| | | | | | | | | | | Asset Management Fees
Under the Tenth Amendment and the Eleventh Amendment the asset management fee payable to the Advisor in each of the twelve-month periods commencing August 2022 through July 2023 and August 2023 through July 2024 is $250,000 in the aggregate.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 % of a customary and competitive real estate commission, but not to exceed % 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 certain properties held by the Company during the renewed term of the agreement (August 2022 through August 2023).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto.
As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.
Special Note Regarding Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning our ability to implement the Plan of Liquidation, other plans and objectives of management for future operations, or assumptions or forecasts related thereto, including with respect to a Plan of Liquidation 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:
•Although our board of directors and stockholders have approved the sale of all of our assets and our dissolution pursuant to the terms of a plan of complete liquidation and dissolution (the “Plan of Liquidation”), we can give no assurance whether we will be able to successfully implement the Plan of Liquidation and sell our assets, pay our debts and distribute the net proceeds from liquidation to our stockholders in the amount or on the timeline as we expect.
•The combination of the continued economic slowdown, rising interest rates and significant inflation as well as a lack of lending activity in the debt markets have contributed to considerable weakness in the commercial real estate markets. These ongoing challenges continue to be one of the most significant risks and uncertainties we face in connection with the implementation of the Plan of Liquidation.
•We can give no assurance regarding the timing of asset dispositions and the sale prices we will receive for assets and the amount and timing of liquidating distributions to be received by our stockholders. If the sales price of our assets is less than estimated or if we underestimated our existing obligations and liabilities or if unanticipated or contingent liabilities arise,including with respect to debt service or interest expense related to the SRT Loan, the amount of liquidating distributions ultimately paid to our stockholders could be less than estimated.
•We are currently in maturity default for failure to pay the amount of the debt outstanding and due to the lender on the January 9, 2024 maturity date for the SRT Loan that is secured by all of our operating real estate assets. Although we are in discussions with the lender to modify the loan to bring it back in good standing while we complete our liquidation activities, no assurances can be provided that we will successfully execute an agreement with the lender to extend the loan. Further, we expect that any extension of the SRT Loan would be on terms and conditions less favorable to us than previously negotiated. As a result of the default, the lender could foreclose on all of our operating properties which secure the loan in satisfaction of the debt. A sale of our assets by the lender may not result in maximum proceeds to us and would adversely impact the amount of our liquidating distributions as the lender is only motivated to receive a purchase price sufficient to satisfy the amount of the debt outstanding, and we believe the value of the collateral to be in excess of the amount of the debt. In addition, as a result of the default, we are required to pay an increased debt service payment due to the default interest rate in effect of 5% above the rate that would otherwise be in effect (30-day SOFR, plus 2.8%) and we will be required to pay various fees to the lender in connection with securing an extension on our debt obligation. The maturity default and the related adverse impacts to us could have an adverse effect on our implementation of the Plan of Liquidation and the amount of and timing of liquidating distributions to be received by our stockholders.
•We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and adversely affect liquidating distributions to our stockholders. Specifically, as a result of a significant tenant’s failure to pay rent due to us, we were unable to meet the financial covenants required to extend the term of our outstanding debt obligation and are in maturity default on the SRT Loan as described above.
•All our assets are concentrated in California, and in particular Los Angeles and San Francisco, 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 could adversely affect our operating results and the amount of any liquidating distributions to our stockholders.
•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.
•Our outstanding debt obligation has a variable interest rate with interest and related payments that vary with the movement of SOFR. Increases in SOFR would increase the amount of our debt payments.
All forward-looking statements should be read in light of the risks identified herein. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.
Overview
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. As of March 31, 2024, our 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.
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 2023. The current term of the Advisory Agreement terminates on August 9, 2024. As of April 2021, the Advisor is an affiliate of L3 Capital, LLC, 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.
Our sole purpose is to wind up our affairs and the liquidation of our assets with no objective to continue or to engage in the conduct of a trade or business, except as necessary for the orderly liquidation of our assets.
