Strategic Realty Trust, Inc. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 000-54376
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STRATEGIC REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
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| 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)
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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 | ||||||||||||
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ý
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
There is no established trading market for the registrant’s common stock. On May 26, 2021 the registrant’s board of directors approved an estimated value per share of its common stock as of February 28, 2021, of $3.43. For a full description of the methodologies used to value the registrant’s assets and liabilities in connection with the calculation of the estimated value per share as of May 26, 2021, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2021. On December 28, 2022, the registrant’s board of directors approved an estimated value per share of the registrant’s common stock of $1.91 per share based on estimated value of the registrant’s real estate assets and the estimated value of the registrant’s tangible other assets less the estimated value of the registrant’s liabilities divided by the number of shares and operating partnership units outstanding, as of September 30, 2022. For a full description of the methodologies used to value the registrant’s assets and liabilities in connection with the calculation of the estimated value per share as of September 30, 2022, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information” of this Annual Report on Form 10-K.
As of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, 10,728,475 shares of its common stock were held by non-affiliates.
As of March 13, 2023, there were 10,752,966 shares of the registrant’s common stock issued and outstanding.
Documents Incorporated by Reference: Registrant incorporates by reference In Part III (Items 10, 11,12, 13 and 14) of this Form 10-K portions of its Definitive Proxy Statement for its 2023 Annual Meeting of Stockholders.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
Special Note Regarding Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K 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 adverse effect of the 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, in particular with respect to retail commercial properties 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 fund or expand our operations 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.
•All 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, including with respect to the continued economic slowdown, the rising interest rate environment and inflation (or the perception that these events may continue) could adversely affect our operating results.
•Our investments in real estate may be affected by unfavorable real estate market and general economic conditions, including the continued economic slowdown, rapidly rising interest rates and significant inflation (or the perception that these events may continue) as well as lack of lending activity in the debt markets, which could decrease the value of our 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.
•Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of SOFR or other indices. Increases in these indices could increase the amount of our debt payments.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this Annual Report. 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 Annual Report, 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 Annual Report, as well as the risks described in Part I, Item 1A, as being heightened as a result of the continued disruptions in the financial markets impacting the commercial real estate industry, including with respect to the current economic slowdown, rising interest rates and significant inflation (or the perception that these events may continue). 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 Annual Report, 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 Annual Report, and the risks described in Part I,
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Item 1A, 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 Annual Report will be achieved.
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PART I
ITEM 1. BUSINESS
Overview
Strategic Realty Trust, Inc., is a Maryland corporation formed on September 18, 2008 to invest in and manage a portfolio of income-producing retail properties, located in the United States. We have elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes, commencing with the taxable year ended December 31, 2009. 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. 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.
From August 7, 2009 through February 7, 2013 we conducted an initial public offering pursuant to which we raised $104.7 million in gross primary offering proceeds through the sale of 10,688,940 shares of common stock and an additional $3.6 million in gross offering proceeds through the sale of 391,182 shares of common stock in our distribution reinvestment plan (“DRIP”).We have also granted 50,000 shares of restricted stock and issued 273,729 shares of common stock to pay a portion of a special distribution in November 2015.
Our board of directors has adopted a share redemption program that may enable our stockholders to sell their shares of common stock to us in limited circumstances (the “SRP”), subject to the significant restrictions and limitations of the program. From January 2013 until April 2015, the SRP was suspended with respect to all redemption requests. In April 2015 the SRP was reinstated solely with respect to shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder. In order to preserve cash in light of the uncertainty relating to the economic impact of COVID-19 on the Company, in April 2020, the board of directors again suspended the SRP. As of the date of this filing the SRP remains suspended. Cumulatively, through December 31, 2022, pursuant to the SRP, we have redeemed 878,458 shares of common stock for approximately $6.2 million.
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 2023. The current term of the Advisory Agreement terminates on August 9, 2023. Effective April 1, 2021, the Advisor was acquired by PUR SRT Advisors LLC (“PUR”), an affiliate of PUR Management LLC, 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 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 entered into an agreement pursuant to which PUR would perform the duties required and receive the benefits of the property management agreements between Glenborough and the Company, subject to Glenborough’s supervision. On February 2, 2022, Glenborough assigned its interest in the various property management agreements to PUR.
Our office address is 550 W. Adams St, Suite 200, Chicago, Illinois 60661, and our main telephone number is (312) 878-4848.
Investment Objectives
Our investment objectives are to:
•preserve, protect and return stockholders’ capital contributions;
•pay predictable and sustainable cash distributions to stockholders; and
•realize capital appreciation upon the ultimate sale of the real estate assets.
Business Strategy
Our focus in 2023 is exploring strategic alternatives available to us to provide liquidity to our stockholders. Although we have begun the process of exploring strategic alternatives, there is no assurance that this process will result in stockholder liquidity, or provide a return to stockholders that equals or exceeds our estimated value per share.
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Investment Portfolio
As of December 31, 2022, our 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 California, which we purchased for an aggregate purchase price of approximately $35.3 million. Additionally, our portfolio includes an improved land parcel. Refer to Item 2, “Properties” for additional information on our portfolio.
Borrowing Policies
We have used secured and unsecured debt as a means of providing funds for the acquisition of real property, real estate-related loans, and other real estate-related assets. Our use of leverage increases the risk of default on loan payments and the resulting foreclosure on a particular asset. In addition, lenders may have recourse to assets other than those specifically securing the repayment of our indebtedness. As of December 31, 2022, our aggregate outstanding indebtedness, including deferred financing costs, net of accumulated amortization, totaled approximately $18.0 million, or 50.4% of the book value of our total assets.
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 December 31, 2022 and 2021, our borrowings were approximately 82.6% and 120.2%, respectively, of the book value of our net assets.
Our Advisor uses its best efforts to obtain financing on the most favorable terms available to us and will seek to refinance assets during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing loan, when an existing loan matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such an investment. The benefits of any such refinancing may include increased cash flow resulting from reduced debt service requirements, and an increase in distributions from proceeds of the refinancing.
Economic Dependency
We depend on our Advisor and its affiliates for certain services that are essential to us, including the disposition of real estate and real estate-related investments and management of the daily operations of our real estate and investment portfolio, and other general and administrative responsibilities. In the event that our Advisor is unable to provide such services to us, we will be required to obtain such services from other sources.
Competitive Market Factors
We face competition from various entities for prospective tenants and to retain our current tenants, including other REITs, pension funds, insurance companies, investment funds and companies, partnerships and developers. Many of these entities have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a tenant. As a result of their greater resources, those entities may have more flexibility than we do in their ability to offer rental concessions to attract and retain tenants. This could put pressure on our ability to maintain or raise rents and could adversely affect our ability to attract or retain tenants. As a result, our financial condition, results of operations, cash flow, ability to satisfy our debt service obligations and ability to pay distributions may be adversely affected.
We also face competition from many of the types of entities referenced above regarding the disposition of properties. These entities may possess properties in similar locations and/or of the same property types as ours and may be attempting to dispose of these properties at the same time we are attempting to dispose of some of our properties, providing potential purchasers with a larger number of properties from which to choose and potentially decreasing the sales price for such properties. Additionally, these entities may be willing to accept a lower return on their individual investments, which could further reduce the sales price of such properties.
This competition could decrease the sales proceeds we receive for properties that we sell, assuming we are able to sell such properties, which could adversely affect our cash flows and the overall return for our stockholders.
Although we believe that we are well-positioned to compete effectively in each facet of our business, there is enormous competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter increased competition in the future that could limit our ability to conduct our business effectively.
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Tax Status
We elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, beginning with the taxable year ended December 31, 2009. We believe we are organized and operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. As a REIT, we generally are not subject to federal income tax on our taxable income that is currently distributed to our stockholders, provided that distributions to our stockholders equal at least 90% of our taxable income, subject to certain adjustments. If we fail to qualify as a REIT in any taxable year without the benefit of certain relief provisions, we will be subject to federal income taxes on our taxable income at regular corporate income tax rates. We may also be subject to certain state or local income taxes, or franchise taxes.
We have elected to treat one of our subsidiaries as a taxable REIT subsidiary, which we refer to as a TRS. In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal Revenue Code. A TRS is subject to federal and state income taxes.
Environmental Matters
All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on a real property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such real property as collateral for future borrowings. Environmental laws also may impose restrictions on the manner in which real property may be used or businesses may be operated. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require us to incur material expenditures or may impose material environmental liability. Additionally, tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our real properties, such as the presence of underground storage tanks, or activities of unrelated third-parties may affect our real properties. There are also various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. In connection with the acquisition and ownership of real properties, we may be exposed to such costs in connection with such regulations. The cost of defending against environmental claims, of any damages or fines we must pay, of compliance with environmental regulatory requirements or of remediating any contaminated real property could materially and adversely affect our business, lower the value of our assets or results of operations and, consequently, lower the amounts available for distribution to our stockholders.
We do not believe that compliance with existing environmental laws will have a material adverse effect on our consolidated financial condition or results of operations. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Human Capital
We have no paid employees. The employees of our Advisor and its affiliates provide management, acquisition, disposition, advisory and certain administrative services for us.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as a result, file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information (including exhibits to our reports) with the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports, proxy and information statements and other information we file electronically with the SEC. Access to these filings is free of charge on the SEC’s website as well as on our website (www.srtreit.com).
ITEM 1A. RISK FACTORS
The following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do
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represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.
Risks Related to an Investment in Us
The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.
On December 28, 2022, our board of directors approved an estimated value per share of our common stock of $1.91 per share based on the estimated value of our real estate assets plus the estimated value of our tangible other assets less the estimated value of our liabilities divided by the number of shares and operating partnership units outstanding, as of September 30, 2022. We provided this estimated value per share to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligations under the rules of the Financial Industry Regulatory Authority (“FINRA”).
As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to generally accepted accounting principles (“GAAP”). Accordingly, with respect to the estimated value per share, we can give no assurance that:
•a stockholder would be able to resell his or her shares at this estimated value;
•a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;
•our shares of common stock would trade at the estimated value per share on a national securities exchange;
•an independent third-party appraiser or other third-party valuation firm would agree with our estimated value per share; or
•the methodology used to estimate our value per share would or would not be acceptable to FINRA or for compliance with ERISA reporting requirements.
The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. As such, the estimated value per share does not take into account estimated disposition costs and fees for real estate properties that are not held for sale, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt. For a description of the methodologies used to value our assets and liabilities in connection with the calculation of the estimated value per share, refer to Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Market Information”.
There is no trading market for shares of our common stock, and we are not required to effectuate a liquidity event by a certain date. As a result, it will be difficult for you to sell your shares of common stock and, if you are able to sell your shares, you are likely to sell them at a substantial discount.
There is no current public market for the shares of our common stock and we have no obligation to list our shares on any public securities market or provide any other type of liquidity to our stockholders. It will therefore be difficult for you to sell your shares of common stock promptly, or at all. Even if you are able to sell your shares of common stock, the absence of a public market may cause the price received for any shares of our common stock sold to be less than what you paid or less than your proportionate value of the assets we own. We have adopted the Amended and Restated Share Redemption Program (the “SRP”) which provides for the repurchase of shares by the Company only in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder. However, effective May 21, 2020, in response to the uncertainty of the economic impact to the Company of the ongoing COVID-19 pandemic, the SRP was suspended. We can provide no assurances, when, if ever, our board of directors may resume the SRP. Further, once resumed, the SRP is only available in connection with the death or “qualifying disability” of a stockholder and is subject to a limit on the number of shares to be redeemed of 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 of the number of shares of our common stock outstanding during the prior calendar year. Additionally, our charter does not require that we consummate a transaction to provide liquidity to stockholders on any date certain or at all. As a result, you should be prepared to hold your shares for an indefinite length of time.
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Distributions are not guaranteed, may fluctuate, and may constitute a return of capital or taxable gain from the sale or exchange of property.
From August 2009 to December 2012, our board of directors declared monthly cash distributions. Due to short-term liquidity issues and defaults under certain of our loan agreements, effective January 15, 2013, our board of directors determined to pay future distributions on a quarterly basis (as opposed to monthly). However, our board of directors did not declare or pay a distribution for the first three quarters of 2013. On December 9, 2013, our board of directors re-established a quarterly distribution that continued through December 2019. 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 voted to suspend the payment of any dividend for the quarter ending March 31, 2020, and to consider resuming dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to us. Dividend payments were not reinstated as of December 31, 2022 and our board of directors does not anticipate declaring regular distributions in 2023.
The actual amount and timing of any future distributions will be determined by our board of directors and typically will depend upon, among other things, the amount of funds available for distribution, which will depend on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.
To the extent that we are unable to consistently fund distributions to our stockholders entirely from our cash flow from operations, the value of your shares upon a listing of our common stock, the sale of our assets or any other liquidity event will likely be reduced. Further, if the aggregate amount of cash distributed in any given year exceeds the amount of our “REIT taxable income” generated during the year, the excess amount will either be (1) a return of capital or (2) gain from the sale or exchange of property to the extent that a stockholder’s basis in our common stock equals or is reduced to zero as the result of our current or prior year distributions. In addition, to the extent we make distributions to stockholders with sources other than cash flow from operations, the amount of cash that is distributed from such sources will limit the amount of investments that we can make, which will in turn negatively impact our ability to achieve our investment objectives and limit our ability to make future distributions.
We are dependent upon our Advisor and its affiliates to conduct our operations, and any adverse changes in the financial health of our Advisor or its affiliates or our relationship with them could hinder our operating performance and the return on our stockholders’ investment.
We are dependent on our Advisor to manage our operations and our portfolio of real estate and real estate-related assets. Our Advisor depends on fees and other compensation that it receives from us in connection with the purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of our Advisor or our relationship with our Advisor could hinder our Advisor’s ability to successfully manage our operations and our portfolio of investments. If our Advisor is unable to provide services to us, we may spend substantial resources in identifying alternative service providers to provide advisory functions.
Provisions of the Maryland General Corporation Law may limit the ability of a third party to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
Our board of directors has elected for us to be subject to certain provisions of the Maryland General Corporation Law (the “MGCL”) relating to corporate governance that may have the effect of delaying, deferring or preventing a transaction or a change of control of us that might involve a premium to the market price of our common stock or otherwise be in our stockholders' best interests. Pursuant to Subtitle 8 of Title 3 of the MGCL, our board of directors has implemented (i) a classified board of directors having staggered three year terms and (ii) a requirement that a vacancy on the board be filled only by the remaining directors. Such provisions may have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if the acquisition would be in our stockholders’ best interests, and may therefore prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
Risks Related To Our Business
We are uncertain of our sources for funding our future capital needs and our cash and cash equivalents on hand is limited. If we cannot obtain debt or equity financing on acceptable terms, our ability to fund our operations may be adversely affected.
Our cash and cash equivalents on hand are currently limited. The fixed costs associated with managing a public REIT, including the significant cost of compliance with all federal, state and local regulatory requirements applicable to us with respect to our business activities, are substantial. Such costs include, without limitation, the cost of preparing all financial statements required under applicable regulations and all reports, documents and filings required under the Exchange Act, or other federal or state laws for the general maintenance of our status as a REIT, under the applicable provisions of the Code, or
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otherwise. Given the size of our portfolio of properties, these costs constitute a significant percentage of our gross income, reducing our net income and cash flow.
Over the long term, if our cash flow from operations does not increase from current levels, whether through increased occupancy or rent rates, we may have to address a liquidity deficiency as our cash flow is not sufficient to cover our current operating expenses. In the event that we develop a need for additional capital in the future for operating expenses, investments, the improvement of our real properties or for any other reason, sources of funding may not be available to us. If we cannot establish reserves out of cash flow generated by our investments, or obtain debt or equity financing on acceptable terms, our ability to fund our operations will be adversely affected. Furthermore, if our liquidity were to become severely limited, it could jeopardize our ability to continue as a going concern.
Uninsured losses or premiums for insurance coverage relating to real property may adversely affect your returns.
We attempt to adequately insure all of our real properties against casualty losses. There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Additionally, mortgage lenders sometimes require commercial property owners to purchase specific coverage against terrorism as a condition for providing mortgage loans. These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to refinance our real properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. Changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our real properties incurs a casualty loss which is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, we cannot assure you that funding will be available to us for repair or reconstruction of damaged real property in the future.
We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems.
We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving our IT networks and related systems could:
•disrupt the proper functioning of our networks and systems and therefore our operations;
•result in misstated financial reports, violations of loan covenants and/or missed reporting deadlines;
•result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
•result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;
•require significant management attention and resources to remedy any damages that result;
•subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
•damage our reputation among our stockholders.
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
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Risks Relating to Our Organizational Structure
The limit on the percentage of shares of our common stock that any person may own may discourage a takeover or business combination that may benefit our stockholders.
Our charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of the value of our then outstanding capital stock (which includes common stock and any preferred stock we may issue) and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding common stock unless exempted by our board of directors. This restriction may discourage a change of control of us and may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to stockholders or which may cause a change in our management. In addition to deterring potential transactions that may be favorable to our stockholders, these provisions may also decrease your ability to sell your shares of our common stock.
