•On March 27, 2020, the Company’s board of directors (the “Board”) decided to suspend the payment of any dividend for the quarter ending March 31, 2020, and will reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of September 30, 2021.
•Effective May 21, 2020, the Company suspended its Amended and Restated Share Redemption Program (the “SRP”). The SRP will remain suspended and no further redemptions will be made unless and until the Board approves the resumption of the SRP.
•Furthermore, the sale of Shops at Turkey Creek, on April 27, 2021, provided the Company with $3.8 million in net proceeds as additional liquidity. Refer to Note 3, “Real Estate Investments” for additional information regarding the sale of Shops at Turkey Creek.
The Company remains in compliance with all the terms of the Wilshire Construction Loan (as defined below), which matures on May 10, 2022 with options to extend for two additional twelve-month periods, subject to certain conditions. Similarly, the Company remains in compliance with the Sunset & Gardner Loan (as defined below), which matures on October 31, 2022.
The SRT Loan (as defined below) is secured by six of the Company’s core urban properties in Los Angeles and San Francisco. The SRT Loan does not have restrictive covenants that could trigger a default caused by tenants not paying rent or seeking rent relief.
The Company is in constant communication with its tenants and has assisted tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020.
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-K 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 present fairly the Company’s condensed consolidated financial position, results of operations and cash flows have been included.
9
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 September 30, 2021 and 2020, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 4. “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.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statement of cash flows (amounts in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 1,661 | $ | 1,816 | |||||||
| Restricted cash | 986 | 806 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 2,647 | $ | 2,622 | |||||||
Reclassifications
Certain prior period amounts have been reclassified to conform with current period’s presentation. The reclassifications had no effect on the Company’s condensed consolidated financial condition, results of operations, or cash flows.
Recent Accounting Pronouncements
The FASB issued the following ASUs, which could have potential impact to the Company’s condensed consolidated financial statements:
In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments (“ASU 2021-05”). ASU 2021-05 amends the lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease, if both of the following criteria are met: (1) the lease would have been classified as a sales-type lease or a direct financing lease; (2) the lessor would have otherwise recognized a day-one loss. ASU 2021-05 is effective for fiscal years beginning after December 31, 2021. The adoption of ASU 2021-05 is not expected to have an impact on the Company’s condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time through December 31, 2022. The Company is evaluating the impact of reference rate reform and whether it will apply any of these practical expedients.
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 was 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. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates (“ASU 2019-10”). ASU 2019-10 extended the mandatory effective date for smaller reporting companies to beginning after December 15, 2022. The adoption of Financial Instruments - Credit Losses is not expected to have an impact on the Company’s condensed consolidated financial statements.
10
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. REAL ESTATE INVESTMENTS
Sale of Properties
On April 27, 2021, the Company consummated the disposition of Shops at Turkey Creek, located in Knoxville, Tennessee, for $4.0 million in cash. The disposition of Shops at Turkey Creek resulted in a gain of approximately $0.4 million, which was included in the Company’s condensed consolidated statement of operations.
Since the sale of this property did not represent a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations of this property were not reported as discontinued operations in the Company’s condensed consolidated financial statements.
The following table represents the net operating income related to Shops at Turkey Creek, which is included in the Company’s condensed consolidated statements of operations (amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating income (loss) | $ | (1) | $ | 31 | $ | 71 | $ | 38 | |||||||||||||||
4. 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 Sunset & Gardner Joint Venture and (ii) the 3032 Wilshire Joint Venture. The Company has consolidated the accounts of these variable interest entities.
Through September 30, 2021, post the initial capital contributions, the Company made additional capital contributions totaling $8.1 million and $8.9 million to the Sunset & Gardner Joint Venture and Wilshire Joint Venture, respectively.
During the year ended December 31, 2020, construction of the Wilshire Property was completed and placed in service.
11
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table reflects the aggregate assets and liabilities of the Sunset & Gardner Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of September 30, 2021 and December 31, 2020 (amounts in thousands):
| September 30, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Investments in real estate | |||||||||||
| Land | $ | 13,026 | $ | 13,026 | |||||||
| Building and improvements | 5,046 | 10,624 | |||||||||
| Tenant improvements | 467 | 547 | |||||||||
| 18,539 | 24,197 | ||||||||||
| Accumulated depreciation | (479) | (209) | |||||||||
| Investments in real estate, net | 18,060 | 23,988 | |||||||||
| Properties under development and development costs: | |||||||||||
| Land | 12,958 | 12,958 | |||||||||
| Development costs | 3,973 | 2,441 | |||||||||
| Properties under development and development costs | 16,931 | 15,399 | |||||||||
| Cash, cash equivalents and restricted cash | 315 | 340 | |||||||||
| Prepaid expenses and other assets, net | 21 | 11 | |||||||||
| Other receivables, net | 29 | — | |||||||||
| Lease intangibles, net | 30 | 73 | |||||||||
TOTAL ASSETS (1) | $ | 35,386 | $ | 39,811 | |||||||
| LIABILITIES | |||||||||||
Notes payable, net (2) | $ | 21,070 | $ | 20,868 | |||||||
| Accounts payable and accrued expenses | 300 | 212 | |||||||||
| Other liabilities | 48 | 33 | |||||||||
| TOTAL LIABILITIES | $ | 21,418 | $ | 21,113 | |||||||
(1)The assets of the Sunset & Gardner Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.
(2)As of both September 30, 2021 and December 31, 2020, includes approximately $0.2 million and $0.3 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 Wilshire Joint Venture is partially guaranteed by the Company, refer to Note 7, “Notes Payable, Net”. The notes payable of the Sunset & Gardner Joint Venture is not guaranteed by the Company.
5. LEASES
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2021, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 10.2 years with a weighted-average remaining term (excluding options to extend) of approximately 6.5 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 $0.1 million as of September 30, 2021 and December 31, 2020, respectively.