Plan of Liquidation
On May 12, 2023, our board of directors unanimously approved the sale of all of our assets and our dissolution pursuant to the terms of the Plan of Liquidation. The principal purpose of the Plan of Liquidation is to maximize stockholder value by selling our assets, paying our debts and distributing the net proceeds from liquidation to our stockholders. On August 23, 2023 our stockholders approved the Plan of Liquidation.
In accordance with the Plan of Liquidation, our objectives are to pursue an orderly liquidation of our company by selling all of our assets, paying our debts and our known liabilities, providing for the payment of unknown or contingent liabilities, distributing the net proceeds from liquidation to our stockholders and winding up our operations and dissolving our company. For more information, see the Plan of Liquidation, which is included as an exhibit to this Quarterly Report on Form 10-Q.
Our expectations about the implementation of the Plan of Liquidation and the amount of any liquidating distributions that we pay to our stockholders and when we will pay them are subject to risks and uncertainties and are based on certain estimates and assumptions, one or more of which may prove to be incorrect. As a result, the actual amount of any liquidating distributions that we pay to our stockholders may be more or less than our estimate and the liquidating distributions may be paid later than
we predict. There are many factors that may affect the amount of liquidating distributions we will ultimately pay to our stockholders. If we underestimated our existing obligations and liabilities or the amount of taxes, transaction fees and expenses relating to the liquidation and dissolution, or if unanticipated or contingent liabilities arise, including with respect to debt service or interest expense related to the SRT Loan, the amount of liquidating distributions ultimately paid to our stockholders could be less than estimated. Moreover, the liquidation value will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets, in response to the real estate and finance markets, based on the amount of net proceeds received from the disposition of our remaining assets and due to other factors. Accordingly, it is not possible to precisely predict the timing of any liquidating distributions we pay to our stockholders or the aggregate amount of liquidating distributions that we will ultimately pay to our stockholders. See “Special Note Regarding Forward-Looking Statements” for additional discussion of the risks associated with our implementation of the Plan of Liquidation.
As a result of the approval of the Plan of Liquidation by our stockholders in August 2023, we adopted the liquidation basis of accounting as of July 1, 2023, as described further in Note 3,“Summary of Significant Accounting Policies - Principles of Consolidation and Basis of Presentation.”
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 and the impact on our ability to implement the Plan of Liquidation.
Since early 2022, inflation in the United States accelerated and, while moderating compared to year-over-year increases in 2021 and 2022, may continue at a relatively elevated level in the near-term. Rising inflation could have an adverse impact on our variable 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 raised interest rates to combat inflation and restore price stability and rates may continue to rise. As a result, such increases may result in higher debt service costs, which will adversely affect our cash flows. In addition, the rising interest rates have resulted in a lack of lending activity in the debt markets which may impact the ability of buyers for our properties to obtain favorable financing. Further, historically, during periods of increasing interest rates, real estate valuations have generally decreased due to rising capitalization rates, which tend to move directionally with interest rates. Consequently, prolonged periods of higher interest rates may negatively impact the valuation of our real estate assets and the amount of liquidating distributions we pay to our stockholders. Although the extent of any prolonged periods of higher interest rates remains unknown at this time, negative impacts to our cost of capital and the cost of capital to any prospective buyers of our properties may adversely affect our ability to implement the Plan of Liquidation.
Results of Operations
In light of the adoption of liquidation basis accounting as of July 1, 2023 and our liquidation pursuant to the Plan of Liquidation, the results of operations for the current year period are not comparable to the prior year period. The sale of assets under the Plan of Liquidation will have a significant impact on our operations. See “— Overview — Plan of Liquidation”.
Changes in Net Assets in Liquidation
For the Three Months Ended March 31, 2024
Net assets in liquidation decreased by approximately 0.9 million from approximately $5.2 million on December 31, 2023 to approximately $4.3 million on March 31, 2024. The primary reason for the decrease in net assets in liquidation was due to a net decrease in the projected sale price of the properties in San Francisco. There is inherent uncertainty with these estimates and projections, and they could change materially based on the timing of the sales of our remaining real estate properties, the performance of our remaining assets and any changes in the underlying assumptions of the projected cash flows from such properties.