We may issue preferred stock or other classes of common stock, which could adversely affect the holders of our common stock.
Our stockholders do not have preemptive rights to any shares issued by us in the future. We may issue, without stockholder approval, preferred stock or other classes of common stock with rights that could dilute the value of your shares of common stock. However, the issuance of preferred stock must also be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. In some instances, the issuance of preferred stock or other classes of common stock would increase the number of stockholders entitled to distributions without simultaneously increasing the size of our asset base.
Our charter authorizes us to issue 450,000,000 shares of capital stock, of which 400,000,000 shares of capital stock are designated as common stock and 50,000,000 shares of capital stock are designated as preferred stock. Our board of directors may amend our charter to increase the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. If we ever create and issue preferred stock with a distribution preference over common stock, payment of any distribution preferences of outstanding preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of preferred stock are normally entitled to receive a preference payment in the event we liquidate, dissolve or wind up before any payment is made to our common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of preferred stock or a separate class or series of common stock may render more difficult or tend to discourage:
•a merger, tender offer or proxy contest;
•the assumption of control by a holder of a large block of our securities; and
•the removal of incumbent management.
Risks Related To Conflicts of Interest
Our Advisor and its affiliates face potential conflicts of interest relating to the leasing and disposition of properties due to their relationship with other real estate programs affiliated with our Advisor, which could result in decisions that are not in our best interest or the best interests of our stockholders.
We and other real estate programs affiliated with our Advisor rely on our Advisor, and other key real estate and debt finance professionals at our Advisor to supervise the property management and leasing of properties. If the team of real estate professionals at our Advisor directs creditworthy prospective tenants to properties owned by another program when it could direct such tenants to our properties, our tenant base may have more inherent risk and our properties’ occupancy may be lower than might otherwise be the case.
In addition, we and real estate programs affiliated with our Advisor rely on our Advisor and other key real estate professionals at our Advisor to sell our properties. These programs may possess properties in similar locations and/or of the same property types as ours and may be attempting to sell these properties at the same time we are attempting to sell some of our properties. If our Advisor directs potential purchasers to properties owned by another affiliated program when it could direct such purchasers to our properties, we may be unable to sell some or all of our properties at the time or at the price we otherwise would, which could reduce our stockholders overall return on investment.
The time and resources that our Advisor and its affiliates, including our officers and affiliated directors, devote to us may be diverted, and we may face additional competition due to the fact that affiliates of our Advisor are not prohibited from raising money for, or managing, another entity that makes the same types of investments that we target.
Our Advisor and its affiliates, including our officers and affiliated directors, are not prohibited from raising money for, or managing, another investment entity that makes the same types of investments as those we target. For example, our Advisor’s
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management currently manages several privately offered real estate programs sponsored by affiliates of our Advisor. As a result, the time and resources they could devote to us may be diverted. In addition, we may compete with any such investment entity for the same investment opportunities.
Our Advisor and its affiliates, including certain of our officers and directors, face conflicts of interest caused by compensation arrangements with us and other affiliates, which could result in actions that are not in the best interests of our stockholders.
Our Advisor and its affiliates receive substantial fees from us in return for their services and these fees could influence the advice provided to us. Among other matters, the compensation arrangements could affect their judgment with respect to:
•acquisitions of property and other investments and originations of loans, which entitle our Advisor to acquisition or origination fees and management fees; and, in the case of acquisitions of investments from other programs sponsored by PUR, may entitle affiliates of our Advisor to disposition or other fees from the seller;
•real property sales, since the asset management fees payable to our Advisor will decrease;
•incurring or refinancing debt and originating loans, which would increase the acquisition, financing, origination and management fees payable to our Advisor; and
•whether and when we seek to sell the Company or its assets.
Further, our Advisor may recommend that we invest in a particular asset or pay a higher purchase price for the asset than it would otherwise recommend if it did not receive an acquisition fee. Certain acquisition fees and asset management fees payable to our Advisor and property management fees payable to the property manager are payable irrespective of the quality of the underlying real estate or property management services during the term of the related agreement. These fees may influence our Advisor to recommend transactions with respect to the sale of a property or properties that may not be in our best interest at the time. Investments with higher net operating income growth potential are generally riskier or more speculative. In addition, the premature sale of an asset may add concentration risk to the portfolio or may be at a price lower than if we held on to the asset. Moreover, our Advisor has considerable discretion with respect to the terms and timing of acquisition, disposition, refinancing and leasing transactions. In evaluating investments and other management strategies, the opportunity to earn these fees may lead our Advisor to place undue emphasis on criteria relating to its compensation at the expense of other criteria, such as the preservation of capital, to achieve higher short-term compensation. Considerations relating to our affiliates’ compensation from us and other affiliates of our Advisor could result in decisions that are not in the best interests of our stockholders, which could result in a decline in the value of your investment.
Risks Associated with Our Properties
The risks identified below should be interpreted as being heightened as a result of the continued disruptions in the financial markets impacting the U.S. commercial real estate industry.
Elevated market and economic volatility due to adverse economic and geopolitical conditions (such as the war in Ukraine), health crisis (such as the continuing impact of the COVID-19 pandemic), concerns over persistent inflation, rising interest rates and slowing economic growth, could have material and adverse effects on our operations.
Our operations may be adversely affected by market and economic volatility experienced by the U.S. and global economies, the U.S. retail market as a whole and/or the local economies in San Francisco and Los Angeles where our properties are located. Such adverse economic and geopolitical conditions may be due to, among other issues, increased labor market challenges impacting the recruitment and retention of employees, rising inflation and interest rates, volatility in the public equity and debt markets, and international economic and other conditions, including pandemics (such as the continuing impact of the COVID-19 pandemic), geopolitical instability (such as the war in Ukraine), sanctions and other conditions beyond our control. These current conditions, or similar conditions existing in the future, may adversely affect our financial condition and results of operations as a result of one or more of the following, among other potential consequences:
•revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to meet our debt service obligations on debt financing or reducing cash available for distribution to our stockholders.
•the financial condition of our tenants may be adversely affected, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, lack of funding, operational failures or for other reasons;
•potential changes in customer behavior with respect to retail space resulting from the COVID-19 pandemic, which could materially and negatively impact the future demand for retail space, resulting in slower overall leasing and an adverse impact to our operations and the valuation of our investments;
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•our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to refinance existing debt and increase our future interest expense;
•the ability of potential purchasers of our assets to access the debt markets on favorable terms and conditions may be limited due to the current rising interest rate environment;
•reduced values of our properties and revenues from our properties may (i) limit our ability to dispose of assets at attractive prices, (ii) limit our ability to obtain debt financing secured by our properties, and (iii) reduce the availability of unsecured loans;
•the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, a dislocation of the markets for our short-term investments, increased volatility in market rates for such investments or other factors; and
•to the extent we enter into derivative financial instruments, one or more counterparties to our derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments.
Inflation and increased interest rates may adversely affect our financial condition and results of operations.
Although inflation has not materially impacted our operations in the recent past, inflation is at a 40-year high and beginning in March of 2022, the Federal Reserve began raising the federal funds rate in an effort to curb inflation. The Federal Reserve’s action, coupled with other macroeconomic factors, may trigger a recession in the United States, globally, or both. Increased inflation and interest rates could have an adverse impact on our variable rate debt, our ability to borrow money, and general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue. Increases in the costs of owning and operating our properties due to inflation could reduce our net operating income and the value of an investment in us to the extent such increases are not reimbursed or paid by our tenants. If we are materially impacted by increasing inflation because, for example, inflationary increases in costs are not sufficiently offset by the contractual rent increases and operating expense reimbursement provisions or escalations in the leases with our tenants, our results of operations could be adversely affected. In addition, due to rising interest rates, we may experience restrictions in our liquidity based on certain financial covenant requirements, our inability to refinance maturing debt in part or in full as it comes due and higher debt service costs and reduced yields relative to cost of debt. If we are unable to find alternative credit arrangements or other funding in a high interest environment, our business needs may not be adequately met.
In addition, tenants and potential tenants of our properties may be adversely impacted by inflation and rising interest rates, which could negatively impact our tenants’ ability to pay rent and the demand for our properties. Such adverse impacts on our tenants may cause increased vacancies, which may add pressure to lower rents and increase our expenditures for re-leasing.
Our retail properties are subject to property taxes that may increase in the future, which could adversely affect our cash flow.
Our real properties are subject to real and personal property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. Certain of our leases provide that the property taxes, or increases therein, are charged to the lessees as an expense related to the real properties that they occupy, while other leases provide that we are responsible for such taxes. In any case, as the owner of the properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If real property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes even if otherwise stated under the terms of the lease. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale. In addition, we will generally be responsible for real property taxes related to any vacant space.
An economic downturn in the United States may have an adverse impact on the retail industry generally. Slow or negative growth in the retail industry may result in defaults by retail tenants which could have an adverse impact on our financial operations.
An economic downturn in the United States may have an adverse impact on the retail industry generally. As a result, the retail industry may face reductions in sales revenues and increased bankruptcies. Adverse economic conditions may result in an increase in distressed or bankrupt retail companies, which in turn could result in an increase in defaults by tenants at our commercial properties. Additionally, slow economic growth is likely to hinder new entrants in the retail market which may make it difficult for us to fully lease our properties. Tenant defaults and decreased demand for retail space would have an adverse impact on the value of our retail properties and our results of operations. In particular, the COVID-19 pandemic has impacted the retail industry across the United States, including our portfolio of properties.
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Our properties consist of retail properties. Our performance, therefore, is linked to the market for retail space generally.
As of December 31, 2022, we owned six properties, each of which is a retail property and the majority of which have multiple tenants. The market for retail space has been and in the future could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to such stores resulting from a regional economic downturn, a general downturn in the local area where our retail center is located, or a decline in the desirability of the shopping environment of a particular shopping center. Such a reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.
Our retail tenants face competition from numerous retail channels, which may reduce our profitability and ability to pay distributions.
Retailers at our current retail properties and at any retail property we may acquire in the future face continued competition from discount or value retailers, factory outlet centers, wholesale clubs, mail order catalogs and operators, television shopping networks and shopping via the Internet. Such competition could adversely affect our tenants and, consequently, our revenues and the total return on investment to our stockholders.
Retail conditions may adversely affect our base rent and subsequently, our income.
Some of our leases may provide for base rent plus contractual base rent increases. A number of our retail leases may also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue that we may derive from percentage rent leases could decline upon a general economic downturn.
Certain of our tenants account for a meaningful portion of the gross leasable area of our portfolio and/or our annual minimum rent, and the inability of these tenants to make contractual rent payments to us could expose us to potential losses in rental revenue, expense recoveries, and percentage rent.
A concentration of credit risk may arise in our business when a nationally or regionally-based tenant is responsible for a substantial amount of rent in multiple properties owned by us. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to us, exposing us to potential losses in rental revenue, expense recoveries, and percentage rent. Further, the impact may be magnified if the tenant is renting space in multiple locations. Generally, we do not obtain security from nationally-based or regionally-based tenants in support of their lease obligations to us. As of December 31, 2022, Intent to Dine, LLC, 450 Hayes Valley, LLC, and La Conq, LLC each accounted for more than 10% of our annualized minimum rent.
The bankruptcy or insolvency of a major tenant may adversely impact our operations and the total return to our stockholders.
The bankruptcy or insolvency of a significant tenant or a number of smaller tenants at one of our properties or any retail property we may acquire in the future may have an adverse impact on our income and the total return to our stockholders. Generally, under bankruptcy law, a debtor tenant has 120 days to exercise the option of assuming or rejecting the obligations under any unexpired lease for nonresidential real property, which period may be extended once by the bankruptcy court. If the tenant assumes its lease, the tenant must cure all defaults under the lease and may be required to provide adequate assurance of its future performance under the lease. If the tenant rejects the lease, we will have a claim against the tenant’s bankruptcy estate. Although rent owing for the period between filing for bankruptcy and rejection of the lease may be afforded administrative expense priority and paid in full, pre-bankruptcy arrears and amounts owing under the remaining term of the lease will be afforded general unsecured claim status (absent collateral securing the claim). Moreover, amounts owing under the remaining term of the lease will be capped. Other than equity and subordinated claims, general unsecured claims are the last claims paid in a bankruptcy and therefore funds may not be available to pay such claims in full.
Because of the concentration of a significant portion of our assets in one geographic area 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 the total return to our stockholders.
As of December 31, 2022, 50.8% of our annual minimum rent was derived from properties in San Francisco, California with an additional 49.2% of our annual minimum rent coming from properties located in other California cities. As such, the geographic concentration of our portfolio makes us particularly susceptible to adverse economic developments in the California real estate markets. In addition, the majority of our real estate properties consists of urban retail properties. Any adverse
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economic or real estate developments in the San Francisco or broader California geographic markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for urban retail space could adversely affect our operating results and our ability to pay distributions to our stockholders.
The costs of complying with governmental laws and regulations related to environmental protection and human health and safety may be high.
All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such real property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such real property as collateral for future borrowings. Environmental laws also may impose restrictions on the manner in which real property may be used or businesses may be operated. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our real properties, such as the presence of underground storage tanks, or activities of unrelated third-parties may affect our real properties. There are also various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. In connection with the acquisition and ownership of our real properties, we may be exposed to such costs in connection with such regulations. The cost of defending against environmental claims, of any damages or fines we must pay, of compliance with environmental regulatory requirements or of remediating any contaminated real property could materially and adversely affect our business, lower the value of our assets or results of operations and, consequently, lower the amounts available for distribution to you.
The costs associated with complying with the Americans with Disabilities Act may reduce the amount of cash available for distribution to our stockholders.
Investment in real properties may also be subject to the Americans with Disabilities Act of 1990, as amended, or “ADA”. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. We are committed to complying with the act to the extent to which it applies. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. With respect to the properties we acquire, the ADA’s requirements could require us to remove access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third-party, such as a tenant, to ensure compliance with the ADA. We cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. Any monies we use to comply with the ADA will reduce the amount of cash available for distribution to our stockholders.
Real properties are illiquid investments, and we may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so.
Real properties are illiquid investments. We may be unable to adjust our portfolio in response to changes in economic or other conditions. In addition, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and supply and demand that are beyond our control. We cannot predict whether we will be able to sell any real property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a real property. Also, we may acquire real properties that are subject to contractual “lock-out” provisions that could restrict our ability to dispose of the real property for a period of time. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements.
In acquiring a real property, we may agree to restrictions that prohibit the sale of that real property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that real property. Our real properties may also be subject to resale restrictions. All these provisions would restrict our ability to sell a property, which could reduce the amount of cash available for distribution to our stockholders.
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Risks Associated With Debt Financing
Restrictions imposed by our loan agreements may limit our ability to execute our business strategy and could limit our ability to make distributions to our stockholders.
We are a party to loan agreements that contain a variety of restrictive covenants. These covenants include requirements to maintain certain financial ratios and requirements to maintain compliance with applicable laws. A lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. In general, we expect our loan agreements to restrict our ability to encumber or otherwise transfer our interest in the respective property without the prior consent of the lender. Loan documents we enter may contain other customary negative covenants that may limit our ability to further mortgage the property, discontinue insurance coverage, replace our Advisor or impose other limitations. Any such restriction or limitation may have an adverse effect on our operations and our ability to make distributions to you.
We have incurred mortgage indebtedness and other borrowings, which may increase our business risks, could hinder our ability to make distributions and could decrease the value of your investment.
We have, and may in the future, obtain lines of credit and long-term financing that may be secured by our real properties and other assets. Under 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 are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities. Generally speaking, the preceding calculation is expected to approximate 75% of the aggregate cost of our investments before non-cash reserves and depreciation. Our charter allows us to borrow in excess of these amounts if such excess is approved by a majority of the independent directors and is disclosed to stockholders in our next quarterly report, along with justification for such excess. As of December 31, 2022, our aggregate borrowings did not exceed 300% of the value of our net assets. Also, we may incur mortgage debt and pledge some or all of our investments as security for that debt to obtain funds to acquire additional investments or for working capital. We may also borrow funds as necessary or advisable to ensure we maintain our REIT tax qualification, including the requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the distribution paid deduction and excluding net capital gains). Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for U.S. federal income tax purposes.
High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure on any of our properties will be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we will recognize taxable income on foreclosure, but we would not receive any cash proceeds. If any mortgage contains cross collateralization or cross default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected.
Instability in the debt markets may make it more difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make to our stockholders.
If mortgage debt is unavailable on reasonable terms as a result of increased interest rates or other factors, we may not be able to finance the purchase of additional properties. In addition, if we place mortgage debt on properties, we run the risk of being unable to refinance such debt when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance debt, our income could be reduced. We may be unable to refinance debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us, or could result in the foreclosure of such properties. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise more capital by issuing securities or by borrowing more money.
Increases in interest rates could increase the amount of our debt payments and negatively impact our operating results.
Interest we pay on our debt obligations will reduce cash available for distributions. If we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flows and our ability to make distributions to you. If we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times, which may not permit realization of the maximum return on such investments.