12
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents the components of income from real estate operations for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Lease income - operating leases | $ | 358 | $ | 351 | $ | 1,503 | $ | 1,540 | |||||||||||||||
Variable lease income (1) | 135 | 178 | 431 | 450 | |||||||||||||||||||
| Rental and reimbursements income | $ | 493 | $ | 529 | $ | 1,934 | $ | 1,990 | |||||||||||||||
(1)Primarily includes tenant reimbursements for real estate taxes, insurance and common area maintenance.
At the start of the COVID-19 pandemic and shelter-in-place orders, a majority of the Company’s tenants requested rent deferral or rent abatement due to the pandemic and government-mandated restrictions. These tenants totaled approximately 94% of the leased square footage in the Company’s wholly-owned properties. Not all tenant requests resulted in modified agreements nor did the Company forgo its contractual rights under its lease agreements. The Company reviewed these requests on a case-by-case basis and agreed to modifications to some of the tenant leases, while other leases were not modified. Of the total leased square footage in the Company’s wholly-owned properties, 47% of the leases were either (i) not modified and the tenants were able to continue to make their payments or (ii) the leases were modified to provide for a short-term temporary rent deferral or abatement. The rent deferrals generally were one to two months and were to be repaid within 12 months. Any rent abatement was typically one to two months and involved an extension of the tenant's lease. Another 28% of the leases in the Company’s wholly-owned properties were modified to provide ongoing rent relief to the tenant. These lease modifications involved some combination of lease extensions, application of security deposits, temporary rent deferrals, partial rent forgiveness or abatement, and new percentage rent clauses to protect the landlord in the event sales returned to prior levels during the period of the lease modifications. Temporary deferrals resulted in increased receivable balances, with continued recognition of revenue during the deferral period. Lease term extensions with partial rent forgiveness and/or abatement, resulted in adjustments to the amount of revenue recognized on a straight-line basis. The tenants making up the remaining 25% of the Company’s wholly-owned properties’ leased square footage requested lease concessions; however, the Company could not agree with these tenants on lease changes acceptable to both parties. During the nine months ended September 30, 2021, these tenants terminated their leases and were replaced with new tenants.
As of September 30, 2021, approximately $0.3 million of rental income due and payable was outstanding. The Company collected a total of approximately $0.03 million, or 10%, of the outstanding balance in October 2021. Additionally, approximately $3 thousand of rental income earned and recognized to date, was deferred and is expected to be collected in future periods.
As of September 30, 2021, the future minimum rental income from the Company’s wholly-owned properties under non-cancelable operating leases was as follows (amounts in thousands):
| Remainder 2021 | $ | 405 | |||
| 2022 | 1,893 | ||||
| 2023 | 1,928 | ||||
| 2024 | 1,889 | ||||
| 2025 | 1,644 | ||||
| Thereafter | 6,556 | ||||
| Total | $ | 14,315 | |||
13
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of September 30, 2021 and December 31, 2020, the Company’s acquired lease intangibles and below-market lease liabilities were as follows (amounts in thousands):
| Lease Intangibles | Below-Market Lease Liabilities | ||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||
| Cost | $ | 2,057 | $ | 1,892 | $ | (389) | $ | (389) | |||||||||||||||
| Accumulated amortization | (1,264) | (716) | 253 | 142 | |||||||||||||||||||
| Total | $ | 793 | $ | 1,176 | $ | (136) | $ | (247) | |||||||||||||||
The Company’s amortization of lease intangibles and below-market lease liabilities for the three and nine months ended September 30, 2021 and 2020, were as follows (amounts in thousands):
| Lease Intangibles | Below-Market Lease Liabilities | ||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Amortization | $ | (281) | $ | (63) | $ | 6 | $ | 11 | |||||||||||||||
| Lease Intangibles | Below-Market Lease Liabilities | ||||||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Amortization | $ | (604) | $ | (188) | $ | 111 | $ | 41 | |||||||||||||||
7. NOTES PAYABLE, NET
On December 24, 2019, the Company entered into a Loan Agreement (the “SRT Loan Agreement”) with PFP Holding Company, LLC (the “SRT Lender”) for a non-recourse secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on the Company’s five San Francisco assets (Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and 388 Fulton Street) as well as the Company’s Silverlake Collection located in Los Angeles. The SRT Loan matures on January 9, 2023. The Company has an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. The Company has the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of yield maintenance payments if such prepayment occurs in the first 18 months of the loan term, calculated through the 18th monthly payment date, as well as certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. Any prepayment or repayment on or before the first 12 months of the loan term in connection with a bona fide third-party sale of a property securing the SRT Loan shall only require the payment of yield maintenance payments calculated through the 12th monthly payment date.
As of September 30, 2021, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating LIBOR rate loan which bears interest at 30-day LIBOR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity.
Pursuant to the SRT Loan, the Company must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on the Company’s liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates. At September 30, 2021, the Company was in compliance with the loan requirements in effect as of that date.
14
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In connection with the SRT Loan, the Company executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the San Francisco assets.
On May 7, 2019, the Company refinanced and repaid its financing from Loan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of September 30, 2021, the Wilshire Construction Loan had a principal balance of approximately $12.6 million, with future funding available up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Loan is scheduled to mature on May 10, 2022, with options to extend for two additional twelve-month periods, subject to certain conditions as stated in the loan agreement. The Wilshire Construction Loan is secured by a first Deed of Trust on the Wilshire Property. The Company executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of the Company’s joint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of borrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. The Company executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. The Company used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
Pursuant to the Wilshire Construction Loan, the Company must comply with certain matters contained in the loan documents including but not limited to minimum limits on the Company’s liquidity and tangible net worth. The Company remains in compliance with all the terms of the Wilshire Construction Loan.