Liquidity and Capital Resources
As described above under “—Overview – Plan of Liquidation,” our board of directors and our stockholders have approved the sale of all of our assets and our dissolution pursuant to the terms of the Plan of Liquidation. We expect to sell all of our assets, pay all of our known liabilities, provide for unknown liabilities and distribute the net proceeds from liquidation to our stockholders. We expect our principal demands for funds during the short and long-term are and will be for the payment of operating expenses, interest payments on our outstanding indebtedness, general and administrative expenses, including expenses in connection with the Plan of Liquidation, and payments of distributions to stockholders pursuant to the Plan of Liquidation. We expect to use our cash on hand and net sales proceeds from the sale of our assets as our primary source of
liquidity. To the extent available, we also intend to use cash flow generated by our real estate investments; however, asset sales will further reduce cash flow from these sources.
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 collectability 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. In particular, our significant tenant, Intent to Dine, LLC, has stopped paying rent under its lease, which has adversely affected our cash flow from operations. While we intend to pursue all remedies available to us with respect to collecting amounts outstanding and owed to us under the lease, we can provide no assurances that we will be successful in recovering amounts owed or securing a new tenant. If we are unable to address the reduced rental revenue caused by these events, our access to capital and ability to fund our liquidity needs will be adversely affected due to our decreased cash from operations and potential inability to satisfy financial covenants established by lenders.
Due to our decreased cash flow from operations, caused in significant part by our significant tenant’s failure to pay rent owed to us, we did not satisfy the financial covenants necessary to exercise our one-year extension option for the SRT Loan on its January 9, 2024 maturity date, and we are in maturity default with respect to the loan for failure to pay the amount outstanding and due. As a result of the default we are paying increased debt service due to the default interest rate in effect of 5% above the rate that would otherwise be in effect (30-day SOFR, plus 2.8%),which we expect to adversely impact our ability to fund our short-term liquidity needs. We are in discussions with the lender to modify the terms of the SRT Loan and secure an extension of the maturity date; however, we can provide no assurances we will be successful in modifying the SRT Loan. Further, we expect that any extension of the SRT Loan would be on terms and conditions less favorable to us than previously negotiated, including a potential requirement for cash flow sweeps at our properties, and we would be required to pay various fees to the lender in connection with securing any extension of the loan. These events would adversely impact our ability to fund our short-term liquidity needs.
In addition, the SRT Loan is secured by all of our retail properties and as a result of the default, the lender could foreclose on all of our operating properties which secure the loan in satisfaction of the debt and our access to cash flows from the properties would be limited. In addition, a sale of our assets by the lender may not result in maximum proceeds to us and would adversely impact the amount of our liquidating distributions as the lender is only motivated to receive a purchase price sufficient to satisfy the amount of the debt outstanding, and we believe the value of the collateral to be in excess of the amount of the debt. The maturity default and the related adverse impacts to us could have an adverse effect on our liquidity as well s the implementation of the Plan of Liquidation and the amount of and timing of liquidating distributions to be received by our stockholders.
As of March 31, 2024, our cash and cash equivalents were approximately $0.8 million and we had $0.5 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).
Subject to our ability to agree to an extension with respect to the SRT Loan, we believe that our cash on hand, along with other potential sources of liquidity that we may be able to obtain, will be sufficient to fund our working capital needs and debt obligations through the completion of the Plan of Liquidation. We note, however, that with our limited amount of cash on hand, our ability to make a loan paydown, without the sale of real estate assets, is severely limited. The properties securing the SRT Loan are being marketed for sale in connection with the implementation of the Plan of Liquidation and any net sales proceeds would be due to the lender until the debt is satisfied. 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. However, as discussed, the lender on the SRT Loan could take control of our properties pursuant to foreclosure proceedings as a result of the maturity default on the SRT Loan. Such an event would materially impact our ability to fund our working capital needs as we would no longer have access to the cash flows from the properties.