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Derivative financial instruments that we may use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment.
We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging strategy can protect us completely. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income test.
U.S. Federal Income Tax Risks
Our failure to continue to qualify as a REIT would subject us to U.S. federal income tax and reduce cash available for distribution to you.
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2009. We intend to continue to operate in a manner so as to continue to qualify as a REIT for U.S. federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to continue to qualify as a REIT. If we fail to continue to qualify as a REIT in any taxable year, we would be subject to federal and applicable state and local income tax on our taxable income at regular corporate income tax rates, in which case we might be required to borrow or liquidate some investments in order to pay the applicable tax. Losing our REIT status would reduce our net income available for investment or distribution to you because of the additional tax liability. In addition, distributions to you would no longer qualify for the dividends-paid deduction and we would no longer be required to make distributions. Furthermore, if we fail to qualify as a REIT in any taxable year for which we have elected to be taxed as a REIT, we would generally be unable to elect REIT status for the four taxable years following the year in which our REIT status is lost.
Complying with REIT requirements may force us to borrow funds to make distributions to you or otherwise depend on external sources of capital to fund such distributions.
To continue to qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, subject to certain adjustments, to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In that case, if we so elect, a stockholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. A stockholder, including a tax-exempt or foreign stockholder, would have to file a U.S. federal income tax return to claim that credit or refund. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.
From time-to-time, we may generate taxable income greater than our net income (loss) for GAAP. In addition, our taxable income may be greater than our cash flow available for distribution to you as a result of, among other things, investments in assets that generate taxable income in advance of the corresponding cash flow from the assets (for instance, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise).
If we do not have other funds available in the situations described in the preceding paragraphs, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.
Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital will depend upon a number of factors, including our current and potential future earnings and cash distributions.
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Despite our qualification for taxation as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you.
Despite our qualification for taxation as a REIT for U.S. federal income tax purposes, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income or property. Any of these taxes would decrease cash available for distribution to you. For instance:
•in order to continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain for this purpose) to you.
•to the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income.
•we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
•if we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
•if we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business and do not qualify for a safe harbor in the Internal Revenue Code, our gain would be subject to the 100% “prohibited transaction” tax.
•any domestic taxable REIT subsidiary, or TRS, of ours will be subject to federal corporate income tax on its income, and on any non-arm’s-length transactions between us and any TRS, for instance, excessive rents charged to a TRS could be subject to a 100% tax.
•we may be subject to tax on income from certain activities conducted as a result of taking title to collateral.
•we may be subject to state or local income, property and transfer taxes, such as mortgage recording taxes.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or liquidate otherwise attractive investments.
To continue to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to you at disadvantageous times or when we do not have funds readily available for distribution. Additionally, we may be unable to pursue investments that would be otherwise attractive to us in order to satisfy the requirements for qualifying as a REIT.
We must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets) and no more than 20% of the value of our gross assets (25% for certain taxable years beginning before December 31, 2017) may be represented by securities of one or more TRSs. Finally, for the taxable years after 2015, no more than 25% of our assets may consist of debt investments that are issued by “publicly offered REITs” and would not otherwise be treated as qualifying real estate assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of profit maximization and may require us to liquidate investments from our portfolio, or refrain from making, otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to stockholders.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations effectively. Our aggregate gross income from non-qualifying hedges, fees and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS would be subject to federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with interest rate or other changes than we would otherwise incur.
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Liquidation of assets may jeopardize our REIT qualification.
To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% prohibited transaction tax on any resulting gain if we sell assets that are treated as dealer property or inventory.
The prohibited transactions tax may limit our ability to engage in transactions, including disposition of assets and certain methods of securitizing loans, which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of dealer property, other than foreclosure property, but including loans held primarily for sale to customers in the ordinary course of business. We might be subject to the prohibited transaction tax if we were to dispose of or securitize loans in a manner that is treated as a sale of the loans, for U.S. federal income tax purposes. In order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans and may limit the structures we use for any securitization financing transactions, even though such sales or structures might otherwise be beneficial to us. Additionally, we may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe-harbor exception to prohibited transaction treatment is available, we cannot assure you that we can comply with such safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of our trade or business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.
It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through a TRS. However, to the extent that we engage in such activities through a TRS, the income associated with such activities will be subject to a corporate income tax. In addition, the Internal Revenue Service (“IRS”) may attempt to ignore or otherwise recast such activities in order to impose a prohibited transaction tax on us, and there can be no assurance that such recast will not be successful.
We also may not be able to use secured financing structures that would create taxable mortgage pools, other than in a TRS or through a subsidiary REIT.
We may recognize substantial amounts of REIT taxable income, which we would be required to distribute to you, in a year in which we are not profitable under GAAP principles or other economic measures.
We may recognize substantial amounts of REIT taxable income in years in which we are not profitable under GAAP or other economic measures as a result of the differences between GAAP and tax accounting methods. For instance, certain of our assets will be marked-to-market for GAAP purposes but not for tax purposes, which could result in losses for GAAP purposes that are not recognized in computing our REIT taxable income. Additionally, we may deduct our capital losses only to the extent of our capital gains in computing our REIT taxable income for a given taxable year. Consequently, we could recognize substantial amounts of REIT taxable income and would be required to distribute such income to you, in a year in which we are not profitable under GAAP or other economic measures.
We may distribute our common stock in a taxable distribution, in which case you may sell shares of our common stock to pay tax on such distributions, and you may receive less in cash than the amount of the dividend that is taxable.
We may make taxable distributions that are payable in cash and common stock. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable distributions that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. Accordingly, it is unclear whether and to what extent we will be able to make taxable distributions payable in cash and common stock. If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such distributions will be required to include the dividend as taxable income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, you may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount recorded in earnings with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain for this purpose) in order to continue to qualify as a REIT. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code and to avoid corporate
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income tax and the 4% excise tax. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Our qualification as a REIT could be jeopardized as a result of an interest in joint ventures or investment funds.
We may hold certain limited partner or non-managing member interests in partnerships or limited liability companies that are joint ventures or investment funds. If a partnership or limited liability company in which we own an interest takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action which could cause us to fail a REIT gross income or asset test, and that we would not become aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to continue to qualify as a REIT unless we are able to qualify for a statutory REIT “savings” provision, which may require us to pay a significant penalty tax to maintain our REIT qualification.
Distributions paid by REITs do not qualify for the reduced tax rates that apply to other corporate distributions.
The maximum tax rate for “qualified dividends” paid by corporations to non-corporate stockholders is currently 20%. Distributions paid by REITs, however, generally are taxed at ordinary income rates (subject to a maximum rate of 29.6% for non-corporate stockholders), rather than the preferential rate applicable to qualified dividends.
Retirement Plan Risks
If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or an owner of a retirement arrangement subject to Section 4975 of the Internal Revenue Code (such as an IRA) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. Fiduciaries and IRA owners investing the assets of such a plan or account in our common stock should satisfy themselves that:
•the investment is consistent with their fiduciary and other obligations under ERISA and the Internal Revenue Code;
•the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;
•the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;
•the investment in our shares, for which no public market currently exists, is consistent with the liquidity needs of the plan or IRA;
•the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;
•our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and
•the investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In addition, the investment transaction must be reversed. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA owners should consult with counsel before making an investment in our common stock.
If our assets are deemed to be plan assets, the Advisor and we may be exposed to liabilities under Title I of ERISA and the Internal Revenue Code.
In some circumstances where an ERISA plan holds an interest in an entity, the assets of the entity are deemed to be ERISA plan assets unless an exception applies. This is known as the “look-through rule.” Under those circumstances, the obligations
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and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA or Section 4975 of the Internal Revenue Code, may be applicable, and there may be liability under these and other provisions of ERISA and the Internal Revenue Code. We believe that our assets should not be treated as plan assets because the shares should qualify as “publicly-offered securities” that are exempt from the look-through rules under applicable Treasury Regulations. We note, however, that because certain limitations are imposed upon the transferability of shares so that we may qualify as a REIT, and perhaps for other reasons, it is possible that this exemption may not apply. If that is the case, and if the Advisor or we are exposed to liability under ERISA or the Internal Revenue Code or we are required to alter our operations to comply with ERISA or the Internal Revenue Code, our performance and results of operations could be adversely affected. Prior to making an investment in us, you should consult with your legal and other advisors concerning the impact of ERISA and the Internal Revenue Code on your investment and our performance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Property Portfolio
As of December 31, 2022, our portfolio included six retail properties, excluding a residual land parcel at Topaz Marketplace, 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 California. As of December 31, 2022, approximately 88% of our portfolio was leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 5.8 years. The following table provides summary information regarding the properties in our portfolio as of December 31, 2022 (dollar amounts in thousands):
| (dollars in thousands) | Rentable Square Feet | Percent Leased (2) | Effective Rent (3) (per Sq. Foot) | Date Acquired | Original Purchase Price | Debt | ||||||||||||||||||||||||||||||||||||||
Property Name (1) | Location | |||||||||||||||||||||||||||||||||||||||||||
| 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 | % | 65.31 | 6/14/2016 | 2,740 | 1,500 | ||||||||||||||||||||||||||||||||||||
| Fulton Shops | San Francisco, CA | 3,758 | 66 | % | 58.42 | 7/27/2016 | 4,595 | 2,200 | ||||||||||||||||||||||||||||||||||||
| 450 Hayes | San Francisco, CA | 3,724 | 100 | % | 103.37 | 12/22/2016 | 7,567 | 3,650 | ||||||||||||||||||||||||||||||||||||
| 388 Fulton | San Francisco, CA | 3,110 | 100 | % | 61.96 | 1/4/2017 | 4,195 | 2,300 | ||||||||||||||||||||||||||||||||||||
| Silver Lake | Los Angeles, CA | 10,876 | 100 | % | 82.82 | 1/11/2017 | 13,300 | 6,900 | ||||||||||||||||||||||||||||||||||||
| 27,108 | $ | 35,287 | $ | 18,000 | ||||||||||||||||||||||||||||||||||||||||
(1)List of properties does not include a residual parcel at Topaz Marketplace as of December 31, 2022.
(2)Percentage is based on leased rentable square feet of each property as of December 31, 2022.
(3)Effective rent per square foot is calculated by dividing the annualized December 31, 2022 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.
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Lease Expirations
The following table reflects the timing of tenant lease expirations at our properties as of December 31, 2022 (dollar amounts in thousands):
Year of Expiration (1) | Number of Leases Expiring | Annualized Base Rent Expiring (2) | Percent of Portfolio Annualized Base Rent Expiring | Square Feet Expiring | ||||||||||||||||||||||
| 2023 | 1 | $ | 49 | 2.7% | 730 | |||||||||||||||||||||
| 2024 | 2 | 103 | 5.6 | 1,514 | ||||||||||||||||||||||
| 2025 | 1 | 118 | 6.4 | 1,894 | ||||||||||||||||||||||
| 2026 | 5 | 548 | 29.9 | 7,456 | ||||||||||||||||||||||
| 2027 | 1 | 27 | 1.5 | 589 | ||||||||||||||||||||||
| 2028 | — | — | — | — | ||||||||||||||||||||||
| 2029 | — | — | — | — | ||||||||||||||||||||||
| 2030 | — | — | — | — | ||||||||||||||||||||||
| Thereafter | 3 | 989 | 53.9 | 11,720 | ||||||||||||||||||||||
| Total | 13 | $ | 1,834 | 100.0% | 23,903 | |||||||||||||||||||||
(1)Represents the expiration date of the lease as of December 31, 2022, and does not take into account any tenant renewal options.
(2)Annualized base rent represents annualized contractual base rent as of December 31, 2022. These amounts do not include other items such as tenant concession (e.g. free rent), percentage rent and expense recoveries.
Significant Tenants
As of December 31, 2022, our real estate properties were leased to approximately 13 retail tenants over a diverse range of industries. The following table reflects information regarding tenants which account for more than 10% of our annualized minimum rent as of December 31, 2022 (dollar amounts in thousands):
| Name of Tenant | Industry | Property | Annualized Rent | % Annualized Minimum Rent | % Rentable Square Feet Occupied | Lease Expiration | ||||||||||||||||||||||||||||||||
| Intent to Dine, LLC | Restaurant | Silver Lake | $ | 599 | 33 | % | 26 | % | November 30, 2031 | |||||||||||||||||||||||||||||
| 450 Hayes Valley, LLC | Restaurant | 450 Hayes | 281 | 15 | 11 | November 30, 2031 | ||||||||||||||||||||||||||||||||
| La Conq, LLC | Restaurant | Silver Lake | 202 | 11 | 9 | September 5, 2026 | ||||||||||||||||||||||||||||||||
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.
On December 28, 2022, our board of directors approved an estimated value per share of our common stock of $1.91 per share based on the estimated value of our real estate assets and the estimated value of our tangible other assets less the estimated value of the our liabilities divided by the number of shares and operating partnership units outstanding, all as of September 30, 2022, with the exception of the inclusion of the disposition price for the Wilshire property which was as of October 11, 2022. We provided the estimated value per share to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligation under Financial Industry Regulatory Authority (“FINRA”) Rule 2231. The valuation with an effective date of December 28, 2022 was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) (“IPA”) in April 2013.
Our independent directors are responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine our estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The estimated value per share was determined after consultation with SRT Advisor, LLC (the “Advisor”) and Robert A. Stanger & Co, Inc. (“Stanger”), an independent third-party valuation firm. The engagement of Stanger was approved by the board of directors, including all of its independent members. Stanger prepared individual appraisal reports (individually an “Appraisal Report” collectively the “Appraisal Reports”), summarizing key inputs and assumptions, on eight of the nine properties in which we wholly owned or owned an interest in as of September 30, 2022 (the “Appraised Properties”). Stanger also prepared a net asset value report (the “NAV Report”) which estimates the net asset value per share of our stock as of September 30, 2022. The NAV Report relied upon: (i) the Appraisal Reports for the Appraised Properties; (ii) the October 11, 2022 closing statement for the Wilshire property, which reflects the disposition price, net of transaction costs for the property (the “Disposition Property”); (iii) Stanger's estimated value of our mortgage loans payable and other debt; and (iv) the Advisor's estimate of the value of our other assets and liabilities as of September 30, 2022, to calculate an estimated net asset value per share of our common stock.
Upon the board of directors’ receipt and review of Stanger’s Appraisal Reports and NAV Report, and in light of other factors considered, the board of directors, including the independent directors, approved $1.91 per share as the estimated value of our common stock as of September 30, 2022, which determination is ultimately and solely the responsibility of the board of directors.
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The table below sets forth the calculation of our estimated value per share as of September 30, 2022:
Strategic Realty Trust, Inc. and Subsidiaries
Estimated Value Per Share
(in thousands, except shares and per share amounts)
(unaudited)
| Assets | ||||||||
| Investments in real estate, net | $ | 35,370 | ||||||
| Properties under development and development costs | 12,540 | |||||||
| Cash, cash equivalents and restricted cash | 1,076 | |||||||
| Prepaid expenses and other assets, net | 202 | |||||||
| Tenants receivables, net | 175 | |||||||
| Assets held for sale | 14,951 | |||||||
| Total assets | 64,314 | |||||||
| Liabilities | ||||||||
| Notes payable | 42,573 | |||||||
| Accounts payable and accrued expenses | 704 | |||||||
| Other liabilities | 136 | |||||||
| Total liabilities | 43,413 | |||||||
| Stockholders’ equity | $ | 20,901 | ||||||
| Shares and OP units outstanding | 10,957,289 | |||||||
| Estimated value per share | $ | 1.91 | ||||||
Methodology and Key Assumptions
Our goal in calculating an estimated value per share is to arrive at a value that is reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions and a process that is in compliance with the valuation guidelines established by the IPA.
FINRA’s current rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets less our liabilities according to U.S. generally accepted accounting principles (“GAAP”), nor does it represent a liquidation value of our assets and liabilities or the amount our shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not held for sale, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt.
The following is a summary of the valuation and appraisal methodologies used to value our assets and liabilities:
Real Estate
Independent Valuation Firm
Stanger was selected by the Advisor and approved by our independent directors and board of directors to appraise the eight Appraised Properties in which we wholly own or own an interest in with a valuation date of September 30, 2022. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or the Advisor. The compensation we paid to Stanger was based on the scope of work and not on the appraised values of the Appraised Properties. The Appraisal Reports were performed in accordance with the Code of Ethics and the Uniform Standards of Professional
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Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. Each Appraisal Report was reviewed, approved and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the Appraisal Reports are subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing the Appraisal Reports, Stanger did not, and was not requested to, solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.
Stanger collected reasonably available material information that it deemed relevant in appraising the Appraised Properties. Stanger relied in part on property-level information provided by the Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or the Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, board of directors and/or the Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we have clear and marketable title to each Appraised Property, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density or shape are pending or being considered. Furthermore, Stanger’s analyses, opinions and conclusions were necessarily based upon market, economic, financial and other circumstances and conditions existing as of or prior to the date of the Appraisal Reports, and any material change in such circumstances and conditions may affect Stanger’s analyses and conclusions. The Appraisal Reports contain other assumptions, qualifications and limitations that qualify the analyses, opinions and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger’s analyses.
Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by the us in connection with public security offerings, private placements, business combinations and similar transactions. We engaged Stanger to deliver the Appraisal Reports and assist in the net asset value calculation and Stanger received compensation for those efforts. In addition, we have agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the date of this filing, Stanger has provided appraisal, valuation and financial advisory services for us and has received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services for us, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable appraisal report.
Although Stanger considered any comments received from us or the Advisor regarding the Appraisal Reports, the final appraised values of the Appraised Properties were determined by Stanger. The Appraisal Reports are addressed solely to us to assist it in calculating an updated estimated value per share of our common stock. The Appraisal Reports are not addressed to the public and may not be relied upon by any other person to establish an estimated value per share of our common stock and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to the Appraisal Reports. All of the Appraisal Reports, including the analysis, opinions and conclusions set forth in such reports, are qualified by the assumptions, qualifications and limitations set forth in each respective Appraisal Report.
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Real Estate Valuation
As described above, we engaged Stanger to provide an appraisal of the Appraised Properties consisting of eight of the nine properties in our portfolio ((including the property owned in a joint venture)), as of September 30, 2022. The Wilshire property, the disposition of which was completed on October 11, 2022, was valued based on the closing statement, which reflected the disposition price for the property, net of transaction costs. In preparing the Appraisal Reports, Stanger, among other things:
•interviewed our officers or the Advisor's personnel to obtain information relating to the physical condition of each Appraised Property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties;
•reviewed lease agreements for those properties subject to a long-term lease and discussed with us or Advisor certain lease provisions and factors on each property; and
•reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer's criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties.
Stanger appraised each of the Appraised Properties, using various methodologies including a direct capitalization analysis, discounted cash flow analyses and sales comparison approach, as appropriate, and relied primarily on the discounted cash flow analyses for the final valuations of each of the Appraised Properties. Stanger calculated the discounted cash flow value of the Appraised Properties using property-level cash flow estimates, terminal capitalization rates and discount rates that fall within ranges they believe would be used by similar investors to value the Appraised Properties based on survey data adjusted for unique property and market-specific factors. The Disposition Property was included in the NAV Report at its disposition price pursuant to a purchase and sale agreement, net of transaction costs per the October 11, 2022 closing statement.
The total acquisition cost of the nine properties in which we wholly owned or owned an interest in as of September 30, 2022 was $62.1 million, excluding acquisition fees and expenses. In addition, we had invested $27.5 million in capital and tenant improvements on these nine real estate assets since inception. As of September 30, 2022, the total appraised value of the Appraised Properties was $47.9 million and the estimated value for the Disposition Property based on the October 11, 2022 closing statement was $15.0 million. The total estimated value of the nine properties in which we wholly owned or owned an interest in as of September 30, 2022 compared to the total acquisition cost plus subsequent capital improvements through September 30, 2022 of these assets, results in an overall decrease in the real estate value of those nine properties of approximately $26.7 million or approximately 29.9%. The following summarizes the key assumptions that were used in the discounted cash flow models used to arrive at the appraised value of our Appraised Properties:
| Range | Weighted Average | |||||||||||||
| Terminal capitalization rate | 5.25% - 6.25% | 5.65% | ||||||||||||
| Discount rate | 6.25% - 7.75% | 6.51% | ||||||||||||
| Income and expense growth rate | 3.00% | 3.00% | ||||||||||||
| Projection period | 10.0 Years - 11.0 Years | 10.1 Years | ||||||||||||
While we believe that Stanger’s assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the calculation of the appraised value of the Appraised Properties and thus, the estimated value per share. The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to the real estate properties referenced in the table above. Additionally, the table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 5% in accordance with the IPA guidance:
| Increase (Decrease) on the Estimated Value per Share due to | ||||||||||||||||||||||||||
| Decrease 25 Basis Points | Increase 25 Basis Points | Decrease 5.0% | Increase 5.0% | |||||||||||||||||||||||
| Terminal capitalization rates | $ | 0.09 | $ | (0.08) | $ | 0.10 | $ | 0.09 | ||||||||||||||||||
| Discount rates | 0.06 | (0.06) | 0.08 | 0.08 | ||||||||||||||||||||||
Notes Payable
Values for mortgage loans were estimated by Stanger using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term, loan-to-value ratios, debt-service-coverage ratios, prepayment terms, and collateral property attributes (i.e.
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age, location, etc.). The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for our consolidated mortgage loans ranged from 6.04% to 8.60%.
As of September 30, 2022, Stanger’s estimate of fair value and carrying value of our consolidated notes payable were $42.6 million. The weighted-average discount rate applied to the future estimated debt payments, which have a weighted-average remaining term of 0.4 years, was approximately 7.1%. The table below illustrates the impact on our estimated value per share if the discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to our notes payable. Additionally, the table below illustrates the impact on the estimated value per share if the discount rates were adjusted by 5% in accordance with the IPA guidance:
| Adjustment to Discount Rates | ||||||||||||||||||||||||||
| +25 Basis Points | -25 Basis Points | +5% | -5% | |||||||||||||||||||||||
| Estimated fair value | $ | 42,549 | $ | 42,573 | $ | 42,541 | $ | 42,573 | ||||||||||||||||||
| Weighted average discount rate | 7.3 | % | 6.8 | % | 7.4 | % | 6.7 | % | ||||||||||||||||||
| Change in value per share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||||||||||
Other Assets and Liabilities
The carrying values of a majority of our other assets and liabilities are considered to equal their fair value due to their short maturities or liquid nature. Certain balances, such as straight-line rent receivables, lease intangible assets and liabilities, deferred financing costs, unamortized lease commissions and unamortized lease incentives, have been eliminated for the purpose of the valuation due to the fact that the value of those balances were already considered in the valuation of the respective investments.
Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets.
Limitations of Estimated Value Per Share
As mentioned above, we provided this estimated value per share to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligations. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to GAAP.
Accordingly, with respect to the estimated value per share, we can give no assurance that:
•a shareholder would be able to resell his or her shares at this estimated value;
•a shareholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of us;
•our shares of common stock would trade at the estimated value per share on a national securities exchange;
•an independent third-party appraiser or other third-party valuation firm would agree with our estimated value per share; or
•the methodology used to estimate our value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share does not take into account estimated disposition costs and fees for real estate properties that are not held for sale, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt. On December 21, 2022, we completed the sale of the Sunset & Gardner Joint Venture Property. Inclusion of the actual disposition price, net of transaction costs, instead of the appraised value of the property as of September 30, 2022, would have had no impact on the estimated value per share. We currently expect to utilize the Advisor and/or an independent valuation firm to update the estimated value per share in 2023, in accordance with the recommended IPA guidelines.
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Stockholder Information
As of March 13, 2023, we had 10,752,966 shares of our common stock outstanding held by a total of approximately 2,832 stockholders. The number of stockholders is based on the records of our transfer agent.
Distributions
In order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. Our board of directors regularly evaluates the amount and timing of distributions based on our operational cash needs.
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 determined to suspend the payment of any dividend for the quarter ending March 31, 2020, and to consider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as of December 31, 2022 and our board of directors does not anticipate paying regular distributions during 2023.
Share Redemption Program
Our board of directors has adopted a share redemption program that may enable our stockholders to sell their shares of common stock to us in limited circumstances (the “SRP”), subject to the significant restrictions and limitations of the program. From January 2013 until April 2015, the SRP was suspended with respect to all redemption requests. In April 2015 the SRP was reinstated solely with respect to shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder. Under the 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.
In order to preserve cash in response to the potential economic impact of COVID-19 on our operations, on April 21, 2020, the board of directors approved the suspension of the SRP, 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 requests 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. Resumption of the SRP will be communicated to our stockholders through the filing of a Current Report on Form 8-K or other public filing.
During the quarter ended December 31, 2022, we did not redeem any shares. We have not presented information regarding submitted and unfulfilled redemption requests for the quarter ended December 31, 2022, as our redemption program is suspended.
Use of Proceeds from Sales of Registered Securities and Unregistered Sales of Equity Securities
During the year ended December 31, 2022, we did not sell any equity securities that were not registered under the Securities Act of 1933.
ITEM 6. [Reserved]
ITEM 7. 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 this Annual Report. Also refer to “Forward Looking Statements” preceding Part I.
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.
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. As of December 31, 2022, our property portfolio included six retail properties, excluding a land parcel, comprising an aggregate of approximately 27,000 square feet of multi-tenant, commercial retail space located in California.
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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, 2023. 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.
Our focus in 2023 is exploring strategic alternatives available to us to provide liquidity to our stockholders. Although we have begun the process of exploring strategic alternatives, there is no assurance that this process will result in stockholder liquidity, or provide a return to stockholders that equals or exceeds our estimated value per share.
Market Outlook
Given the ongoing workforce shortages, global supply chain bottlenecks and shortages, recent macroeconomic trends, including inflation and rising interest rates, we continue to monitor and address risks related to the general state of the economy on our portfolio and retail tenants as well as any continued impact from the COVID-19 pandemic. As of December 31, 2022, all of our tenants have resumed paying rent and while we believe that the COVID-19 pandemic 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, we believe that the initial impacts from the pandemic to our portfolio and tenants have started to subside.
During the year ended December 31, 2022, inflation in the United States has accelerated and is currently expected to continue at an elevated level in the near-term. Rising inflation could have an adverse impact on our variable rate debt or the refinancing of our fixed rate debt, as well as general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue. In addition, our retail tenants may experience decreased revenue as a result of rising inflation and reduced consumer spending. The Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise. As a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate swaps or other protection agreements, such increases may result in higher debt service costs, which will adversely affect our cash flows.
Market Outlook - Real Estate and Real Estate Finance Markets
Data from the U.S. Department of Commerce showed total retail sales in 2022 increased 8.1% from 2021. Total e-commerce sales for 2022 were estimated at $1,034.1 billion, an increase of 7.7% from 2021. E-commerce sales in 2022 accounted for approximately 14.6% of total sales, which was approximately the same as 2021. Despite retreating from a 40-year record annual growth level of 9.1% in June to 7.1% near the end of the year, inflation had a profound impact on consumer sentiment, shopping behavior and bottom-line sales in 2022. According to a report from Jones Lang LaSalle, “climbing food and gas costs bifurcated consumer spending, causing most consumers to focus on necessities and away from discretionary goods during the year. And, while holiday sales increased 7.6% over 2021, the numbers are much tamer when accounting for elevated prices. Consumers are also shifting spending away from goods to services. Data from the Bureau of Economic Analysis shows a 3.5% year-over-year growth in real consumer spending on services in November. In contrast, real spending on durable and nondurable goods rose 0.6% and fell 1.5%, respectively.”
Jones Lang LaSalle also reported preliminary estimates showing single-asset and portfolio sales transaction volumes narrowly exceeded $70 billion across roughly 4,700 deals last year, a 7% increase over both 2021 and 2019. M&A activity saw a return to normalcy from 2021 with three significant entity-level transactions valued at $5.4 billion, down from the $14.3 billion in 2021.
Retail real estate lending markets remained difficult with retail being among the least favored property classes, and industrial and multifamily attracting more lender attention. As the Federal Reserve Bank continually increases benchmark interest rates to combat inflation, the cost to borrow money for real estate acquisitions continues to increase, thus threatening underlying values of the real estate.
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Jones Lang LaSalle reported retail net absorption reached its highest level in 5 years, which have broadly contributed to solid rent growth in most metro markets. That being noted, the San Francisco market in which the majority of our properties are located has suffered a 4.6% decline in retail rents from the fourth quarter of 2021 to the fourth quarter of 2022.
2022 Significant Events
Property Dispositions
On October 11, 2022, we consummated the disposition of the Wilshire Joint Venture Property, located in Santa Monica, California, for $16.5 million in cash, before customary closing and transaction costs.
On December 21, 2022, we consummated the disposition of the Sunset & Gardner Joint Venture Property, located in Hollywood, California, for $12.9 million in cash, before customary closing and transaction costs.
Loans Secured by Properties
On September 14, 2022, we entered into the Modification and Extension Agreement with ReadyCap Commercial, LLC to extend the maturity date of the construction loan related to the Wilshire Joint Venture Property for an additional six-month period under the same terms and conditions. The new maturity date was November 10, 2022. In connection with the disposition of the Wilshire Joint Venture Property, we repaid the construction loan from ReadyCap Commercial, LLC in the amount of $12.7 million, which loan was secured by a first Deed of Trust on the Wilshire Joint Venture Property.
Loans Secured by Properties Under Development
On September 7, 2022, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 8.6% per annum. The new maturity date is October 31, 2023. In connection with the disposition of the Sunset & Gardner Joint Venture Property, we repaid the loan from Sunset & Gardner loan in the amount of $8.7 million, which loan was secured by a first Deed of Trust on the Sunset & Gardner Joint Venture Property.
Review of our Policies
Our board of directors, including our independent directors, has reviewed our policies described in this Annual Report and determined that they are in the best interest of our stockholders because: (1) they increase the likelihood that we will be able to successfully maintain and manage our current portfolio of investments; (2) our executive officers, directors and affiliates of our Advisor have expertise with the type of properties in our current portfolio; and (3) the use of leverage has enabled us to acquire income producing assets, thereby increasing the likelihood of generating income for our stockholders.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies and estimates that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated 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 consolidated 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.
Revenue Recognition
Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
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•whether the tenant improvements are expected to have any residual value at the end of the lease term.
For leases with minimum scheduled rent increases, we recognize income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in reported revenue amounts which differ from those that are contractually due from tenants. If we determine that collectability of straight-line rents is not reasonably assured, we limit future recognition to amounts contractually owed and paid, and, when appropriate, establish an allowance for estimated losses.
We maintain an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We monitor the liquidity and creditworthiness of our tenants on an ongoing basis. For straight-line rent amounts, our assessment is based on amounts estimated to be recoverable over the term of the lease.
Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.
We apply the provisions of Accounting Standards Codification 610-20, Gains and Losses From the Derecognition of Nonfinancial Assets (“ASC 610-20”), for gains on sale of real estate, and recognize any gains at the time control of a property is transferred and when it is probable that substantially all of the related consideration will be collected.
We adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended by subsequent ASUs, effective January 1, 2019, utilizing the practical expedients described in ASU 2018-11. We elected the lessor practical expedient to not separate common area maintenance and reimbursement of real estate taxes from the associated lease for all existing and new leases as the timing and pattern of payments and associated lease payments are the same. The timing of revenue recognition remains the same for our existing leases and new leases. Revenues related to our leases continue to be reported on one line in the presentation within the statement of operations as a result of electing this lessor practical expedient. We continue to capitalize our direct leasing costs. These costs are incurred as a result of obtaining new leases, and renewing leases, and are paid to our Advisor. Additionally, we are not a lessee of real estate or equipment, as we are externally managed by our Advisor.
Investments in Real Estate
We evaluate our acquisitions in accordance with ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”) that clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions.
Beginning with January 1, 2017, acquisitions were determined to be asset acquisitions, as they did not meet the definition of a business.
Evaluation of business combination or asset acquisition:
We evaluate each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
• Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or
• The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e. revenue generated before and after the transaction).
An acquired process is considered substantive if:
• The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process;
• The process cannot be replaced without significant cost, effort, or delay; or
• The process is considered unique or scarce.
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Generally, we expect that acquisitions of real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets), or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
In asset acquisitions, the purchase consideration, including acquisition costs, is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
| Years | |||||
| Buildings and improvements | 5 - 30 years | ||||
| Tenant improvements | 1 - 15 years | ||||
Tenant improvement costs recorded as capital assets are depreciated over the tenant’s remaining lease term, which we determined approximates the useful life of the improvement. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized. Acquisition costs related to asset acquisitions are capitalized in the consolidated balance sheets.
Impairment of Long-lived Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets and liabilities, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures, property sales capitalization rates and expected holding period of the property.
We evaluate our equity investments for impairment in accordance with ASC Topic 320, Investments – Debt and Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss.
We recorded an impairment loss during the year ended December 31, 2022 of approximately $6.0 million related to the operating property and the development property we owned through joint ventures, which was included in our consolidated statement of operations in this Annual Report. For the operating property we recorded a $2.6 million non-cash impairment charge determined using purchase price per the disposition consummated on October 11, 2022, less costs to sell. The non-cash impairment related to the operating property was included in building and improvements in our consolidated balance sheets in this Annual Report. For the development property we recorded a $3.5 million non-cash impairment charge related to development costs. We recorded the non-cash impairment charge as a result of changes in cash flow estimates, which triggered the future estimated undiscounted cash flows to be lower than the net carrying value of the property. The decrease in cash flow projections was primarily due to an adverse change in legal factors including an expiration of entitlements resulting in higher costs to re-entitle the property and proposed zoning changes. Estimates were also impacted by the high inflationary environment, which we believe will result in higher costs to construct the property due to supply chain issues and higher building material costs. We recorded an impairment loss during the year ended December 31, 2021 of approximately $6.9 million related to the development project and the operating property we owned through joint ventures, which was included in our consolidated statement of operations in this Annual Report. Refer to Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for more information regarding the methodologies used to estimate fair value of the investments in real estate.