On October 29, 2018, the Company entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and had an interest rate of 6.9% per annum. The original Sunset & Gardner Loan agreement matured on October 31, 2019. The Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 6.5% per annum. On July 31, 2020, the Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. On July 21, 2021, the Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.9% per annum. The new maturity date is October 31, 2022. The Sunset & Gardner Loan is secured by a first Deed of Trust on the Sunset & Gardner Property.
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of September 30, 2021 (amounts in thousands):
| Remainder of 2021 | $ | — | |||
| 2022 | 21,258 | ||||
| 2023 | 18,000 | ||||
| Total future principal payments | 39,258 | ||||
| Unamortized financing costs, net | 517 | ||||
| Notes payable, net | $ | 38,741 | |||
The following table sets forth interest costs incurred by the Company for the periods presented (amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Expensed | |||||||||||||||||||||||
| Interest costs, net of amortization of deferred financing costs | $ | 216 | $ | 139 | $ | 638 | $ | 139 | |||||||||||||||
| Amortization of deferred financing costs | 103 | 91 | 309 | 328 | |||||||||||||||||||
| Total interest costs | $ | 319 | $ | 230 | $ | 947 | $ | 467 | |||||||||||||||
| Capitalized | |||||||||||||||||||||||
| Interest costs, net of amortization of deferred financing costs | $ | 356 | $ | 444 | $ | 1,063 | $ | 1,500 | |||||||||||||||
| Amortization of deferred financing costs | 44 | 56 | 131 | 200 | |||||||||||||||||||
| Total interest costs | $ | 400 | $ | 500 | $ | 1,194 | $ | 1,700 | |||||||||||||||
15
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of both September 30, 2021 and December 31, 2020, interest expense payable was approximately $0.2 million, including an amount related to the variable interest entities of approximately $0.1 million, for each period.
8. FAIR VALUE DISCLOSURES
The Company believes the total carrying values reflected on its consolidated balance sheets for cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to affiliates, mortgage loan and construction loan secured by properties under development, and the Company’s multi-property secured financing, reasonably approximated their fair values based on their nature, terms, and interest rates that approximate current market rates at September 30, 2021.
As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the operating properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.
Using Level 3 measurements, including each property’s undiscounted cash flow, which took into account each property’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition, as well as a terminal capitalization rate of 4.75%, the Company determined that the carrying values of the operating property it owns through the Wilshire Joint Venture was not fully recoverable. As such, for the three and nine months ended September 30, 2021, the Company recorded an impairment loss of approximately $5.6 million related to the Wilshire Property.
The Company did not record any impairment losses for both the three and nine months ended September 30, 2020.
9. 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 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 the Company. Under the current SRP, as amended to date, the number of shares to be redeemed is limited to the lesser of (i) a total of $3.8 million for redemptions sought upon a stockholder’s death and a total of $1.2 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted-average number of shares of the Company’s common stock outstanding during the prior calendar year. Share repurchases pursuant to the SRP are made at the sole discretion of the Company. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.
The redemption price for shares that are redeemed is 100% of the Company’s most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or qualifying disability.
The SRP provides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If the Company cannot honor all redemption requests received in a given quarter, all requests, including death and qualifying disability redemptions, will be honored on a pro rata basis. If the Company does not completely satisfy a redemption request in one quarter, it will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. The Company may increase or decrease the amount of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and 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.
In order to preserve cash in light of the uncertainty relating to the duration of shelter-in-place orders and the economic impact of COVID-19 on the Company, by unanimous written consent executed on April 21, 2020, the board of directors approved the suspension of the SRP, which offered redemption opportunities only in connection with a stockholder’s death or qualifying disability. The suspension of the SRP became effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made until the board of directors approves the resumption of the SRP. During the suspension, the Company will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the board of directors has elected to lift the suspension and provided the terms and conditions for any continuation of the SRP. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be.
16
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes share redemption activity during the nine months ended September 30, 2021 and 2020 (amounts in thousands, except shares):
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Shares of common stock redeemed | — | 19,907 | |||||||||
| Purchase price | $ | — | $ | 117 | |||||||
There were no share redemptions during the three months ended September 30, 2021 and 2020.
Cumulatively, through September 30, 2021, pursuant to the Original Share Redemption Program and the Amended and Restated SRP, the Company has redeemed 878,458 shares sold in the Offering and/or its dividend reinvestment plan for $6.2 million.
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, the board of directors of the Company voted to suspend the payment of any dividend for the quarter ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of September 30, 2021.
10. 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.
The following table sets forth the computation of the Company’s basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands, except shares and per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator - basic and diluted | |||||||||||||||||||||||
| Net loss | $ | (6,976) | $ | (968) | $ | (8,906) | $ | (1,067) | |||||||||||||||
| Net loss attributable to non-controlling interests | (139) | (19) | (177) | (21) | |||||||||||||||||||
| Net loss attributable to common shares | $ | (6,837) | $ | (949) | $ | (8,729) | $ | (1,046) | |||||||||||||||
| Denominator - basic and diluted | |||||||||||||||||||||||
| Basic weighted average common shares | 10,739,729 | 10,739,729 | 10,739,729 | 10,746,195 | |||||||||||||||||||
Common Units (1) | — | — | — | — | |||||||||||||||||||
| Diluted weighted average common shares | 10,739,729 | 10,739,729 | 10,739,729 | 10,746,195 | |||||||||||||||||||
| Loss per common share - basic and diluted | |||||||||||||||||||||||
| Net loss attributable to common shares | $ | (0.64) | $ | (0.09) | $ | (0.81) | $ | (0.10) | |||||||||||||||
(1)The effect of 217,475 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive.
11. RELATED PARTY TRANSACTIONS
On August 7, 2013, the Company entered into the Advisory Agreement with the Advisor, which has been renewed for successive terms with a current expiration date of August 9, 2022. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services. Effective April 1, 2021, PUR SRT Advisors LLC, controls SRT Advisor, LLC. Previously, Glenborough controlled the Advisor.