In addition, 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 cash flow. Moreover, over the long term, if we are unsuccessful in implementing the Plan of Liquidation and our cash flow from operations does not increase from current levels, whether through increased occupancy or rent rates, we will
have to address a liquidity deficiency as our cash flow is not sufficient to cover our current operating expenses over the long term. These forward-looking statements are subject to a number of uncertainties, including with respect to the current economic environment and there can be no guarantee that we will be successful with our plan.
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 all of our remaining operating assets - 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 matured on January 9, 2024, without extension pursuant to its terms as a result of the Company’s failure to satisfy the necessary financial covenants for a one-year extension..
We are currently in maturity default for failure to pay the amount of the debt outstanding and due to the SRT Lender on the January 9, 2024 maturity date. Although we are in discussions with the SRT Lender to extend the term of the SRT Loan while we complete our liquidation activities, no assurances can be provided that we will successfully extend the term of the SRT Loan. As a result of the default, we are required to pay an increased debt service payment due to the default interest rate in effect of 5% above the rate that would otherwise be in effect (30-day SOFR, plus 2.8%) and will be required to pay various fees to the lender in connection with securing an extension on our debt obligation. In addition, the SRT Lender could foreclose on the properties that secure the loan in satisfaction of the debt. These events could have an adverse effect on our implementation of the Plan of Liquidation and the amount of and timing of liquidating distributions to be received by our stockholders.
The properties securing the SRT Loan are being marketed for sale in connection with the implementation of the Plan of Liquidation and any net sales proceeds would be due to the lender until the debt is satisfied. Individual properties could 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 March 31, 2024, 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%. Monthly payments were interest-only with the entire principal balance and all outstanding interest due at maturity. As of March 31, 2024, interest expense payable was $0.4 million and default interest payable was $0.2 million.
Pursuant to the SRT Loan, we were required to 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. As of March 31, 2024, we were not in compliance with the loan requirements and were in maturity default as discussed above.
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.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors.
Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly Distributions
In accordance with the Plan of Liquidation, our objectives are to pursue an orderly liquidation of our company by selling or otherwise disposing of our remaining assets, paying or otherwise settling our debts and our known liabilities, providing for the payment of unknown or contingent liabilities, distributing the net proceeds from liquidation to our stockholders and winding up our operations and dissolving our company. We may pay multiple, or a single, liquidating distribution(s) to our stockholders during the liquidation process. We will pay the final liquidating distribution after we sell all of our assets, pay or provide for all of our known liabilities and provide for unknown liabilities. We expect to complete these activities within 24 months of August 23, 2023, the day we received stockholder approval of the Plan of Liquidation. A final liquidating distribution to our stockholders may not be paid until all of our liabilities have been satisfied.
Our expectations about the amount of liquidating distributions that we will pay and when we will pay them are based on many estimates and assumptions, one or more of which may prove to be incorrect. As a result, the actual amount of liquidating distributions we pay to our stockholders may be more or less than we estimate and the liquidating distributions may be paid later than we predict. We do not expect to pay regular monthly distributions during the liquidation process. We intend to maintain adequate cash reserves for liquidity, debt repayments and other future capital needs.
Related Party Transactions and Agreements
We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 11. “Related Party Transactions” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies that management believes are or will be critical during our liquidation. We consider these policies 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 as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements.
Subsequent to the adoption of the liquidation basis of accounting, we are required to estimate all costs and income we expect to incur and earn through the end of liquidation including the estimated amount of cash we expect to collect through the disposal of our assets and the estimated costs to dispose of our assets.