Assets Held for Sale
When certain criteria are met, long-lived assets are classified as held for sale and are reported at the lower of their carrying value or their fair value less costs to sell and are no longer depreciated. With the adoption of Accounting Standards Update No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment on April 30, 2014, only disposed properties that represent a strategic shift that has (or will have) a major effect on our operations and financial results are reported as discontinued operations.
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Fair Value Measurements
Under generally accepted accounting principles (“GAAP”), we are required to measure or disclose certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement.
When available, we utilize quoted market prices or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a non-binding quoted market price, observable inputs might not be relevant and could require us to use significant judgment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for an asset owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets; or (ii) a present value technique that considers the future cash flows based on contractual obligations discounted by an observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
We consider the following factors to be indicators of an inactive market (1) there are few recent transactions; (2) price quotations are not based on current information; (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets); (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability; (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with our estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability; (6) there is a wide bid-ask spread or significant increase in the bid-ask spread; (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities; and (8) little information is released publicly (for example, a principal-to-principal market).
We consider the following factors to be indicators of non-orderly transactions (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions; (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant; (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced); and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal results of operations as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any
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taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT. Even if we qualify as a REIT, we may be subject to certain state or local income taxes and to U.S. Federal income and excise taxes on our undistributed income.
We evaluate tax positions taken in the consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.
When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.
Our tax returns remain subject to examination and consequently, the taxability of our distributions is subject to change.
Portfolio Investments
As of December 31, 2022, our portfolio included six retail properties, excluding a land parcel, comprising an aggregate of approximately 27,000 square feet of single- and multi-tenant, commercial retail space located in California.
Results of Operations
As of December 31, 2022 and 2021, approximately 88% and 86% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately 5.8 years and 6.3 years, respectively. In 2022 there was one property disposition (the Wilshire Joint Venture property) and one disposition of a property in the pre-development stage (the Sunset & Gardner Joint Venture property). In 2021 there was one property disposition (Shops at Turkey Creek).
Leasing Information
There were two new leases added in our retail properties during the year ended December 31, 2022. The following table provides information regarding our leasing activity for the year ended December 31, 2022 for properties we held as of December 31, 2022.
| Total Vacant Rentable Sq. Feet at | Lease Terminations in 2022 | New Leases in 2022 | Lease Renewals in 2022 | Total Vacant Rentable Sq. Feet at | Tenant Retention Rate in | |||||||||||||||||||||||||||
| December 31, 2021 | (Sq. Feet) | (Sq. Feet) | (Sq. Feet) | December 31, 2022 | 2022 | |||||||||||||||||||||||||||
| 3,794 | 1,902 | 2,491 | — | 3,205 | n/a | |||||||||||||||||||||||||||
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Comparison of the year ended December 31, 2022, versus the year ended December 31, 2021.
The following table provides summary information about our results of operations for the years ended December 31, 2022 and 2021 (amounts in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| Rental revenue and reimbursements | $ | 2,787 | $ | 2,431 | $ | 356 | 14.6 | % | |||||||||||||||
| Operating and maintenance expenses | 1,689 | 2,082 | (393) | (18.9) | % | ||||||||||||||||||
| General and administrative expenses | 1,509 | 1,335 | 174 | 13.0 | % | ||||||||||||||||||
| Depreciation and amortization expenses | 1,098 | 1,373 | (275) | (20.0) | % | ||||||||||||||||||
| Interest expense | 2,418 | 1,265 | 1,153 | 91.1 | % | ||||||||||||||||||
| Loss on early lease termination | 190 | 648 | (458) | (70.7) | % | ||||||||||||||||||
| Loss on impairment of real estate | 6,035 | 6,897 | (862) | (12.5) | % | ||||||||||||||||||
| Operating loss | (10,152) | (11,169) | 1,017 | (9.1) | % | ||||||||||||||||||
| Other (loss) income, net | (1,610) | 422 | (2,032) | (481.5) | % | ||||||||||||||||||
| Net loss | $ | (11,762) | $ | (10,747) | $ | (1,015) | 9.4 | % | |||||||||||||||
Our results of operations for the year ended December 31, 2022, are not necessarily indicative of those expected in future periods.
Revenue
The increase in revenue during the year ended December 31, 2022, compared to the same period in 2021, was primarily due to the receipt of key money from a new tenant as part of new lease agreement at the 388 Fulton property and a new tenant having a full year of rent at the Silverlake property.
Operating and maintenance expenses
Operating and maintenance expenses decreased during the year ended December 31, 2022, compared to the same period in 2021, primarily due to lower bad debt reserves. Additional decrease due to the sale of Shops at Turkey Creek in the second quarter of 2021 and the sale of the Wilshire Joint Venture Property development on October 11, 2022.
General and administrative expenses
General and administrative expenses increased during the year ended December 31, 2022, compared to the same period in 2021, primarily due to higher legal and professional fees. This was partially offset by lower asset management fees.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased during the year ended December 31, 2022, compared to the same period in 2021, primarily due to the suspension of depreciation at the Wilshire Joint Venture Property due to the classification of the property as held for sale in the consolidated balance sheets as of June 30, 2022 and the disposition of the Wilshire Joint Venture Property on October 11, 2022.
Interest expense
Interest expense increased during the year ended December 31, 2022, compared to the same period in 2021, primarily due to draw downs on the unsecured loan from PUR Holdings Lender, LLC, an affiliate of the Advisor. Additional increase due to increase in the Secured Overnight Financing Rate resulting in a higher interest rate on the SRT Loan.
Loss on impairment of real estate
Loss on impairment during the year ended December 31, 2022, of approximately $2.6 million and $3.5 million, respectively, related to the Wilshire Joint Venture and the Sunset & Gardner Joint Venture.
Loss on impairment during the year ended December 31, 2021, of approximately $5.6 million and $1.3 million, respectively, related to the Wilshire Joint Venture and the Sunset & Gardner Joint Venture.
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Other (loss) income, net
Other loss, net for year ended December 31, 2022, consisted of losses on sale of the Wilshire Joint Venture Property and the Sunset & Gardner Joint Venture property of approximately $0.4 million and $1.2 million, respectively. Other income, net for the year ended December 31, 2021, consisted of a gain on sale of Shops at Turkey Creek of approximately $0.4 million.
Liquidity and Capital Resources
Our principal demand for funds is for the payment of operating expenses and interest on our outstanding indebtedness, as well as the payment of distributions to our stockholders. Prior to the termination of our initial public offering in February 2013 we used offering proceeds and debt financing to fund our acquisition activities and our other cash needs. Currently we have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from real estate investments is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures, all of which may be adversely affected by the general market conditions impacting commercial real estate and our tenants as discussed above.
As of December 31, 2022, our cash and cash equivalents were approximately $3.1 million and we had $0.4 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 December 31, 2022 and 2021, our borrowings were approximately 82.6% and 120.2%, respectively, of the value of our net assets.
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (amounts in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | $ Change | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | (2,833) | $ | (2,290) | $ | (543) | |||||||||||
| Investing activities | 26,472 | 1,220 | 25,252 | ||||||||||||||
| Financing activities | (22,575) | 855 | (23,430) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 1,064 | $ | (215) | |||||||||||||
Cash Flows from Operating Activities
The change in cash flows from operating activities was primarily due to lower provisions for losses on tenant receivables, lower depreciation and amortization expense and lower losses on early lease terminations due to fewer tenants terminating leases during the year ended December 31, 2022 as compared to the same period in 2021.
Cash Flows from Investing Activities
Cash flows provided by investing activities during the year ended December 31, 2022, primarily consisted of approximately $28.0 million in proceeds from the sales of the Wilshire Joint Venture Property and the Sunset & Gardner Joint Venture Property, partially offset by $0.8 million of additional investment in the Sunset & Gardner Joint Venture prior to sale.
Cash flows provided by investing activities during the year ended December 31, 2021 primarily consisted of approximately $3.8 million in proceeds from the sale of Shops at Turkey Creek, partially offset by $1.8 million of additional investment in the Sunset & Gardner Joint Venture.
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Cash Flows from Financing Activities
Cash flows used by financing activities during the year ended December 31, 2022, primarily consisted of repayments of $12.7 million, $8.7 million, and $3.0 million related to our Wilshire Construction Loan (as defined below), Sunset & Gardner Loan (as defined below), and Unsecured Loan (as defined below), respectively. Partially offset by proceeds of $2.0 million from the draw down on the Unsecured Loan from PUR Holdings Lender, LLC, an affiliate of the Advisor.
Cash flows provided by financing activities during the year ended December 31, 2021, primarily consisted of proceeds of $1.0 million from the draw down on the Unsecured Loan from PUR Holdings Lender, LLC, an affiliate of the Advisor. Partially offset by payment of financing costs related to the extension of the Sunset & Gardner loan and loan fees associated with Unsecured Loan.
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, debt refinancing and the sale of shares of our common stock. We may fund our short-term operating cash needs from operations, from the sales of properties and from debt.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for operating expenses, distributions to stockholders, redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs from our cash flow from operations, debt and sales of properties. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 8. “Notes Payable, Net” to our consolidated financial statements included in this Annual Report on Form 10-K 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 continued effects of the COVID-19 pandemic, the current economic slowdown, the rising interest rate environment and inflation (or the public perception that any of these events may continue). The full impact of these events on our rental revenue and, as a result, future cash from operations cannot be determined at present.
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 and debt obligations for at least the next twelve months and beyond. However, the fixed costs associated with managing a public REIT, including the significant cost of corporate compliance with all federal, state and local regulatory requirements applicable to us with respect to our business activities, are substantial. Such costs include, without limitation, the cost of preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports, documents and filings required under the Exchange Act, or other federal or state laws for the general maintenance of our status as a REIT, under the applicable provisions of the Code, or otherwise. Given the size of our portfolio of properties, these costs constitute a significant percentage of our gross income, reducing our net income and cash flow. Moreover, over the long term, if our cash flow from operations does not increase from current levels, whether through increased occupancy or rent rates, we may have to address a liquidity deficiency as our cash flow is not sufficient to cover our current operating expenses. These forward-looking statements are subject to a number of uncertainties, including with respect to the continuing impact of the COVID-19 pandemic, and the current economic environment and there can be no guarantee that we will be successful with our plan.
We are actively exploring options should cash flow from operations not sufficiently improve, including reviewing strategic alternatives available to us to provide liquidity to our stockholders.
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 was scheduled to mature 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. On January 18, 2023, the Company and the SRT Lender extended the maturity date of the SRT Loan for an additional twelve-month period under the same terms and conditions. The new maturity date is January 9, 2024. We have the right to prepay the SRT Loan in whole at
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any time or in part from time to time, 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.
As of December 31, 2022, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating Secured Overnight Financing Rate (“SOFR”) rate loan which bears interest at 30-day SOFR (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, 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”). The Wilshire Construction Loan had funding available up to a total of approximately $13.9 million, and an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. On September 14, 2022, the Company entered into the Modification and Extension Agreement with the Lender to extend the maturity date of the Wilshire Construction Loan for an additional six-month period under the same terms and conditions. The new maturity date was November 10, 2022. On October 11, 2022, the Company consummated the disposition of the Wilshire Joint Venture Property for $16.5 million in cash, before customary closing and transaction costs. In connection with the disposition of the Wilshire Joint Venture Property, the Company repaid the principal balance of the Wilshire Construction Loan in the amount of $12.7 million, which was secured by a first Deed of Trust on the Wilshire Joint Venture Property.
Loans Secured by Properties Under Development
On October 29, 2018, the Company entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan had a principal balance of approximately $8.7 million, and had an initial interest rate of 6.9% per annum. At each maturity date in October 2019, 2020, and 2021, in connection with an extension of the loan for an additional twelve-month period, the interest rate of the loan was changed to 6.5%, 7.3%, and 7.9%, respectively. On September 7, 2022, the Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, except an increase of the interest rate to 8.6% per annum. The new maturity date was October 31, 2023. The Sunset & Gardner Loan was secured by a first Deed of Trust on the Sunset & Gardner Property. In connection with the disposition of the Sunset & Gardner Joint Venture Property, we repaid the loan from Sunset & Gardner loan in the amount of $8.7 million.
Loan with Affiliate
On December 30, 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. 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. On March 15, 2022, we and PUR Holdings Lender, LLC, amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, from December 30, 2022 to June 30, 2023, if we provide PUR Holdings Lender, LLC, with notice, pay an extension fee, and no event of default has occurred. On August 2, 2022, PUR Holdings Lender, LLC agreed to an additional six month extension at the option of the Company to extend the maturity date until December 31, 2023. We declined both options to extend the maturity date of the Unsecured Loan. On December 23, 2022 the Company paid off the outstanding balance of $3.0 million.
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
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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 years ended December 31, 2022 and 2021, our total operating expenses did not exceed the 2%/25% Guidelines.
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.
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 regularly evaluates the amount and timing of distributions based on our operational cash needs.
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. Dividend payments were not reinstated as of December 31, 2022.
Funds From Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of a real estate company’s operating performance. The National Association of Real Estate Investment Trusts, or “NAREIT”, an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.
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.
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Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net loss to FFO is as follows (amounts in thousands, except shares and per share amounts):
| Year Ended December 31, | ||||||||||||||
| FFO | 2022 | 2021 | ||||||||||||
| Net loss | $ | (11,762) | $ | (10,747) | ||||||||||
| Adjustments: | ||||||||||||||
| Loss (gain) on disposal of assets | 1,610 | (422) | ||||||||||||
| Depreciation of real estate | 918 | 1,192 | ||||||||||||
| Amortization of in-place leases and leasing costs | 180 | 181 | ||||||||||||
| Loss on impairment of real estate | 6,035 | 6,897 | ||||||||||||
FFO attributable to common shares and Common Units (1) | $ | (3,019) | $ | (2,899) | ||||||||||
FFO per share and Common Unit (1) | $ | (0.28) | $ | (0.26) | ||||||||||
Weighted average common shares and units outstanding (1) | 10,957,289 | 10,957,204 | ||||||||||||
(1)Our common units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to common units in the computation of FFO and including the common units together with weighted average shares outstanding for the computation of FFO per share and common unit.
Related Party Transactions and Agreements
We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 12. “Related Party Transactions” to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Subsequent Events
On January 18, 2023, we extended the maturity date of the SRT Loan for an additional twelve-month period under the same terms and conditions. The new maturity date is January 9, 2024.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data can be found beginning on Page F-1 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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.
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Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. In connection with the preparation of this Annual Report, our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on its assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective.
This Annual Report does not include an attestation report, or any other report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC applicable to smaller reporting companies.
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 December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
As of the three months ended December 31, 2022, all items required to be disclosed under Form 8-K were reported under Form 8-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We expect to file a definitive Proxy Statement for our 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2023 Proxy Statement that specifically address the items required to be set forth herein are incorporated by reference.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that contains general guidelines for conducting our business and is designed to help directors, employees and independent consultants resolve ethical issues in an increasingly complex business environment. The Code of Ethics applies to all of our officers, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions and all members of our board of directors. The Code of Ethics covers topics including, but not limited to, conflicts of interest, record keeping and reporting, payments to foreign and U.S. government personnel and compliance with laws, rules and regulations. We will provide to any person without charge a copy of our Code of Ethics, including any amendments or waivers, upon written request delivered to our principal executive office at the address listed on the cover page of this Annual Report.
Audit Committee Financial Expert
The information required by this Item is incorporated by reference to the 2023 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the 2023 Proxy Statement.
42
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
1.The list of financial statements contained herein is set forth on page F-1 hereof.
2.Financial Statement Schedules -
a.Schedule III - Real Estate Operating Properties and Accumulated Depreciation is set forth beginning on page S-1 hereof.
b.All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
c.The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
ITEM 16. FORM 10-K SUMMARY
None.
43
Index to Consolidated Financial Statements
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Strategic Realty Trust, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Strategic Realty Trust, Inc., and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, equity, and cash flows for the years then ended, and the related notes and financial statement schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets
As described in Note 2 to the consolidated financial statements, the Company’s evaluation of investments in real estate, related intangible assets, and properties under development (collectively “real estate assets”) for impairment involves an assessment of each real estate asset to determine whether events or changes in circumstances exist that indicate that the carrying value of real estate assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate assets may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate assets, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate assets. As described in Note 4 to the consolidated financial statements, during 2022, as a result of its on-going impairment monitoring, the Company recognized loss on impairment of real estate of $6 million.
We identified the determination of impairment indicators and impairment assessment of investments in real estate assets as a critical audit matter. Auditing management’s impairment conclusions required us to evaluate management’s identification of impairment indicators relating to the real estate assets estimated holding periods, future undiscounted cash flows, and estimated fair values. There is significant judgment used by management when evaluating the real estate assets for potential impairment.