17
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company is party to property management agreements with respect to each of its properties pursuant to which Glenborough was engaged to serve as property manager. Effective April 1, 2021, Glenborough and PUR SRT Advisor LLC entered into an agreement pursuant to which PUR SRT Advisor LLC would perform the duties required and receive the benefits of the property management agreements, subject to Glenborough’s supervision. As a result, PUR SRT Advisor LLC is currently providing property management services to the Company and receiving the fees described below. The property management agreements expire August 10, 2022 and will automatically renew every year, unless expressly terminated.
On March 3, 2021, the Company obtained a $2.5 million Standby Loan Commitment (the “Loan”) from Glenborough Property Partners, LLC, an affiliate of the Advisor prior to April 1, 2021. If the Company elects to act on the Standby Commitment, the Loan would have a term of 12 months with an interest rate of 7.0% per annum, payable monthly. The Company would have the right to prepay or repay the Loan in whole or in part at any time without penalty. There are no other loan fees or financing coordination fees paid or payable in connection with this loan. The Loan would be secured by first deed of trust on Shops at Turkey Creek. As a result of the sale of Shops at Turkey Creek, refer to Note 3, “Real Estate Investments”, the Loan was not executed and as such, the Standby Commitment expired.
Summary of Related Party Fees
The following table sets forth the Advisor related party costs incurred and payable by the Company for the periods presented (amounts in thousands):
| Incurred | Payable as of | ||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | ||||||||||||||||||||||||||||||||
| Expensed | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Legal leasing fees | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Asset management fees | 144 | 158 | 446 | 481 | 48 | — | |||||||||||||||||||||||||||||
| Reimbursement of operating expenses | — | 6 | — | 17 | — | — | |||||||||||||||||||||||||||||
| Property management fees | 13 | 22 | 48 | 58 | 4 | 9 | |||||||||||||||||||||||||||||
| Disposition fees | — | — | 50 | 157 | — | — | |||||||||||||||||||||||||||||
| Total | $ | 157 | $ | 186 | $ | 546 | $ | 713 | $ | 52 | $ | 9 | |||||||||||||||||||||||
| Capitalized | |||||||||||||||||||||||||||||||||||
| Acquisition fees | $ | 2 | $ | 7 | $ | 7 | $ | 16 | $ | — | $ | — | |||||||||||||||||||||||
| Leasing fees | — | 13 | 20 | 113 | — | — | |||||||||||||||||||||||||||||
| Legal leasing fees | — | 10 | 10 | 38 | — | — | |||||||||||||||||||||||||||||
| Construction management fees | — | 8 | 35 | 136 | — | 2 | |||||||||||||||||||||||||||||
| Financing coordination fees | — | 44 | — | 44 | — | — | |||||||||||||||||||||||||||||
| Total | $ | 2 | $ | 82 | $ | 72 | $ | 347 | $ | — | $ | 2 | |||||||||||||||||||||||
Acquisition Fees
Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. An acquisition fee is capitalized by the Company when the related transaction does not qualify as a business combination; otherwise an acquisition fee is expensed.
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.
18
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 above) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors. Pursuant to an amendment to the Advisory Agreement entered on August 2, 2018, the board of directors, including a majority of the independent directors identified certain unusual and non-recurring factors that would justify reimbursement to the Advisor of amounts in excess of the 2%/25% Guidelines and confirmed that the Advisor would not be obligated to reimburse the Company for these excess amounts to the extent the excess was caused by such factors.
For the three and nine months ended September 30, 2021 and 2020, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fees
Under the property management agreements the Company pays property management fees calculated at a maximum of up to 4% of the properties’ gross revenue.
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, the Company pays a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.
Legal Leasing Fees
Under the property management agreements, the Company pays a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.
Construction Management Fees
In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and in exchange the Company pays a fee equal to 5% of the hard costs for the project in question.
19
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its condensed consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
13. SUBSEQUENT EVENTS
Financing
On November 9, 2021, the Company obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. The Company has the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by the Company. The Unsecured Loan is guaranteed by the Company.
20
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 accompanying consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission, or SEC, on March 26, 2021, which we refer to herein as our “2020 Annual Report on Form 10-K.”
As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., and, as required by context, Strategic Realty 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 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•The potential adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets.
•Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor’s compensation arrangements with us and conflicts in allocating time among us and other programs and business activities.
•We are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected.
•We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders.
•A significant portion of our assets are concentrated in one state and in urban retail properties, any adverse economic, real estate or business conditions in this geographic area or in the urban retail market could affect our operating results and our ability to pay distributions to our stockholders.
•Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders.
21
•Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Moreover, you should interpret many of the risks identified in this Quarterly Report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 2020 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.
22
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, one of which was substantially completed during the year ended December 31, 2020. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we have operated and intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership.