Pursuant to our stockholders’ approval of the Plan of Liquidation, we adopted the liquidation basis of accounting as of and for the periods subsequent to July 1, 2023 (as approval of the Plan of Liquidation became imminent during the month of July 2023 based on the results of our solicitation of proxies from our stockholders for their approval of the Plan of Liquidation). Accordingly, on July 1, 2023, assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash or other consideration that we expect to receive through the disposal of our assets as we carry out our Plan of Liquidation. The liquidation values of our remaining real estate properties are presented on a net realizable value basis. Liabilities are carried at their contractual amounts due or estimated settlement amounts.
We accrue costs and income that we expect to incur and earn through the completion of our liquidation, including the estimated amount of cash or other consideration that we expect to receive through the disposal of our assets and the estimated costs to dispose of our assets, to the extent we have a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the Condensed Consolidated Statement of Net Assets. Actual costs and income may differ from amounts reflected in the financial statements because of the inherent uncertainty in estimating future events. These differences may be material. See Note 2, “Plan of Liquidation” and Note 4, “Liabilities for Estimated Costs in Excess of Estimated Receipts During Liquidation” for further discussion. Actual costs incurred but unpaid as of March 31, 2024 are included in accounts payable and accrued expenses, due to affiliate and other liabilities on the Condensed Consolidated Statement of Net Assets.
Real Estate - Liquidation Basis of Accounting
As of July 1, 2023, our investments in real estate were adjusted to their estimated net realizable value, or liquidation value, to reflect the change to the liquidation basis of accounting. The liquidation value represents the estimated amount of cash or other consideration we expect to realize through the disposal our assets, including any residual value attributable to lease intangibles, as we carries out the Plan of Liquidation. The liquidation value of investments in real estate was based on a number of factors including discounted cash flow and direct capitalization analyses, detailed analysis of current market comparables and broker opinions of value. The liquidation values of the Company’s investments in real estate are presented on an undiscounted basis and investments in real estate are no longer depreciated. Subsequent to July 1, 2023, all changes in the estimated liquidation value of the investments in real estate are reflected as a change to our net assets in liquidation.
Below is a discussion of additional accounting policies and estimates. While management determined these to be not critical, they are still considered to be significant and relevant for understanding and evaluating our reported financial results.
Rents and Other Receivables
In accordance with the liquidation basis of accounting, as of July 1, 2023, rents and other receivables were adjusted to their net realizable value. We periodically evaluate the collectibility of amounts due from tenants. Any changes in the collectibility of the receivables are reflected as a change to our net assets in liquidation.
Revenue Recognition - Liquidation Basis of Accounting
Under the liquidation basis of accounting, we accrued all income that we expect to earn through the completion of our liquidation to the extent we have a reasonable basis for estimation. Revenue from tenants is estimated based on the contractual in-place leases and projected leases through the anticipated disposition date of the property. These amounts are presented net of estimated expenses and other liquidation costs and are classified in liabilities for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statement of Net Assets.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant’s sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. Contingent rental income is not contemplated under liquidation accounting unless there is a reasonable basis to estimate future receipts.
Accrued Liquidation Costs
In accordance with the liquidation basis of accounting, we accrue for certain estimated liquidation costs to the extent we have a reasonable basis for estimation. These consist of legal fees, dissolution costs, final audit/tax costs, insurance, and transfer agent related costs.
Subsequent Events
We evaluate subsequent events up until the date the condensed consolidated financial statements are issued.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this Quarterly Report on Form 10-Q, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended.
Share Redemption Program
Our board of directors adopted a share redemption program that could 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. During the three months ended March 31, 2024, we did not redeem shares. As a result of the approval by our board of directors and our stockholders of the Plan of Liquidation, we do not expect to redeem any shares under the SRP going forward and expect that any future liquidity provided to stockholders will be in the form of liquidating distributions. We can provide no assurances as to the timing, amount, or successful implementation of the Plan of Liquidation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On May 10, 2024, our board of directors approved an updated estimated liquidation value per share of our common stock of $0.39, which is equal to our net assets in liquidation, divided by the number of shares outstanding, all as of March 31, 2024, and as disclosed in this Quarterly Report on Form 10-Q (the “May 2024 Estimated Liquidation Value Per Share”).