The primary procedures we performed to address this critical audit matter included:
F-2
•We evaluated management’s assessment of triggering events by testing their determination of undiscounted future cash flows expected to be generated by the real estate assets, which included evaluating the significant assumptions including:
◦Assessing the valuation and analysis for clerical accuracy
◦Evaluating management’s determination of the estimated holding period of the real estate assets by comparing previous holding periods and changes to the forecasted holding periods to management’s plan; discussing with accounting and operations management the Company’s intent to hold or sell the real estate assets, evaluating the consistency with audit procedures in other areas of the audit; and reading minutes of the board of directors’ meetings.
◦Comparing capitalization rates to rates published by third parties.
•For real estate assets where management has concluded the carrying value is not recoverable and for which a loss on impairment should be recognized, we evaluated management’s impairment measurement by testing their estimate of the estimated fair value of the specified real estate assets, which include evaluating the significant assumptions including:
◦Assessing the valuation and analysis for clerical accuracy
◦We used the work of internal fair value specialists in evaluating the significant assumptions relating to the estimated fair value of the identified real estate assets, including the key inputs such as projected rental rates, development costs, capitalization rates, considering past performance of the assets, comparing to market data, and whether the assumptions were consistent with evidence obtained in other areas of the audit.
◦If available, evaluating executed purchase agreements.
/s/ Moss Adams LLP
Campbell, California
March 17, 2023
We have served as the Company’s auditor since 2013.
F-3
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
| December 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Investments in real estate | |||||||||||
| Land | $ | 12,374 | $ | 25,400 | |||||||
| Building and improvements | 22,140 | 27,550 | |||||||||
| Tenant improvements | 947 | 1,753 | |||||||||
| 35,461 | 54,703 | ||||||||||
| Accumulated depreciation | (4,838) | (5,148) | |||||||||
| Investments in real estate, net | 30,623 | 49,555 | |||||||||
| Properties under development and development costs | |||||||||||
| Land | — | 12,958 | |||||||||
| Development costs | — | 3,189 | |||||||||
| Properties under development and development costs | — | 16,147 | |||||||||
| Cash, cash equivalents and restricted cash | 3,471 | 2,407 | |||||||||
| Prepaid expenses and other assets | 152 | 129 | |||||||||
Tenant receivables, net of $19 and $83 bad debt reserve | 841 | 844 | |||||||||
| Deferred leasing costs, net | 353 | 270 | |||||||||
| Lease intangibles, net | 308 | 500 | |||||||||
TOTAL ASSETS (1) | $ | 35,748 | $ | 69,852 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Notes payable, net | $ | 18,000 | $ | 39,780 | |||||||
| Accounts payable and accrued expenses | 285 | 731 | |||||||||
| Amounts due to affiliates | 37 | 63 | |||||||||
| Other liabilities | 172 | 240 | |||||||||
| Below-market lease liabilities, net | 108 | 130 | |||||||||
TOTAL LIABILITIES (1) | 18,602 | 40,944 | |||||||||
| 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; 10,752,966 shares issued and outstanding at December 31, 2022 and 2021 | 110 | 110 | |||||||||
| Additional paid-in capital | 94,644 | 94,644 | |||||||||
| Accumulated deficit | (77,852) | (66,307) | |||||||||
| Total stockholders’ equity | 16,902 | 28,447 | |||||||||
| Non-controlling interests | 244 | 461 | |||||||||
| TOTAL EQUITY | 17,146 | 28,908 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 35,748 | $ | 69,852 | |||||||
(1)As of December 31, 2022 and 2021, includes approximately $0.6 million and $34.8 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 $0.0 million and $21.5 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 consolidated financial statements.
F-4
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Rental and reimbursements | $ | 2,787 | $ | 2,431 | |||||||
| Expense: | |||||||||||
| Operating and maintenance | 1,689 | 2,082 | |||||||||
| General and administrative | 1,509 | 1,335 | |||||||||
| Depreciation and amortization | 1,098 | 1,373 | |||||||||
| Interest expense | 2,418 | 1,265 | |||||||||
| Loss on early lease termination | 190 | 648 | |||||||||
| Loss on impairment of real estate | 6,035 | 6,897 | |||||||||
| 12,939 | 13,600 | ||||||||||
| Operating loss | (10,152) | (11,169) | |||||||||
| Other income: | |||||||||||
| Net (loss) gain on disposal of real estate | (1,610) | 422 | |||||||||
| Net loss | (11,762) | (10,747) | |||||||||
| Net loss attributable to non-controlling interests | (217) | (211) | |||||||||
| Net loss attributable to common stockholders | $ | (11,545) | $ | (10,536) | |||||||
| Loss per common share - basic and diluted | $ | (1.07) | $ | (0.98) | |||||||
| Weighted average shares outstanding used to calculate loss per common share - basic and diluted | 10,752,966 | 10,740,882 | |||||||||
See accompanying notes to consolidated financial statements.
F-5
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except shares)
| 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 | ||||||||||||||||||||||||||||
| Conversion of OP units to common shares | 13,152 | — | 42 | — | 42 | (42) | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (10,536) | (10,536) | (211) | (10,747) | ||||||||||||||||||||||||||||||||||
| BALANCE — December 31, 2021 | 10,752,966 | 110 | 94,644 | (66,307) | 28,447 | 461 | 28,908 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (11,545) | (11,545) | (217) | (11,762) | ||||||||||||||||||||||||||||||||||
| BALANCE — December 31, 2022 | 10,752,966 | $ | 110 | $ | 94,644 | $ | (77,852) | $ | 16,902 | $ | 244 | $ | 17,146 | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-6
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (11,762) | $ | (10,747) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Net loss (gain) on disposal of real estate | 1,610 | (422) | |||||||||
| Loss on impairment of real estate | 6,035 | 6,897 | |||||||||
| Straight-line rent | (132) | (84) | |||||||||
| Amortization of deferred financing costs | 720 | 412 | |||||||||
| Depreciation and amortization | 1,098 | 1,373 | |||||||||
| Amortization of above and below-market leases | (21) | (21) | |||||||||
| Provision for losses on tenant receivable | 19 | 487 | |||||||||
| Loss on early lease termination | 190 | 648 | |||||||||
| Other | 42 | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Prepaid expenses and other assets | (23) | (23) | |||||||||
| Tenant receivables | 52 | (681) | |||||||||
| Accounts payable and accrued expenses | (567) | (288) | |||||||||
| Amounts due to affiliates | (26) | 52 | |||||||||
| Other liabilities | (68) | 107 | |||||||||
| Net cash used in operating activities | (2,833) | (2,290) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from the sale of real estate | 28,003 | 3,770 | |||||||||
| Investment in properties under development and development costs | (847) | (1,824) | |||||||||
| Improvements and capital expenditures | (408) | (458) | |||||||||
| Payments for leasing costs | (276) | (268) | |||||||||
| Net cash provided by investing activities | 26,472 | 1,220 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from notes payable from investments in consolidated variable interest entities | 152 | 49 | |||||||||
| Repayment of notes payable from investments in consolidated variable interest entities | (21,411) | — | |||||||||
| Loan proceeds from an affiliate | 2,000 | 1,000 | |||||||||
| Repayment of loan from an affiliate | (3,000) | — | |||||||||
| Payment of loan fees from investments in consolidated variable interest entities | (301) | (174) | |||||||||
| Payment of loan fees and financing costs from an affiliate | (15) | (20) | |||||||||
| Net cash (used in) provided by financing activities | (22,575) | 855 | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 1,064 | (215) | |||||||||
| Cash, cash equivalents and restricted cash – beginning of year | 2,407 | 2,622 | |||||||||
| Cash, cash equivalents and restricted cash – end of year | $ | 3,471 | $ | 2,407 | |||||||
| Supplemental disclosure of non-cash investing and financing activities and other cash flow information: | |||||||||||
| Change in accrued liabilities capitalized to investment in development | $ | 43 | $ | 16 | |||||||
| Change to accrued mortgage note payable interest capitalized to investment in development | (57) | 4 | |||||||||
| Amortization of deferred loan fees capitalized to investment in development | 87 | 174 | |||||||||
| Conversion of OP units to common shares | — | 42 | |||||||||
| Changes in capital improvements and leasing costs, accrued but not paid | 62 | 210 | |||||||||
| Cash paid for interest, net of amounts capitalized | 1,730 | 853 | |||||||||
See accompanying notes to consolidated financial statements.
F-7
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2022, 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 2023. The current term of the Advisory Agreement terminates on August 9, 2023. The advisor is an affiliate of PUR Management LLC (“PUR”), 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
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 December 31, 2022 and 2021, the Company owned 98.1%, respectively, of the limited partnership interests in the OP.
The Company’s principal demands for funds are currently the payment of operating expenses and the interest on outstanding indebtedness. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its 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 manages a portfolio of income-producing retail properties located in the California. As of December 31, 2022, 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 December 31, 2022, the rentable space at the Company’s retail properties was 88% leased.
The Company’s focus in 2023 is exploring strategic alternatives available to it to provide liquidity to its stockholders. Although the Company has begun the process of exploring strategic alternatives, there is no assurance that this process will result in stockholder liquidity, or provide a return to stockholders that equals or exceeds the estimated value per share of the Company.
F-8
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Liquidity
Given the ongoing workforce shortages, global supply chain bottlenecks and shortages, and high inflation, the Company continues to monitor and address risks related to the general state of the economy on the portfolio and the Company’s retail tenants as well as any continued impact from the COVID-19 pandemic. The Company believes that the actions taken to improve its financial position and maximize liquidity, including the suspension of distributions and the share redemption program, will continue to mitigate the impact to the Company’s cash flow caused by the current impact of inflation and rising interests rates and the general state of the economy on the Company’s portfolio and retail tenants.
The Company’s cash demands have primarily been funded by cash provided by property operations, debt financings and the sales of properties. The COVID-19 pandemic 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 December 31, 2022, the Company had approximately $3.1 million in cash and cash equivalents. In addition, the Company had approximately $0.4 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 is actively exploring options to provide additional liquidity, such as a sale of one or more assets that are not generating positive cash flow. On October 11, 2022, the Company consummated the disposition of the Wilshire Joint Venture Property for $16.5 million in cash, before customary closing and transaction costs, resulting in net cash proceeds of approximately $2.2 million. In connection with the disposition of the Wilshire Joint Venture Property, the Company repaid the Wilshire Construction Loan (as defined in Note 8) in the amount of $12.7 million, which was secured by a first Deed of Trust on the Wilshire Joint Venture Property. On December 21, 2022, the Company consummated the disposition of the Sunset & Gardner Joint Venture Property for $12.9 million in cash, before customary closing and transaction costs, resulting in net cash proceeds of approximately $3.7 million. In connection with the disposition of the Sunset & Gardner Joint Venture Property, the Company repaid the Sunset & Gardner Loan (as defined in Note 8) in the amount of $8.7 million, which was secured by a first Deed of Trust on the Sunset & Gardner Joint Venture Property.
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. We have exercised one extension option and the SRT Loan has one remaining extension option available, each with covenants and conditions and while there is no guarantee of meeting the covenants and conditions, management believes they would exercise the extension options, or refinance if needed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying 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 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 consolidated financial position, results of operations and cash flows have been included.
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of December 31, 2021, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 4. “Variable Interest Entities” for additional information.
Non-Controlling Interests
The Company’s non-controlling interests are comprised of common units in the OP (“Common Units”). The Company accounts for non-controlling interests in accordance with ASC 810. In accordance with ASC 810, the Company reports non-controlling interests in subsidiaries within equity in the consolidated financial statements, but separate from stockholders’ equity. Net income attributable to non-controlling interests is presented as a reduction from net income in calculating net income attributable to common stockholders on the consolidated statement of operations. Acquisitions or dispositions of non-
F-9
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
controlling interests that do not result in a change of control are accounted for as equity transactions. In addition, ASC 810 requires that a parent company recognize a gain or loss in the Company’s results of operations when a subsidiary is deconsolidated upon a change in control. In accordance with ASC 480-10, Distinguishing Liabilities from Equity, non-controlling interests that are determined to be redeemable are carried at their fair value or redemption value as of the balance sheet date and reported as liabilities or temporary equity depending on their terms. The Company periodically evaluates individual non-controlling interests for the ability to continue to recognize the non-controlling interest as permanent equity in the consolidated balance sheets. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as liabilities or temporary equity. All non-controlling interests at December 31, 2022 and 2021, qualified as permanent equity.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in the Company’s consolidated financial statements, and actual results could differ from the estimates or assumptions used by management. Additionally, other companies may utilize different estimates that may impact the comparability of the Company’s consolidated results of operations to those of companies in similar businesses. The Company considers significant estimates to include the carrying amounts and recoverability of investments in real estate, impairments, real estate acquisition purchase price allocations, allowance for doubtful accounts and straight-line rent receivable, estimated useful lives to determine depreciation and amortization and fair value determinations, among others.
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 consolidated balance sheets that sum to the total of the same such amounts shown on the consolidated statement of cash flows (amounts in thousands):
| December 31, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | 3,089 | $ | 1,833 | |||||||
| Restricted cash | 382 | 574 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 3,471 | $ | 2,407 | |||||||
Revenue Recognition
Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
•whether the tenant improvements are expected to have any residual value at the end of the lease.
F-10
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For leases with minimum scheduled rent increases, the Company recognizes income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue amounts which differ from those that are contractually due from tenants on a cash basis. If the Company determines the collectability of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed and paid, and, when appropriate, establishes an allowance for estimated losses.
The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants on an ongoing basis. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. The Company’s straight-line rent receivable, which is included in tenant receivables, net, on the consolidated balance sheets, was approximately $670 thousand and $538 thousand as of December 31, 2022 and 2021, respectively.
Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, insurance and CAM is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.
The Company has elected the lessor practical expedient to not separate common area maintenance and reimbursement of real estate taxes from the associated lease for all existing and new leases as the timing and pattern of payments and associated lease payments are the same. The timing of revenue recognition remains the same for the Company’s existing leases and new leases. Revenues related to the Company’s leases continue to be reported on one line in the presentation within the statement of operations as a result of electing this lessor practical expedient. The Company continues to capitalize its direct leasing costs. These costs are incurred as a result of obtaining new leases, and renewing leases, and are paid to the Company’s Advisor. Additionally, the Company is not a lessee of real estate or equipment, as it is externally managed by its Advisor.
Valuation of Accounts Receivable
The Company makes estimates of the collectability of its tenant receivables related to base rents, including deferred rents receivable, expense reimbursements and other revenue or income.
The Company analyzes tenant receivables, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Concentration of Credit Risk
A concentration of credit risk arises in the Company’s business when a tenant occupies a substantial amount of space in properties owned by the Company or accounts for a substantial amount of annual revenue. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to the Company, exposing the Company to potential losses in rental revenue, expense recoveries, and percentage rent. Generally, the Company does not obtain security deposits from the nationally-based or regionally-based tenants in support of their lease obligations to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk.
As of December 31, 2022, Intent to Dine, LLC, 450 Hayes Valley, LLC, La Conq, LLC each accounted for more than 10% of the Company’s annualized minimum rent. As of December 31, 2022, there were no amounts outstanding from Intent to Dine, LLC, or La Conq, LLC and the amounts outstanding from 450 Hayes Valley, LLC, were immaterial.
As of December 31, 2021,Intent to Dine, LLC, 450 Hayes Valley, LLC, and La Conq, LLC each accounted for more than 10% of the Company’s annualized minimum rent. As of December 31, 2021, there were no amounts outstanding from Intent to Dine, LLC, or La Conq, LLC and the amounts outstanding from 450 Hayes Valley, LLC, were immaterial.
Reportable Segments
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. The Company has one reportable segment, income-producing retail properties, which consists of activities related to investing in real estate. The retail properties are all located in California, and the Company evaluates operating performance on an overall portfolio level.
F-11
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investments in Real Estate
The Company applies the provisions of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”) to account for property acquisitions. ASU No. 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions.
Evaluation of business combination or asset acquisition:
The Company evaluates each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
•Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or
•The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e. revenue generated before and after the transaction).
An acquired process is considered substantive if:
•The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process;
•The process cannot be replaced without significant cost, effort, or delay; or
•The process is considered unique or scarce.
Generally, the Company expects that acquisitions of real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets), or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
In asset acquisitions, the purchase consideration, including acquisition costs, is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
| Years | |||||
| Buildings and improvements | 5 - 30 years | ||||
| Tenant improvements | 1 - 15 years | ||||
Tenant improvement costs recorded as capital assets are depreciated over the tenant’s remaining lease term, which the Company has determined approximates the useful life of the improvement. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized. Acquisition costs related to asset acquisitions are capitalized in the consolidated balance sheets.
Properties Under Development
The initial cost of properties under development includes the acquisition cost of the property, direct development costs and borrowing costs directly attributable to the development. Borrowing costs associated with direct expenditures on properties under development are capitalized. The amount of capitalized borrowing costs is determined by reference to borrowings specific to the project, where relevant. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. Practical completion is when the property is capable of operating in the manner intended by management. Capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. Capitalized costs are reduced by any profits from incidental operations.