Since our inception, our business has been managed by an external advisor. We do not have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2022. The current term of the Advisory Agreement terminates on August 9, 2022. Effective April 1, 2021, the Advisor merged with PUR SRT Advisors LLC, an affiliate of PUR Management LLC, which is an affiliate of L3 Capital, LLC. L3 Capital, LLC is a real estate investment firm focused on institutional quality, value-add, prime urban retail and mixed-use investment within first tier U.S. metropolitan markets. As a result of this transaction, PUR SRT Advisors LLC, controls SRT Advisor, LLC.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has caused state and local governments to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate, and the types of construction projects that may continue. California, where the majority of our properties are located, declared a state of emergency on March 4, 2020 and instituted a shelter-in-place order on March 19, 2020 to reduce the spread of COVID-19. On May 7, 2020, California moved into Stage 2 of its four-stage reopening roadmap, permitting certain sectors of the economy to reopen provided that there were significant safety measures in place. On June 12, 2020, California permitted businesses such as movie theaters, restaurants, wineries, bars, zoos, museums, gyms, fitness centers, hotels, card rooms, racetracks, and campgrounds to re-open. On July 13, 2020, California re-instituted a state-wide closure on many types of businesses that were previously permitted to re-open such as indoor dining, bars, movie theaters, and museums. In August 2020, California moved to a four-tier, color-coded system assigning every county to a tier based on its test positivity and adjusted case rate. San Francisco County, where a number of our properties are located, was assigned a “moderate” tier in September 2020, which allows for some indoor business operations to open with modifications. Los Angeles County remained in the “widespread” tier, requiring many non-essential indoors business operations to stay closed. On December 6, 2020, due to a significant rise in COVID-19 cases around the Thanksgiving holiday and beyond, as part of California’s mitigation measures, both Los Angeles and San Francisco counties went into a regional stay-at-home order. This order implemented restrictions requiring many non-essential indoor business operations to close or stay closed. This order was subsequently lifted effective January 28, 2021, with both counties remaining in the “widespread” tier. As of June 30, 2021, due to declining new cases and hospitalizations, the state of California lifted COVID-19 related restrictions.
COVID-19 and the efforts to contain its spread have significantly impacted the global economy, the U.S. economy, the economies of the local markets throughout California in which our properties are predominately located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and shelter-in-place or stay-at-home orders. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed, lifted or reinstated, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or when customers will re-engage with tenants as they have in the past. Due to this uncertainty, some of our tenants have been experiencing hardships, as they were unable to operate at full capacity until the middle of June 2021.
We believe that the COVID-19 outbreak has and could continue to negatively impact our financial condition and results of operations, including but not limited to, declines in real estate rental revenues, the inability to sell certain properties at a favorable price, and a decrease in construction and leasing activity. At the start of the pandemic and shelter-in-place orders, a majority of our tenants requested rent deferral or rent abatement due to the pandemic and government-mandated restrictions. These tenants initially totaled 94% of the leased square footage in our wholly-owned properties. We reviewed these requests on
23
a case-by-case basis and agreed to modifications to some of the tenant leases, and other leases were not modified. In most cases, it is in our best interest to help our tenants remain in business and reopen when shelter-in-place orders or other mandated closures or restrictions are lifted. If these tenants fail, finding replacement tenants may be costly and time-consuming.
Of the total leased square footage in our wholly-owned properties, 47% of the leases were either (i) not modified and the tenants were able to continue to make their payments or (ii) the leases were modified to provide for a short-term temporary rent deferral or abatement. The rent deferrals generally were one to two months and were to be repaid within 12 months. Any rent abatement was typically one to two months and in many cases also involved an extension of the tenant's lease. Another 28% of the leases in our wholly-owned properties were modified to provide ongoing rent relief to the tenant. These leases generally were with restaurants and salons that faced significant operating restrictions limiting their ability to be open, open indoors, or open with anything but a limited capacity. These lease modifications involved some combination of lease extensions, application of security deposits, temporary rent deferrals, partial rent forgiveness or abatement, and new percentage rent clauses to protect the landlord in the event sales returned to prior levels during the period of the lease modifications. These concessions lasted through the first and second quarters of 2021 to allow these businesses to commit to new operating strategies and costs for a pandemic environment. The tenants making up the remaining 25% of our leased square footage requested lease concessions; however, we could not agree with these tenants on lease changes acceptable to both parties. During the nine months ended September 30, 2021, these tenants terminated their leases and were replaced with new tenants.
To mitigate the impact of COVID-19 on our operations and liquidity, we have taken a number of proactive measures, which include the following:
•We are in constant communication with our tenants and have assisted tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020.
•We believe we will be able to service our debts and pay for our ongoing general and administrative expenses for the foreseeable future. As of September 30, 2021, we have approximately $1.7 million in cash and cash equivalents. In addition, we had approximately $1.0 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs).
•On November 9, 2021, we obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. We have the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us.
•The SRT Loan is secured by six of our core urban properties in Los Angeles and San Francisco. The SRT Loan does not have restrictive covenants and ongoing debt coverage ratios that could trigger a default caused by tenants not paying rent or seeking rent relief.
•We remain in compliance with all the terms of the Wilshire Construction Loan (as defined below), which matures on May 10, 2022 with options to extend for two additional twelve-month periods, subject to certain conditions. Similarly, we remain in compliance with the Sunset & Gardner Loan (as defined below), which matures on October 31, 2022.
•To further preserve cash and liquidity, we suspended our Amended and Restated Share Redemption Program (the “SRP”), such suspension was effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made unless and until our board of directors (the “Board”) approves the resumption of the SRP. During the suspension, we will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the Board has elected to lift the suspension and provided the terms and conditions for any continuation of the program. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be. In addition, on March 27, 2020, the board of directors decided to suspend the payment of any dividend for the quarter ending March 31, 2020, and will reconsider future dividend payments on a quarter-by-quarter basis as more information becomes available on the impact of COVID-19. Dividend payments were not reinstated as of September 30, 2021.
Given the uncertainty of the COVID-19 pandemic’s near and potential long-term impact on our business, the full extent of the financial impact cannot be reasonably estimated at this time. However, there are those who believe that, as more tools are developed to fight COVID-19 - increased testing, enhanced monitoring, data analysis and identification of effective therapeutics-the country can, anchored by advice of healthcare specialists, incrementally foster economic activity in the near term and at some point with a vaccine and time, the country should return to a more normal state as with other pandemics in the past. Although vaccines for COVID-19 are being made available to the general public in the U.S. and around the world, the
24
vaccine may not materially affect the spread of the virus and the outbreak could have a continued adverse impact on economic and market conditions.
