ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission, or SEC, on March 26, 2021, which we refer to herein as our “2020 Annual Report on Form 10-K.”
As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.
Special Note Regarding Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•The potential adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets.
•Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor’s compensation arrangements with us and conflicts in allocating time among us and other programs and business activities.
•We are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected.
•We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders.
•A significant portion of our assets are concentrated in one state and in urban retail properties, any adverse economic, real estate or business conditions in this geographic area or in the urban retail market could affect our operating results and our ability to pay distributions to our stockholders.
•Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders.
•Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Moreover, you should interpret many of the risks identified in this Quarterly Report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 2020 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.
Overview
We are a Maryland corporation that was formed on September 18, 2008, to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development, one of which was substantially completed during the year ended December 31, 2020. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we have operated and intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership.
Since our inception, our business has been managed by an external advisor. We do not have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2022. The current term of the Advisory Agreement terminates on August 9, 2022. Effective April 1, 2021, the Advisor merged with PUR SRT Advisors LLC, an affiliate of PUR Management LLC, which is an affiliate of L3 Capital, LLC. L3 Capital, LLC is a real estate investment firm focused on institutional quality, value-add, prime urban retail and mixed-use investment within first tier U.S. metropolitan markets. As a result of this transaction, PUR SRT Advisors LLC, controls SRT Advisor, LLC.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has caused state and local governments to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate, and the types of construction projects that may continue. California, where the majority of our properties are located, declared a state of emergency on March 4, 2020 and instituted a shelter-in-place order on March 19, 2020 to reduce the spread of COVID-19. On May 7, 2020, California moved into Stage 2 of its four-stage reopening roadmap, permitting certain sectors of the economy to reopen provided that there were significant safety measures in place. On June 12, 2020, California permitted businesses such as movie theaters, restaurants, wineries, bars, zoos, museums, gyms, fitness centers, hotels, card rooms, racetracks, and campgrounds to re-open. On July 13, 2020, California re-instituted a state-wide closure on many types of businesses that were previously permitted to re-open such as indoor dining, bars, movie theaters, and museums. In August 2020, California moved to a four-tier, color-coded system assigning every county to a tier based on its test positivity and adjusted case rate. San Francisco County, where a number of our properties are located, was assigned a “moderate” tier in September 2020, which allows for some indoor business operations to open with modifications. Los Angeles County remained in the “widespread” tier, requiring many non-essential indoors business operations to stay closed. On December 6, 2020, due to a significant rise in COVID-19 cases around the Thanksgiving holiday and beyond, as part of California’s mitigation measures, both Los Angeles and San Francisco counties went into a regional stay-at-home order. This order implemented restrictions requiring many non-essential indoor business operations to close or stay closed. This order was subsequently lifted effective January 28, 2021, with both counties remaining in the “widespread” tier. As of June 30, 2021, due to declining new cases and hospitalizations, the state of California lifted COVID-19 related restrictions.
COVID-19 and the efforts to contain its spread have significantly impacted the global economy, the U.S. economy, the economies of the local markets throughout California in which our properties are predominately located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and shelter-in-place or stay-at-home orders. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed, lifted or reinstated, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or when customers will re-engage with tenants as they have in the past. Due to this uncertainty, some of our tenants have been experiencing hardships, as they were unable to operate at full capacity until the middle of June 2021.
We believe that the COVID-19 outbreak has and could continue to negatively impact our financial condition and results of operations, including but not limited to, declines in real estate rental revenues, the inability to sell certain properties at a favorable price, and a decrease in construction and leasing activity. At the start of the pandemic and shelter-in-place orders, a majority of our tenants requested rent deferral or rent abatement due to the pandemic and government-mandated restrictions. These tenants initially totaled 94% of the leased square footage in our wholly-owned properties. We reviewed these requests on
a case-by-case basis and agreed to modifications to some of the tenant leases, and other leases were not modified. In most cases, it is in our best interest to help our tenants remain in business and reopen when shelter-in-place orders or other mandated closures or restrictions are lifted. If these tenants fail, finding replacement tenants may be costly and time-consuming.
Of the total leased square footage in our wholly-owned properties, 47% of the leases were either (i) not modified and the tenants were able to continue to make their payments or (ii) the leases were modified to provide for a short-term temporary rent deferral or abatement. The rent deferrals generally were one to two months and were to be repaid within 12 months. Any rent abatement was typically one to two months and in many cases also involved an extension of the tenant's lease. Another 28% of the leases in our wholly-owned properties were modified to provide ongoing rent relief to the tenant. These leases generally were with restaurants and salons that faced significant operating restrictions limiting their ability to be open, open indoors, or open with anything but a limited capacity. These lease modifications involved some combination of lease extensions, application of security deposits, temporary rent deferrals, partial rent forgiveness or abatement, and new percentage rent clauses to protect the landlord in the event sales returned to prior levels during the period of the lease modifications. These concessions lasted through the first and second quarters of 2021 to allow these businesses to commit to new operating strategies and costs for a pandemic environment. The tenants making up the remaining 25% of our leased square footage requested lease concessions; however, we could not agree with these tenants on lease changes acceptable to both parties. During the nine months ended September 30, 2021, these tenants terminated their leases and were replaced with new tenants.
To mitigate the impact of COVID-19 on our operations and liquidity, we have taken a number of proactive measures, which include the following:
•We are in constant communication with our tenants and have assisted tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020.
•We believe we will be able to service our debts and pay for our ongoing general and administrative expenses for the foreseeable future. As of September 30, 2021, we have approximately $1.7 million in cash and cash equivalents. In addition, we had approximately $1.0 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs).