Interest on projects is based on interest rates in place during the development period, and is capitalized until the project is ready for its intended use. The amount of interest capitalized including financing costs amortized during the years ended December 31, 2022 and 2021, was approximately $0.9 million and $1.6 million, respectively.
F-12
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Impairment of Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that the Company estimates in this analysis include projected rental rates, capital expenditures, property sale capitalization rates, and expected holding period of the property.
The Company evaluates its equity investments for impairment in accordance with ASC 320, Investments – Debt and Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss.
The Company continually monitors its properties under development for impairment. Estimates of future cash flows used to test the recoverability of properties under development are based on their expected service potential when development is substantially complete. Those estimates include cash flows associated with all future expenditures necessary to develop the properties under development, including interest payments that will be capitalized as part of the cost of the properties under development.
The Company recorded impairment losses during the years ended December 31, 2022 and 2021 of approximately $6.0 million and $6.9 million, respectively, related to the development project and the operating property, each disposed of in the fourth quarter of 2022.
Fair Value Measurements
Under GAAP, the Company is required to measure or disclose certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement.
When available, the Company utilizes quoted market prices or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to use significant judgment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for an asset owned by it to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and external appraisals) and establishes a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets; or (ii) a present value technique that considers the future cash flows based on contractual obligations discounted by observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
F-13
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company considers the following factors to be indicators of an inactive market: (1) there are few recent transactions; (2) price quotations are not based on current information; (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets); (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability; (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability; (6) there is a wide bid-ask spread or significant increase in the bid-ask spread; (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities; and (8) little information is released publicly (for example, a principal-to-principal market).
The Company considers the following factors to be indicators of non-orderly transactions: (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions; (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant; (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced); and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.
Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the straight-line method which approximates the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financings that do not close are expensed in the period in which it is determined that the financing will not close.
The Company presents deferred financing costs, net of accumulated amortization, as a contra-liability that reduces the carrying amount of the associated note payable, rather than as a deferred asset. Deferred financing costs related to a line-of-credit arrangement are presented on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT. Even if the Company qualifies as a REIT, it may be subject to certain state or local income taxes, and to U.S. federal income and excise taxes on its undistributed income.
The Company evaluates tax positions taken in the consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, the Company may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.
When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.
The Company’s tax returns remain subject to examination and consequently, the taxability of the distributions is subject to change.
F-14
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company accounts for non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
Reclassifications
Certain prior period amounts have been reclassified to conform with current period’s presentation. The reclassifications had no effect on the Company’s 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 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 did not have an impact on the Company’s 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 adoption of ASU 2020-04 did not have an impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 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 consolidated financial statements.
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 consolidated statement of operations.
Since the sale of Shops at Turkey Creek did not represent a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations was not reported as discontinued operations in the Company’s consolidated financial statements.
The following table represents the net operating income related to Shops at Turkey Creek, which is included in the Company’s consolidated statements of operations (amounts in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating income | $ | — | $ | 57 | |||||||
F-15
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. VARIABLE INTEREST ENTITIES
The Company had variable interests in, and was 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.
Sunset & Gardner Joint Venture
On January 7, 2016, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of Sunset & Gardner Investors, LLC (the “Sunset & Gardner Joint Venture Agreement”) to form a joint venture (the” Sunset & Gardner Joint Venture”) with Sunset & Gardner LA, LLC (“S&G LA” and, together with the Company, the “Sunset & Gardner Members”), a subsidiary of Cadence Capital Investments, LLC (“Cadence”).
The Sunset & Gardner Joint Venture Agreement provides for the ownership and operation of certain real property by the Sunset & Gardner Joint Venture, in which the Company owns a 100% capital interest and a 50% profits interest. In exchange for ownership in the Sunset & Gardner Joint Venture, the Company contributed cash in an amount of $5.3 million in initial capital contributions and has agreed to contribute a minimum of $0.7 million in subsequent capital contributions to the Sunset & Gardner Joint Venture. S&G LA contributed its rights to acquire the real property and agreed to provide certain management and development services.
On January 28, 2016, the Sunset & Gardner Joint Venture used the capital contributions of the Company, together with the proceeds of a loan in the amount of $10.7 million, to purchase property located at the corner of Sunset Boulevard and Gardner in Hollywood, California from a third party seller, for a total purchase price of approximately $13.0 million (“the Sunset & Gardner Joint Venture Property”).
Pursuant to the Sunset & Gardner Joint Venture Agreement, S&G LA manages and conducts the day-to-day operations and affairs of the Sunset & Gardner Joint Venture, subject to certain major decisions set forth in the Sunset & Gardner Joint Venture Agreement that require the consent of all the Sunset & Gardner Members. The Company has the power to direct the activities of the Sunset & Gardner Joint Venture through its approval process of the activities that most significantly impact the economic performance of the Sunset & Gardner Joint Venture. Such activities include the budgeting, leasing, financings, and ultimately, the sale of the property. Income, losses and distributions are generally allocated based on the Sunset & Gardner Members’ respective capital and profits interests. Through the Company’s commitment to contribute 100% of capital to develop and operate the property through the life of the Sunset & Gardner Joint Venture, the Company has an obligation to absorb losses of the Sunset & Gardner Joint Venture. Additionally, in certain circumstances described in the Sunset & Gardner Joint Venture Agreement, the Company may be required to make additional capital contributions to the Joint Venture, in proportion to the Sunset & Gardner Members’ respective ownership interests.
Until the Company receives back its capital contribution and specified preferred returns, all distributions go to the Company; thereafter, the Sunset & Gardner Joint Venture will distribute the profits 50% to the Company and 50% to S&G LA. Additionally, the Company has the ability to buy out S&G LA upon certain conditions per the Sunset & Gardner Joint Venture Agreement.
Through December 31, 2022, post the initial capital contributions, the Company made additional capital contributions totaling $9.5 million to the Sunset & Gardner Joint Venture.
On December 21, 2022, the Company consummated the disposition of the Sunset & Gardner Joint Venture Property, to an unaffiliated third party for $12.9 million in cash, before customary closing and transaction costs, resulting in net cash proceeds of approximately $3.7 million. The disposition of the Sunset & Gardner Joint Venture Property resulted in a loss of approximately $1.2 million, which was included in the Company’s consolidated statement of operations. In connection with the disposition of the Sunset & Gardner Joint Venture Property, the Company repaid the Sunset & Gardner Loan (as defined in Note 8) in the amount of $8.7 million, which was secured by a first deed of trust on the Sunset & Gardner Joint Venture Property.
Since the sale of the Sunset & Gardner Joint Venture 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 was not reported as discontinued operations in the Company’s consolidated financial statements.
F-16
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table represents the net operating loss related to the Sunset & Gardner Joint Venture Property, which is included in the Company’s consolidated statements of operations (amounts in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating loss | $ | (3,724) | $ | (484) | |||||||
3032 Wilshire Joint Venture
On December 21, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture Agreement”) to form a joint venture (the “Wilshire Joint Venture”) with 3032 Wilshire SM, LLC, a subsidiary of Cadence (together with the Company, the “Wilshire Members”).
On December 14, 2015, and January 5, 2016, the Company paid deposits in the amounts of $0.5 million and $0.1 million, respectively, toward the acquisition of certain property located at 3032 Wilshire Boulevard and 1210 Berkeley Street in Santa Monica, California (the “Wilshire Property”). On March 7, 2016, the Company contributed $5.7 million to the Wilshire Joint Venture. The Wilshire Joint Venture Agreement provides for the ownership and operation of certain real property by the Wilshire Joint Venture, in which the Company owns a 100% capital interest and a 50% profits interest.
On March 8, 2016, the Wilshire Joint Venture used the deposits and capital contribution of the Company, together with the proceeds of a loan in the amount of $8.5 million, to acquire the Wilshire Property from a third-party seller, for a total purchase price of $13.5 million.
Pursuant to the Wilshire Joint Venture Agreement, 3032 Wilshire SM, LLC manages and conducts the day-to-day operations and affairs of the Wilshire Joint Venture, subject to certain major decisions set forth in the Wilshire Joint Venture Agreement that require the consent of all the Wilshire Members. The Company has the power to direct the activities of the Wilshire Joint Venture through its approval process of the activities that most significantly impact the economic performance of the Wilshire Joint Venture. Such activities include the budgeting, leasing, financings, and ultimately, the sale of the property. Income, losses and distributions are generally allocated based on the Wilshire Members’ respective capital and profits interests. Through the Company’s commitment to contribute 100% of capital to develop and operate the property through the life of the Wilshire Joint Venture, the Company has an obligation to absorb losses of the Wilshire Joint Venture. Additionally, in certain circumstances described in the Wilshire Joint Venture Agreement, the Company may be required to make additional capital contributions to the Wilshire Joint Venture, in proportion to the Wilshire Members’ respective ownership interests.
Until the Company receives back its capital contribution and specified preferred returns, all distributions go to the Company; thereafter, the Wilshire Joint Venture will distribute the profits 50% to the Company and 50% to 3032 Wilshire SM, LLC. Additionally, the Company has the ability to buy out 3032 Wilshire SM, LLC upon certain conditions per the Operating Agreement.
During the year ended December 31, 2020, construction of the Wilshire Joint Venture Property was completed and the property was placed in service.
Through December 31, 2022, post the initial capital contributions, the Company made additional capital contributions totaling $10.5 million to the Wilshire Joint Venture.
On October 11, 2022, the Company consummated the disposition of the Wilshire Joint Venture Property for $16.5 million in cash, before customary closing and transaction costs, resulting in net cash proceeds of approximately $2.2 million. The disposition of the Wilshire Joint Venture Property resulted in a loss of approximately $0.5 million, which was included in the Company’s consolidated statement of operations. In connection with the disposition of the Wilshire Joint Venture Property, the Company repaid the construction loan from ReadyCap Commercial, LLC in the amount of $12.7 million, which loan was secured by a first deed of trust on the Wilshire Joint Venture Property.
Since the sale of the Wilshire Joint Venture 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 was not reported as discontinued operations in the Company’s consolidated financial statements.
F-17
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table represents the net operating loss related to the Wilshire Joint Venture Property, which is included in the Company’s consolidated statements of operations (amounts in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating (loss) income | $ | (3,942) | $ | (7,529) | |||||||
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 December 31, 2022 and 2021 (amounts in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Investments in real estate | |||||||||||
| Land | $ | — | $ | 13,026 | |||||||
| Building and improvements | — | 5,218 | |||||||||
| Tenant improvements | — | 467 | |||||||||
| — | 18,711 | ||||||||||
| Accumulated depreciation | — | (520) | |||||||||
| Investments in real estate, net | — | 18,191 | |||||||||
| Properties under development and development costs: | |||||||||||
| Land | — | 12,958 | |||||||||
| Development costs | — | 3,189 | |||||||||
| Properties under development and development costs | — | 16,147 | |||||||||
| Cash, cash equivalents and restricted cash | 531 | 371 | |||||||||
| Prepaid expenses and other assets, net | 19 | 13 | |||||||||
| Other receivables, net | 26 | 69 | |||||||||
| Lease intangibles, net | — | 29 | |||||||||
TOTAL ASSETS (1) | $ | 576 | $ | 34,820 | |||||||
| LIABILITIES | |||||||||||
Notes payable, net (2) | $ | — | $ | 21,063 | |||||||
| Accounts payable and accrued expenses | 31 | 347 | |||||||||
| Amounts due to affiliates | — | 4 | |||||||||
| Other liabilities | — | 71 | |||||||||
| TOTAL LIABILITIES | $ | 31 | $ | 21,485 | |||||||
(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 December 31, 2021, includes approximately $0.2 million of deferred financing costs, net, as a contra-liability.
F-18
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 31, 2022, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 9.4 years with a weighted-average remaining term (excluding options to extend) of approximately 5.8 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled approximately $0.1 million as of December 31, 2022 and 2021, respectively.
The following table presents the components of income from real estate operations for the year ended December 31, 2022 and 2021 (amounts in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Lease income - operating leases | $ | 2,120 | $ | 1,935 | |||||||
Variable lease income (1) | 667 | 496 | |||||||||
| Rental and reimbursements income | $ | 2,787 | $ | 2,431 | |||||||
(1)Primarily includes tenant reimbursements for real estate taxes, insurance, consideration based on sales, common area maintenance, utilities, marketing, and certain other items including negative variable lease income.
As of December 31, 2022, the future minimum rental income from the Company’s wholly-owned properties under non-cancelable operating leases was as follows (amounts in thousands):
| 2023 | $ | 1,830 | |||
| 2024 | 1,860 | ||||
| 2025 | 1,763 | ||||
| 2026 | 1,475 | ||||
| 2027 | 1,121 | ||||
| Thereafter | 4,720 | ||||
| Total | $ | 12,769 | |||
6. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of December 31, 2022 and 2021, the Company’s above-market lease intangibles, at-market lease intangibles and below-market lease liabilities were as follows (amounts in thousands):
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| At-Market Lease Intangibles | Above-Market Lease Intangibles | Below-Market Lease Liabilities | At-Market Lease Intangibles | Above-Market Lease Intangibles | Below-Market Lease Liabilities | ||||||||||||||||||
| Cost | $ | 765 | $ | — | $ | (247) | $ | 1,661 | $ | 82 | $ | (388) | |||||||||||
| Accumulated amortization | (457) | — | 139 | (1,176) | (67) | 258 | |||||||||||||||||
| Total | $ | 308 | $ | — | $ | (108) | $ | 485 | $ | 15 | $ | (130) | |||||||||||
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amortization of at-market lease intangible assets is recorded in depreciation and amortization expense and amortization of above-market rent and below-market rent is recorded as a reduction to and increase to rental and reimbursements, respectively, in the consolidated statements of operations. The Company’s amortization of above-market lease intangibles, at-market lease intangibles and below-market lease liabilities for the years ended December 31, 2022 and 2021, were as follows (amounts in thousands):
| Above-Market Lease Intangibles | At-Market Lease Intangibles | Below-Market Lease Liabilities | |||||||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| Amortization | $ | (1) | $ | (7) | $ | (80) | $ | (127) | $ | 22 | $ | 28 | |||||||||||||||||||||||
The scheduled future amortization of at-market lease intangibles and below-market lease liabilities as of December 31, 2022, was as follows (amounts in thousands):
| At-Market Lease Intangibles | Net Increase in Lease Revenues | ||||||||||
| 2023 | $ | 75 | $ | (23) | |||||||
| 2024 | 67 | (22) | |||||||||
| 2025 | 36 | (13) | |||||||||
| 2026 | 32 | (11) | |||||||||
| 2027 | 20 | (8) | |||||||||
| Thereafter | 78 | (31) | |||||||||
| Total | $ | 308 | $ | (108) | |||||||
7. DEFERRED LEASING COSTS, NET
Deferred leasing costs consist primarily of initial direct costs in connection with lease originations. We record amortization of deferred leasing costs on a straight-line basis over the terms of the related leases. As of December 31, 2022 and 2021, details of these deferred costs were as follows (amounts in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred leasing costs | $ | 440 | $ | 350 | |||||||
| Accumulated amortization | (87) | (80) | |||||||||
| Deferred leasing costs, net | $ | 353 | $ | 270 | |||||||
Amortization of deferred leasing costs is recorded in depreciation and amortization expense in the consolidated statements of operations. The Company’s deferred leasing costs amortization for the years ended December 31, 2022 and 2021, were as follows (amounts in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Amortization of deferred leasing costs | $ | (55) | $ | (36) | |||||||
8. 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 was scheduled to mature 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. On January 18, 2023, the Company and the SRT Lender extended the maturity date of the SRT Loan for an additional twelve-month period under the same terms and conditions. The new maturity date is January 9, 2024. The Company has the right to
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
prepay the SRT Loan in whole at any time or in part from time to time, 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.
As of December 31, 2022, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating Secured Overnight Financing Rate (“SOFR”) rate loan which bears interest at 30-day SOFR (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. Effective December 24, 2019, the Company entered into a derivative transaction with a financial institution with a notional amount of $18,000,000, representing an interest rate cap. The Company will receive a payment from the counterparty if the rate on SOFR exceeds 3.5%. The instrument is measured at fair value using readily observable market inputs, such as quotations on interest rates, and classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. The Company paid $17 thousand for the derivative and it matures on January 9, 2023. The impact of the interest rate cap is immaterial for all periods reported and is included as a component of interest expense in the consolidated statements of operations.
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 December 31, 2022, the Company was in compliance with the loan requirements in effect as of that date.
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”). The Wilshire Construction Loan had funding available up to a total of approximately $13.9 million, and an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. On September 14, 2022, the Company entered into the Modification and Extension Agreement with the Lender to extend the maturity date of the Wilshire Construction Loan for an additional six-month period under the same terms and conditions. The new maturity date was November 10, 2022. On October 11, 2022, the Company consummated the disposition of the Wilshire Joint Venture Property for $16.5 million in cash, before customary closing and transaction costs. In connection with the disposition of the Wilshire Joint Venture Property, the Company repaid the principal balance of the Wilshire Construction Loan in the amount of $12.7 million, which was secured by a first Deed of Trust on the Wilshire Joint Venture Property.