Property Portfolio
As of September 30, 2021, our wholly-owned property portfolio included six retail properties, excluding a land parcel, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 27,000 square feet of multi-tenant, commercial retail space located in one state. We purchased our properties for an aggregate purchase price of approximately $35.3 million. As of September 30, 2021 approximately 91% of our portfolio, excluding the Wilshire property that was placed into service in the third quarter of 2020, was leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 6.5 years. As of December 31, 2020, approximately 79% of our portfolio was leased (based on rentable square footage as of December 31, 2020), with a weighted-average remaining lease term of approximately 6.3 years.
| (dollars in thousands) | Rentable Square Feet | Percent Leased (2) | Effective Rent (3) (per Sq. Foot) | Date Acquired | Original Purchase Price | Debt (4) | ||||||||||||||||||||||||||||||||||||||
Property Name (1) | Location | |||||||||||||||||||||||||||||||||||||||||||
| Wholly-owned Real Estate Investments | ||||||||||||||||||||||||||||||||||||||||||||
| 400 Grove Street | San Francisco, CA | 2,000 | 100 | % | $ | 48.00 | 6/14/2016 | $ | 2,890 | $ | 1,450 | |||||||||||||||||||||||||||||||||
| 8 Octavia Street | San Francisco, CA | 3,640 | 47 | % | 63.41 | 6/14/2016 | 2,740 | 1,500 | ||||||||||||||||||||||||||||||||||||
| Fulton Shops | San Francisco, CA | 3,758 | 84 | % | 63.28 | 7/27/2016 | 4,595 | 2,200 | ||||||||||||||||||||||||||||||||||||
| 450 Hayes | San Francisco, CA | 3,724 | 100 | % | 98.97 | 12/22/2016 | 7,567 | 3,650 | ||||||||||||||||||||||||||||||||||||
| 388 Fulton | San Francisco, CA | 3,110 | 100 | % | 70.18 | 1/4/2017 | 4,195 | 2,300 | ||||||||||||||||||||||||||||||||||||
| Silver Lake | Los Angeles, CA | 10,497 | 100 | % | 74.19 | 1/11/2017 | 13,300 | 6,900 | ||||||||||||||||||||||||||||||||||||
| 26,729 | 35,287 | 18,000 | ||||||||||||||||||||||||||||||||||||||||||
| Real Estate Investments owned through Joint Ventures | ||||||||||||||||||||||||||||||||||||||||||||
| 3032 Wilshire Property | Santa Monica, CA | 11,771 | 45 | % | 92.42 | 3/8/2016 | 13,500 | 12,558 | ||||||||||||||||||||||||||||||||||||
| 38,500 | $ | 48,787 | $ | 30,558 | ||||||||||||||||||||||||||||||||||||||||
(1)List of properties does not include a residual parcel at Topaz Marketplace as of September 30, 2021.
(2)Percentage is based on leased rentable square feet of each property as of September 30, 2021.
(3)Effective rent per square foot is calculated by dividing the annualized September 30, 2021 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries.
(4) Debt represents the outstanding balance as of September 30, 2021, and excludes reclassification of approximately $0.4 deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 7. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report.
Properties Under Development
As of September 30, 2021, we had one property under development in Hollywood, California. This development project is still in the planning phase and construction has not commenced.
25
Results of Operations
Comparison of the three and nine months ended September 30, 2021, versus the three and nine months ended September 30, 2020.
The following table provides summary information about our results of operations for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| Rental revenue and reimbursements | $ | 493 | $ | 529 | $ | (36) | (6.8) | % | |||||||||||||||
| Operating and maintenance expenses | 469 | 455 | 14 | 3.1 | % | ||||||||||||||||||
| General and administrative expenses | 373 | 426 | (53) | (12.4) | % | ||||||||||||||||||
| Depreciation and amortization expenses | 680 | 386 | 294 | 76.2 | % | ||||||||||||||||||
| Interest expense | 319 | 230 | 89 | 38.7 | % | ||||||||||||||||||
| Loss on impairment of real estate | 5,628 | — | 5,628 | 100.0 | % | ||||||||||||||||||
| Operating loss | (6,976) | (968) | (6,008) | 620.7 | % | ||||||||||||||||||
| Net loss | $ | (6,976) | $ | (968) | $ | (6,008) | 620.7 | % | |||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| Rental revenue and reimbursements | $ | 1,934 | $ | 1,990 | $ | (56) | (2.8) | % | |||||||||||||||
| Operating and maintenance expenses | 1,747 | 1,264 | 483 | 38.2 | % | ||||||||||||||||||
| General and administrative expenses | 1,184 | 1,285 | (101) | (7.9) | % | ||||||||||||||||||
| Depreciation and amortization expenses | 1,756 | 988 | 768 | 77.7 | % | ||||||||||||||||||
| Interest expense | 947 | 467 | 480 | 102.8 | % | ||||||||||||||||||
| Loss on impairment of real estate | 5,628 | — | 5,628 | 100.0 | % | ||||||||||||||||||
| Operating loss | (9,328) | (2,014) | (7,314) | 363.2 | % | ||||||||||||||||||
| Other income, net | 422 | 947 | (525) | (55.4) | % | ||||||||||||||||||
| Net loss | $ | (8,906) | $ | (1,067) | $ | (7,839) | 734.7 | % | |||||||||||||||
Our results of operations for the three and nine months September 30, 2021, are not necessarily indicative of those expected in future periods.
Revenue
The decrease in revenue during the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily due to the sale of Shops at Turkey Creek, partially offset by the expiration of rent concessions provided to our tenants as a result of the COVID-19 pandemic. Additionally, rent concessions provided to replacement tenants also contributed to the decrease in revenue.
Operating and maintenance expenses
Operating and maintenance expenses increased during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to additional reserves and write-off of uncollectible rents. Additionally, placement of the Wilshire Property in service in August 2020, contributed to the increase in operating and maintenance expenses. This was partially offset by the sale of Shops at Turkey Creek.