We adopted the liquidation basis of accounting as of and for the periods subsequent to July 1, 2023. Net assets in liquidation represents the remaining estimated liquidation value available to stockholders upon liquidation. For a description of our accounting policies and the methodologies, limitations and assumptions used in the determination of the May 2024 Estimated Liquidation Value Per Share, see the notes to our consolidated financial statements in this Quarterly Report on Form 10-Q.
We are providing the May 2024 Estimated Liquidation Value Per Share to assist broker-dealers that participated in our now-terminated initial public offering in meeting their customer account statement reporting obligations under the Financial Industry Regulatory Authority Rule 2231.
The May 2024 Estimated Liquidation Value Per Share will first appear on the June 2024 stockholder account statements.
Limitations of the May 2024 Estimated Liquidation 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 liquidation value per share, and this difference could be significant. The May 2024 Estimated Liquidation Value Per Share does not represent the fair value of our assets less the fair value of our liabilities according to GAAP. Moreover, we did not obtain updated appraisals in connection with the determination of the May 2024 Estimated Liquidation Value Per Share, and the determination was based solely on the net assets in liquidation as reported in this Quarterly Report on Form 10-Q.
Our expectations about the implementation of the Plan of Liquidation and the amount of any liquidating distributions that we pay to our stockholders and when we will pay them are subject to risks and uncertainties and are based on certain estimates and assumptions, one or more of which may prove to be incorrect. As a result, the actual amount of any liquidating distributions that we pay to our stockholders may be more or less than our estimate and the liquidating distributions may be paid later than we predict. There are many factors that may affect the amount of liquidating distributions we will ultimately pay to our stockholders. If we underestimated our existing obligations and liabilities or the amount of taxes, transaction fees and expenses relating to the liquidation and dissolution, or if unanticipated or contingent liabilities arise,including with respect to debt service or interest expense related to the SRT Loan, the amount of liquidating distributions ultimately paid to our stockholders could be
less than estimated. Moreover, the liquidation value will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets, in response to the real estate and finance markets, based on the amount of net proceeds received from the disposition of our remaining assets and due to other factors. Accordingly, it is not possible to precisely predict the timing of any liquidating distributions we pay to our stockholders or the aggregate amount of liquidating distributions that we will ultimately pay to our stockholders.
No assurance can be given that any liquidating distributions we pay to our stockholders will equal or exceed the May 2024 Estimated Liquidation Value Per Share. Accordingly, with respect to the May 2024 Estimated Liquidation Value Per Share, we can give no assurance:
•of the amount or timing of liquidating distributions we will ultimately be able to pay our stockholders;
•that a stockholder would be able to resell his or her shares at the May 2024 Estimated Liquidation Value Per Share;
•that an independent third-party appraiser or third-party valuation firm would agree with the May 2024 Estimated Liquidation Value Per Share; or
•that the methodology used to determine the May 2024 Estimated Liquidation Value Per Share would be acceptable to FINRA or for compliance with ERISA reporting requirements.
ITEM 6. EXHIBITS
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
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 May 10, 2024.
| | | | | | | | |
| 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) |
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the three months ended March 31, 2024 (and are numbered in accordance with Item 601 of Regulation S-K).
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| | | | | | Incorporated by Reference |
| Exhibit No. | | Description | | Filed
Herewith | | Form/File No. | | Filing Date |
| | | | | | | | |
| | Plan of Complete Liquidation and Dissolution | | | | 10-Q | | 5/15/2023 |
| | | | | | | | |
| | 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 |
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| | Articles Supplementary, dated January 22, 2014 | | | | 8-K | | 1/28/2014 |
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| | Third Amended and Restated Bylaws of Strategic Realty Trust, Inc. | | | | 8-K | | 1/28/2014 |
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| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
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| | Strategic Realty Trust, Inc. Amended and Restated Share Redemption Program Adopted August 26, 2016 | | | | 8-K | | 8/30/2016 |
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| 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 | | | | |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | |
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| 104.1 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | |
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