On October 29, 2018, the Company entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan had a principal balance of approximately $8.7 million, and had an initial interest rate of 6.9% per annum. At each maturity date in October 2019, 2020, and 2021, in connection with an extension of the loan for an additional twelve-month period, the interest rate of the loan was changed to 6.5%, 7.3%, and 7.9%, respectively. On September 7, 2022, the Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, except an increase of the interest rate to 8.6% per annum. The new maturity date was October 31, 2023. The Sunset & Gardner Loan was secured by a first Deed of Trust on the Sunset & Gardner Property. In connection with the disposition of the Sunset & Gardner Joint Venture Property, we repaid the loan from Sunset & Gardner loan in the amount of $8.7 million.
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of December 31, 2022 (amounts in thousands):
| 2023 | $ | 18,000 | |||
| Total future principal payments | 18,000 | ||||
| Notes payable, net | $ | 18,000 | |||
The following table sets forth interest costs incurred by the Company for the periods presented (amounts in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Expensed | |||||||||||
| Interest costs, net of amortization of deferred financing costs | $ | 1,698 | $ | 853 | |||||||
| Amortization of deferred financing costs | 720 | 412 | |||||||||
| Total interest expensed | $ | 2,418 | $ | 1,265 | |||||||
| Capitalized | |||||||||||
| Interest costs, net of amortization of deferred financing costs | $ | 779 | $ | 1,430 | |||||||
| Amortization of deferred financing costs | 87 | 174 | |||||||||
| Total interest capitalized | $ | 866 | $ | 1,604 | |||||||
As of December 31, 2022 and 2021, interest expense payable was approximately $0.1 million and $0.2 million, respectively, including an amount related to the variable interest entities of approximately $0.1 million as of December 31, 2021.
9. 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 December 31, 2022.
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.
For the year ended December 31, 2022, the Company recorded impairment losses of approximately $3.5 million and $2.6 million, respectively, related to the development property owned by the Sunset & Gardner Joint Venture and the Wilshire Joint Venture Property, respectively. For the development property owned by the Sunset & Gardner Joint Venture the impairment amount was determined using Level 3 measurements, including the properties undiscounted cash flow, which took into account the property’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition. For the Wilshire Joint Venture Property the impairment amount was determined using purchase price per the disposition consummated on October 11, 2022, less costs to sell.
For the year ended December 31, 2021, the Company recorded impairment losses of approximately $5.6 million and $1.3 million, respectively, related to the Wilshire Joint Venture Property and the development property owned by the Sunset & Gardner Joint Venture, respectively. The impairment amounts were determined 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 4.6%.
10. EQUITY
Common Stock
Under the Company’s Articles of Amendment and Restatement (the “Charter”), the Company has the authority to issue 400,000,000 shares of common stock. All shares of common stock have a par value of $0.01 per share.
On February 7, 2013, the Company terminated the Offering and ceased offering its securities. The Company sold 10,688,940 shares of common stock in its primary offering for gross operating proceeds of $104.7 million, 391,182 shares of
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
common stock under the distribution reinvestment plan (“DRIP”) for gross offering proceeds of $3.6 million, granted 50,000 shares of restricted stock and issued 273,729 common shares to pay a portion of a special distribution on November 4, 2015. Cumulatively, through December 31, 2022, pursuant to the Original Share Redemption Program and the Amended and Restated Share Redemption Program (the “SRP”), the Company has redeemed 878,458 shares for $6.2 million.
Common Units of the OP
On May 26, 2011, in connection with the acquisition of Pinehurst Square East, a retail property located in Bismarck, North Dakota, the OP issued 287,472 Common Units to certain of the sellers of Pinehurst Square East who elected to receive Common Units for an aggregate value of approximately $2.6 million, or $9.00 per Common Unit. On March 12, 2012, in connection with the acquisition of Turkey Creek, a retail property located in Knoxville, Tennessee, the OP issued 144,324 Common Units to certain of the sellers of Turkey Creek who elected to receive Common Units for an aggregate value of approximately $1.4 million, or $9.50 per Common Unit.
Pursuant to the Advisory Agreement, in April 2014 the Company caused the OP to issue to the Advisor a separate series of limited partnership interests of the OP in exchange for a capital contribution to the OP of $1 thousand (the “Special Units”). The terms of the Special Units entitle the Advisor to (i) 15% of the Company’s net sale proceeds upon disposition of its assets after the Company’s stockholders receive a return of their investment plus a 7% cumulative, non-compounded rate of return or (ii) an equivalent amount in the event that the Company lists its shares of common stock on a national securities exchange or upon certain terminations of the Advisory Agreement after the Company’s stockholders are deemed to have received a return of their investment plus a 7% cumulative, non-compounded rate of return. The holders of Common Units, other than the Company and the holder of the Special Units, generally have the right to cause the OP to redeem all or a portion of their Common Units for, at the Company’s sole discretion, shares of the Company’s common stock, cash or a combination of both. If the Company elects to redeem Common Units for shares of common stock, the Company will generally deliver one share of common stock for each Common Unit redeemed. Holders of Common Units, other than the Company and the holders of the Special Units, may exercise their redemption rights at any time after one year following the date of issuance of their Common Units; provided, however, that a holder of Common Units may not deliver more than two redemption notices in a single calendar year and may not exercise a redemption right for less than 1,000 Common Units, unless such holder holds less than 1,000 Common Units, in which case, it must exercise its redemption right for all of its Common Units.
Preferred Stock
The Charter authorizes the Company to issue 50,000,000 shares of $0.01 par value preferred stock. As of December 31, 2022 and 2021, no shares of preferred stock were issued and outstanding.
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.
In order to preserve cash in response to the potential economic impact of COVID-19 on the Company, the board of directors approved the suspension of the SRP 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. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be.
There were no share redemptions during the years ended December 31, 2022 and 2021.
Cumulatively, through December 31, 2022, 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.
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. The Company’s board of directors regularly evaluates the amount and timing of distributions based on the Company’s operational cash needs.
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In response to 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 determined to suspend the payment of any dividend for the quarter ending March 31, 2020, and to consider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as of December 31, 2022.
11. 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 years ended December 31, 2022 and 2021 (amounts in thousands, except shares and per share amounts):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator - basic and diluted | |||||||||||
| Net loss | $ | (11,762) | $ | (10,747) | |||||||
| Net loss attributable to non-controlling interests | (217) | (211) | |||||||||
| Net loss attributable to common shares | $ | (11,545) | $ | (10,536) | |||||||
| Denominator - basic and diluted | |||||||||||
| Basic weighted average common shares | 10,752,966 | 10,740,882 | |||||||||
Common Units (1) | — | — | |||||||||
| Diluted weighted average common shares | 10,752,966 | 10,740,882 | |||||||||
| Loss per common share - basic and diluted | |||||||||||
| Net loss attributable to common shares | $ | (1.07) | $ | (0.98) | |||||||
(1)For the years ended December 31, 2022 and 2021, the effect of 204,323 of 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.
12. 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, 2023. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services. On August 12, 2022, the Company, the OP, and the Advisor, entered into the Tenth Amendment to the Advisory Agreement (the “Tenth Amendment”). The Tenth Amendment renews the term of the Advisory Agreement for an additional twelve-month period, beginning on August 10, 2022 and amends certain provisions in the Advisory Agreement with respect to the payment of certain fees as follows. The disposition fee payable to the Advisor will be reduced by half in connection with the sale of certain properties held by the Company. The financing coordination fee payable to the Advisor was waived in connection with the refinancings of the Wilshire Joint Venture Property and Sunset & Gardner Joint Venture Property. The asset management fee payable to the Advisor for the twelve-month period commencing August 2022 through July 2023 will be reduced to $250,000 in the aggregate. In all other material respects, the terms of the Advisory Agreement remain unchanged.
The Company is party to property management agreements with respect to each of its properties pursuant to which PUR was engaged to serve as property manager. The property management agreements expire August 10, 2023 and will automatically renew every year, unless expressly terminated.
On December 30, 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. On March 15, 2022, the Company and PUR Holdings Lender, LLC, amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, from December 30, 2022 to June 30, 2023, if we provide PUR Holdings Lender, LLC, with notice, pay an extension fee, and no event of default has occurred. On August 2, 2022, PUR Holdings Lender, LLC agreed to an additional six month extension at
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the option of the Company to extend the maturity date until December 31, 2023. The Company declined both options to extend the maturity date of the Unsecured Loan. The Unsecured Loan is guaranteed by the Company. The Company paid $20 thousand in financing fees, at the close of the loan. On December 23, 2022 the Company paid off the outstanding balance of $3.0 million. Additionally the Company paid $154 thousand in accrued interest and an exit fee of $15 thousand.
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. 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 | ||||||||||||||||||||||
| Year Ended December 31, | December 31, | ||||||||||||||||||||||
| Expensed | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Legal leasing fees | $ | — | $ | 2 | $ | — | $ | — | |||||||||||||||
| Asset management fees | 440 | 589 | 21 | 48 | |||||||||||||||||||
| Reimbursement of operating expenses | 18 | 57 | — | — | |||||||||||||||||||
| Property management fees | 108 | 65 | 16 | 11 | |||||||||||||||||||
| Disposition fees | 137 | 50 | — | — | |||||||||||||||||||
| Total | $ | 703 | $ | 763 | $ | 37 | $ | 59 | |||||||||||||||
| Capitalized | |||||||||||||||||||||||
| Acquisition fees | $ | — | $ | 11 | $ | — | $ | 4 | |||||||||||||||
| Leasing fees | — | 52 | — | — | |||||||||||||||||||
| Legal leasing fees | — | 10 | — | — | |||||||||||||||||||
| Construction management fees | — | 35 | — | — | |||||||||||||||||||
| Financing coordination fees | — | 87 | — | — | |||||||||||||||||||
| Total | $ | — | $ | 195 | $ | — | $ | 4 | |||||||||||||||
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.
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. The Tenth Amendment amended the asset management fee payable to the Advisor for the twelve-month period commencing August 2022 through July 2023 to $250,000 in the aggregate.
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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
For the years ended December 31, 2022 and 2021, 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. Pursuant to the Tenth Amendment the disposition fee payable to the Advisor was reduced by half in connection with the sale of the Wilshire Joint Venture Property and with the sale of the Sunset & Gardner Joint Venture Property.
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.
13. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions
F-26
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
14. SUBSEQUENT EVENTS
On January 18, 2023, the Company and the SRT Lender extended the maturity date of the SRT Loan for an additional twelve-month period under the same terms and conditions. The new maturity date is January 9, 2024.
F-27
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III — REAL ESTATE OPERATING PROPERTIES AND ACCUMULATED DEPRECIATION
December 31, 2021
| (amounts in thousands) | Initial Cost to Company | Cost Capitalized Subsequent to Acquisition(1) | Gross Amount of Which Carried at Close of Period | Life on which Depreciation in Latest Statement of Operations is Computed(3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Encumbrances | Land | Building & Improvements | Land | Building & Improvements | Total (2) | Accumulated Depreciation | Acquisition Date | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Topaz Marketplace | $ | — | $ | 2,120 | $ | 10,724 | $ | (12,590) | $ | 254 | $ | — | $ | 254 | $ | — | 9/23/2011 | n/a | |||||||||||||||||||||||||||||||||||||||||
| 400 Grove Street | 1,450 | 1,009 | 1,813 | — | 1,009 | 1,813 | 2,822 | (393) | 6/14/2016 | 5-30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 8 Octavia Street | 1,500 | 728 | 1,847 | 801 | 728 | 2,648 | 3,376 | (520) | 6/14/2016 | 5-30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fulton Shops | 2,200 | 1,187 | 3,254 | (49) | 1,187 | 3,205 | 4,392 | (681) | 7/27/2016 | 5-30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 450 Hayes | 3,650 | 2,324 | 5,009 | 303 | 2,324 | 5,312 | 7,636 | (1,120) | 12/22/2016 | 5-30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 388 Fulton | 2,300 | 1,109 | 2,943 | 105 | 1,112 | 3,045 | 4,157 | (649) | 01/04/2017 | 5-30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Silver Lake | 6,900 | 5,747 | 6,646 | 431 | 5,760 | 7,064 | 12,824 | (1,475) | 01/11/2017 | 5-30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 18,000 | $ | 14,224 | $ | 32,236 | $ | (10,999) | $ | 12,374 | $ | 23,087 | $ | 35,461 | $ | (4,838) | |||||||||||||||||||||||||||||||||||||||||||
(1)The cost capitalized subsequent to acquisition may include negative balances resulting from the write-off and impairment of real estate assets, and parcel sales.
(2)The aggregate net tax basis of land and buildings for federal income tax purposes is $34.9 million.
(3)Buildings and building improvements are depreciated over their useful lives as shown. Tenant improvements are amortized over the life of the related lease, which with our current portfolio can vary from 1 year to over 15 years.
| (in thousands) | Year Ended December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Real Estate: | ||||||||||||||
| Balance at the beginning of the year | $ | 54,703 | $ | 59,764 | ||||||||||
| Improvements | 469 | 668 | ||||||||||||
| Dispositions | (17,159) | (101) | ||||||||||||
| Impairments | (2,552) | (5,628) | ||||||||||||
| Balance at the end of the year | $ | 35,461 | $ | 54,703 | ||||||||||
| Accumulated Depreciation: | ||||||||||||||
| Balance at the beginning of the year | $ | 5,148 | $ | 3,797 | ||||||||||
| Depreciation expense | 963 | 1,452 | ||||||||||||
| Dispositions | (1,273) | (101) | ||||||||||||
| Balance at the end of the year | $ | 4,838 | $ | 5,148 | ||||||||||
See accompanying report of independent registered public accounting firm.
S-1
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 March 17, 2023.
| Strategic Realty Trust, Inc. | ||||||||
| By: | /s/ Matthew Schreiber | |||||||
| Matthew Schreiber | ||||||||
| Chief Executive Officer and Director (Principal Executive Officer) | ||||||||
| By: | /s/ Ryan Hess | |||||||
| Ryan Hess | ||||||||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title(s) | Date | ||||||||||||
| /s/ Todd A. Spitzer | Chairman of the Board | March 17, 2023 | ||||||||||||
| Todd A. Spitzer | ||||||||||||||
| /s/ Matthew Schreiber | Chief Executive Officer and Director (Principal Executive Officer) | March 17, 2023 | ||||||||||||
| Matthew Schreiber | ||||||||||||||
| /s/ Ryan Hess | Chief Financial Officer (Principal Financial and Accounting Officer) | March 17, 2023 | ||||||||||||
| Ryan Hess | ||||||||||||||
| /s/ Phillip I. Levin | Director | March 17, 2023 | ||||||||||||
| Phillip I. Levin | ||||||||||||||
| /s/ Jeffrey S. Rogers | Director | March 17, 2023 | ||||||||||||
| Jeffrey S. Rogers | ||||||||||||||
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2022 (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 August 1, 2022 | 10-Q | 11/14/2022 | ||||||||||||||||||||||||
| Lease Agreement with La Conq, LLC | 10-K | 3/26/2021 | ||||||||||||||||||||||||
| Lease Agreement with Intent to Dine, LLC | 10-K | 3/25/2022 | ||||||||||||||||||||||||
| Lease Agreement with 450 Hayes Valley, LLC | 10-K | 3/25/2022 | ||||||||||||||||||||||||
| Loan Modification and Extension Agreement between 3032 Wilshire Investors LLC and ReadyCap Commercial, LLC, dated September 14, 2022 | 10-Q | 11/14/2022 | ||||||||||||||||||||||||
| Purchase and Sale Agreement as amended for Wilshire Joint Venture Property | 10-Q | 11/14/2022 | ||||||||||||||||||||||||
| Tenth Amendment to the Advisory Agreement, dated August 15, 2022 | 10-Q | 11/14/2022 | ||||||||||||||||||||||||
| Purchase and Sale Agreement for Sunset & Gardner Joint Venture Property | X | |||||||||||||||||||||||||
| Limited Partnership Agreement of Strategic Realty Operating Partnership, L.P. | 10-Q | 05/14/2021 | ||||||||||||||||||||||||
| Loan Agreement between SRT SF Retail I, LLC and SRT LA Retail, LLC and PFP Holding Company VI, LLC, dated December 24, 2019 | 10-K | 03/18/2020 | ||||||||||||||||||||||||
| Promissory Note with PFP Holding Company VI, LLC, dated December 24, 2019 | 10-K | 03/18/2020 | ||||||||||||||||||||||||
| Advisory Agreement, dated August 10, 2013, by and among TNP Strategic Retail Trust, Inc., TNP Strategic Retail Operating Partnership, LP, and SRT Advisor, LLC | 10-Q | 08/14/2013 | ||||||||||||||||||||||||
| Subsidiaries of the Company | 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 | |||||||||||||||||||||||||
S-3
| 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) | |||||||||||||||||||||||||
S-4