General and administrative expenses
General and administrative expenses decreased during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to lower asset management fees, estimated tax compliance fees and legal fees.
26
Depreciation and amortization expenses
Depreciation and amortization expenses increased during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to the disposal of assets related to terminated leases and placement of the Wilshire Property in service in August 2020.
Interest expense
Interest expense increased during the three and nine months ended September 30, 2021, compared to the same period in 2020, due to the placement of the Wilshire Property in service. Capitalization of interest expense related to the Wilshire Property construction loan ceased in August 2020.
Loss on impairment of real estate
Loss on impairment of approximately $5.6 million related to an operating property we own through a joint venture.
Other income, net
Other income, net for the nine months ended September 30, 2021, consisted of a gain on sale of Shops at Turkey Creek of approximately $0.4 million. Other income, net for the nine months ended September 30, 2020, consisted of a gain on sale of Topaz Marketplace of approximately $0.9 million.
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
As of September 30, 2021, our cash and cash equivalents were approximately $1.7 million and we had $1.0 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs).
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 September 30, 2021 and December 31, 2020, our borrowings were approximately 111.5% and 90.1%, respectively, of the carrying value of our net assets.
The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (amounts in thousands):
| Nine Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | $ Change | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | (1,775) | $ | (2,510) | $ | 735 | |||||||||||
| Investing activities | 1,838 | 5,034 | (3,196) | ||||||||||||||
| Financing activities | (38) | (5,918) | 5,880 | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 25 | $ | (3,394) | |||||||||||||
Cash Flows from Operating Activities
Cash used in operating activities during the nine months ended September 30, 2021 was primarily due to an increase in our accrued property tax expenses, partially offset by a higher operating loss during the nine months ended September 30, 2021 as compared to the same period in 2020, due to higher operating and maintenance expenses and lower revenues.
27
Cash used in operating activities during the nine months ended September 30, 2020, was primarily due to lower operating income, which resulted from sale of Topaz Marketplace during the three months ended March 31, 2020, as well as increased accounts receivable and rent deferral balances resulting from the COVID-19 pandemic. Additionally, decreases in our accrued expense balances contributed to the decrease in cash flows from operations.
Cash Flows from Investing Activities
Cash flows provided by investing activities during the nine months ended September 30, 2021, primarily consisted of approximately $3.8 million in proceeds from the sale of Turkey Creek and partially offset by $1.3 million of additional investment in the Sunset and Gardner Joint Venture.
Cash flows provided by investing activities during the nine months ended September 30, 2020 primarily consisted of approximately $9.9 million of proceeds from sale of Topaz Marketplace. These were partially offset by our aggregate additional $4.2 million investment in the Wilshire and Sunset and Gardner Joint Ventures.
Cash Flows from Financing Activities
Cash flows used in financing activities during the nine months ended September 30, 2021, primarily consisted of payment of financing costs related to the extension of the Sunset & Gardner loan, partially offset by construction loan proceeds.
Cash flows used in financing activities during the nine months ended September 30, 2020, primarily consisted of approximately $8.9 million in repayments of our line of credit. This was partially offset by approximately $3.5 million from construction loan proceeds.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment on our outstanding indebtedness. To date, our cash needs for operations have been funded by 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.
On November 9, 2021, we obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. We have the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us.
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 7. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness.
Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs could be affected by the effects of the COVID-19 pandemic. The full impact of the COVID-19 pandemic on our rental revenue and, as a result, future cash from operations cannot be determined at present.
The sale of Shops at Turkey Creek on April 27, 2021, provided us $3.8 million in additional liquidity as a result of the sales proceeds. Refer to Note 3, “Real Estate Investments” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the sale of the Shops at Turkey Creek.
We believe that our cash on hand, along with other potential aforementioned sources of liquidity that we may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, this forward-looking statement is subject to a number of uncertainties, including with respect to the duration of the COVID-19 pandemic, and there can be no guarantee that we will be successful with our plan. Moreover, over the long term, if our cash flow from operations does not increase from current levels, we may have to address a liquidity deficiency. We are actively exploring options should cash flow from operations not sufficiently improve, such as a sale of one or more assets that are not generating positive cash flow or the sale of equity to an institutional investor.
28
Recent Financing Transactions
Multi-Property Secured Financing
On December 24, 2019, we entered into a Loan Agreement (the “SRT Loan Agreement”) with PFP Holding Company, LLC (the “SRT Lender”) for a non-recourse secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on our five San Francisco assets (Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and 388 Fulton Street) as well as our Silverlake Collection located in Los Angeles. The SRT Loan matures on January 9, 2023. We have an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. We have the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of yield maintenance payments if such prepayment occurs in the first 18 months of the loan term, calculated through the 18th monthly payment date, as well as certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. Any prepayment or repayment on or before the first 12 months of the loan term in connection with a bona fide third-party sale of a property securing the SRT Loan shall only require the payment of yield maintenance payments calculated through the 12th monthly payment date.
As of September 30, 2021, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating LIBOR rate loan which bears interest at 30-day LIBOR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity.
Pursuant to the SRT Loan, we must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on our liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates.
In connection with the SRT Loan, we executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the San Francisco assets.
Loans Secured by Properties
On May 7, 2019, we refinanced and repaid our financing with Loan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of September 30, 2021, the Wilshire Construction Loan had a principal balance of approximately $12.6 million, with future funding available up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Construction Loan is scheduled to mature on May 10, 2022, with options to extend for two additional twelve-month periods, subject to certain conditions as stated in the loan agreement. The Wilshire Construction Loan is secured by a first Deed of Trust on the Wilshire Property. We executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of our joint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of borrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. We executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. We used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
Loans Secured by Properties Under Development
On October 29, 2018, we entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and had an interest rate of 6.9% per annum. The original Sunset & Gardner Loan agreement matured on October 31, 2019. We extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 6.5% per annum. On July 31, 2020, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. On July 21, 2021, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same
29
terms, with an interest rate of 7.9% per annum. The new maturity date is October 31, 2022. The Sunset & Gardner Loan is secured by a first Deed of Trust on the Sunset & Gardner Property.
Line of Credit
On February 10, 2020, we used proceeds from the sale of Topaz Marketplace to repay the line of credit in its entirety. The line of credit expired of its own accord on February 15, 2020, with no balance outstanding. As part of the payoff, Shops at Turkey Creek was released from the line of credit.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three and nine months ended September 30, 2021 and 2020, our total operating expenses did not exceed the 2%/25% Guidelines.
On August 2, 2018, we entered into the Sixth Amendment to the Advisory Agreement. The Advisory Agreement Amendment provides that the Advisor shall not be required to reimburse to us any operating expenses incurred during a given period that exceed the applicable limit on “Total Operating Expenses” (as defined in the Advisory Agreement) to the extent that such excess operating expenses are incurred as a result of certain unusual and non-recurring factors approved by our board of directors, including some related to the execution of our investment strategy as directed by our board of directors. These provisions were also included in the Ninth Amendment to the Advisory Agreement entered into August 5, 2021.
Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly Distributions
As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. 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.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, our board of directors decided to suspend the payment of any dividend for the quarters ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of September 30, 2021.
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
30
estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.
We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows (amounts in thousands, except shares and per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| FFO | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Net loss | $ | (6,976) | $ | (968) | $ | (8,906) | $ | (1,067) | ||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||
| Gain on disposal of assets | — | — | (422) | (947) | ||||||||||||||||||||||
| Depreciation of real estate | 416 | 326 | 1,174 | 807 | ||||||||||||||||||||||
| Amortization of in-place leases and leasing costs | 264 | 60 | 582 | 181 | ||||||||||||||||||||||
| Loss on impairment of real estate | 5,628 | — | 5,628 | — | ||||||||||||||||||||||
FFO attributable to common shares and Common Units (1) | $ | (668) | $ | (582) | $ | (1,944) | $ | (1,026) | ||||||||||||||||||
FFO per share and Common Unit (1) | $ | (0.06) | $ | (0.05) | $ | (0.18) | $ | (0.09) | ||||||||||||||||||
Weighted average common shares and units outstanding (1) | 10,957,204 | 10,957,204 | 10,957,204 | 10,966,939 | ||||||||||||||||||||||
(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 11. “Related Party Transactions” to our 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.
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. A discussion of additional accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2020 Annual Report on Form 10-K.
31
Subsequent Events
On November 9, 2021, we obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. We have the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us.
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 September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
32
PART II
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. Under the current SRP, as amended to date, the number of shares to be redeemed is limited to the lesser of (i) a total of $3.8 million for redemptions sought upon a stockholder’s death and a total of $1.2 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted-average number of shares of 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 qualifying disability.
The SRP provides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If we cannot honor all redemption requests received in a given quarter, all requests, including death and qualifying disability redemptions, will be honored on a pro rata basis. If we do not completely satisfy a redemption request in one quarter, we will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. We may increase or decrease the amount of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
In order to preserve cash in light of the uncertainty relating to the duration of shelter-in-place orders and the economic impact of COVID-19 on the Company, by unanimous written consent executed on April 21, 2020, the Board approved the suspension of the SRP, which offered redemption opportunities only in connection with a stockholder’s death or qualifying disability.
Under the SRP, the Board may amend, suspend, or terminate the SRP with 30 days’ notice to our stockholders. The Current Report on Form 8-K, filed on April 21, 2020 with the SEC, served as such required notice and therefore the suspension of the SRP became effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made until the board of directors approves the resumption of the SRP. During the suspension, we will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the board of directors has elected to lift the suspension and provided the terms and conditions for any continuation of the SRP.
During the quarter ended September 30, 2021, we did not redeem shares. Cumulatively, through September 30, 2021, we have redeemed 878,458 shares for $6.2 million. We have not presented information regarding submitted and unfulfilled redemption requests for the quarter ended September 30, 2021, as our redemption program is suspended and we believe many stockholders who may otherwise desire to have their shares redeemed have not submitted a request due to the suspension of the program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
33
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
As of the three months ended September 30, 2021, all items required to be disclosed under Form 8-K were reported under Form 8-K.
ITEM 6. EXHIBITS
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 12, 2021.
| Strategic Realty Trust, Inc. | ||||||||
| By: | /s/ Andrew Batinovich | |||||||
| Andrew Batinovich | ||||||||
| Chief Executive Officer, Corporate Secretary and Director (Principal Executive Officer) | ||||||||
| By: | /s/ Ryan Hess | |||||||
| Ryan Hess | ||||||||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the nine months ended September 30, 2021 (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 | ||||||||||||||||||||||
| Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc. | S-11/ No. 333-154975 | 7/10/2009 | ||||||||||||||||||||||||
| Articles of Amendment, dated August 22, 2013 | 8-K | 8/26/2013 | ||||||||||||||||||||||||
| Articles Supplementary, dated November 1, 2013 | 8-K | 11/4/2013 | ||||||||||||||||||||||||
| Articles Supplementary, dated January 22, 2014 | 8-K | 1/28/2014 | ||||||||||||||||||||||||
| Third Amended and Restated Bylaws of Strategic Realty Trust, Inc. | 8-K | 1/28/2014 | ||||||||||||||||||||||||
| Loan Modification Agreement between Sunset & Gardner Investors LLC and Lone Oak Fund, LLC, dated July 21, 2021 | X | |||||||||||||||||||||||||
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||
| Strategic Realty Trust, Inc. Amended and Restated Share Redemption Program Adopted August 26, 2016 | 8-K | 8/30/2016 | ||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||
| 104.1 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||
36