•On November 9, 2021, we obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. We have the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us.
•The SRT Loan is secured by six of our core urban properties in Los Angeles and San Francisco. The SRT Loan does not have restrictive covenants and ongoing debt coverage ratios that could trigger a default caused by tenants not paying rent or seeking rent relief.
•We remain in compliance with all the terms of the Wilshire Construction Loan (as defined below), which matures on May 10, 2022 with options to extend for two additional twelve-month periods, subject to certain conditions. Similarly, we remain in compliance with the Sunset & Gardner Loan (as defined below), which matures on October 31, 2022.
•To further preserve cash and liquidity, we suspended our Amended and Restated Share Redemption Program (the “SRP”), such suspension was effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made unless and until our board of directors (the “Board”) approves the resumption of the SRP. During the suspension, we will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the Board has elected to lift the suspension and provided the terms and conditions for any continuation of the program. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be. In addition, on March 27, 2020, the board of directors decided to suspend the payment of any dividend for the quarter ending March 31, 2020, and will reconsider future dividend payments on a quarter-by-quarter basis as more information becomes available on the impact of COVID-19. Dividend payments were not reinstated as of September 30, 2021.
Given the uncertainty of the COVID-19 pandemic’s near and potential long-term impact on our business, the full extent of the financial impact cannot be reasonably estimated at this time. However, there are those who believe that, as more tools are developed to fight COVID-19 - increased testing, enhanced monitoring, data analysis and identification of effective therapeutics-the country can, anchored by advice of healthcare specialists, incrementally foster economic activity in the near term and at some point with a vaccine and time, the country should return to a more normal state as with other pandemics in the past. Although vaccines for COVID-19 are being made available to the general public in the U.S. and around the world, the
vaccine may not materially affect the spread of the virus and the outbreak could have a continued adverse impact on economic and market conditions.
Property Portfolio
As of September 30, 2021, our wholly-owned property portfolio included six retail properties, excluding a land parcel, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 27,000 square feet of multi-tenant, commercial retail space located in one state. We purchased our properties for an aggregate purchase price of approximately $35.3 million. As of September 30, 2021 approximately 91% of our portfolio, excluding the Wilshire property that was placed into service in the third quarter of 2020, was leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 6.5 years. As of December 31, 2020, approximately 79% of our portfolio was leased (based on rentable square footage as of December 31, 2020), with a weighted-average remaining lease term of approximately 6.3 years.
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(dollars in thousands)
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Rentable Square
Feet
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Percent Leased (2)
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Effective
Rent (3)
(per Sq. Foot)
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Date
Acquired
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Original
Purchase
Price
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Debt (4)
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Property Name (1)
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Location
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Wholly-owned Real Estate Investments
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400 Grove Street
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San Francisco, CA
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2,000
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100
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%
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$
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48.00
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6/14/2016
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$
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2,890
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$
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1,450
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8 Octavia Street
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San Francisco, CA
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3,640
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47
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%
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63.41
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6/14/2016
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2,740
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1,500
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Fulton Shops
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San Francisco, CA
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3,758
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84
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%
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63.28
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7/27/2016
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4,595
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2,200
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450 Hayes
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San Francisco, CA
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3,724
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100
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%
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98.97
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12/22/2016
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7,567
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3,650
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388 Fulton
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San Francisco, CA
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3,110
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100
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%
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70.18
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1/4/2017
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4,195
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2,300
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Silver Lake
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Los Angeles, CA
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10,497
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100
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%
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74.19
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1/11/2017
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13,300
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6,900
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26,729
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35,287
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18,000
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Real Estate Investments owned through Joint Ventures
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3032 Wilshire Property
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Santa Monica, CA
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11,771
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45
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%
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92.42
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3/8/2016
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13,500
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12,558
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38,500
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$
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48,787
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$
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30,558
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(1)List of properties does not include a residual parcel at Topaz Marketplace as of September 30, 2021.
(2)Percentage is based on leased rentable square feet of each property as of September 30, 2021.
(3)Effective rent per square foot is calculated by dividing the annualized September 30, 2021 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries.
(4) Debt represents the outstanding balance as of September 30, 2021, and excludes reclassification of approximately $0.4 deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 7. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report.
Properties Under Development
As of September 30, 2021, we had one property under development in Hollywood, California. This development project is still in the planning phase and construction has not commenced.
Results of Operations
Comparison of the three and nine months ended September 30, 2021, versus the three and nine months ended September 30, 2020.
The following table provides summary information about our results of operations for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
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Three Months Ended
September 30,
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2021
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2020
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$ Change
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% Change
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Rental revenue and reimbursements
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$
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493
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$
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529
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$
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(36)
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(6.8)
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%
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Operating and maintenance expenses
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469
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455
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14
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3.1
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%
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General and administrative expenses
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373
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426
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(53)
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(12.4)
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%
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Depreciation and amortization expenses
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680
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386
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294
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76.2
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%
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Interest expense
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319
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230
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89
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38.7
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%
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Loss on impairment of real estate
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5,628
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—
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5,628
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100.0
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%
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Operating loss
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(6,976)
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(968)
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(6,008)
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620.7
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%
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Net loss
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$
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(6,976)
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$
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(968)
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$
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(6,008)
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620.7
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%
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Nine Months Ended
September 30,
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2021
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2020
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$ Change
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% Change
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Rental revenue and reimbursements
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$
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1,934
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$
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1,990
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$
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(56)
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(2.8)
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%
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Operating and maintenance expenses
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1,747
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1,264
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|
483
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38.2
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%
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General and administrative expenses
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1,184
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1,285
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(101)
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(7.9)
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%
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Depreciation and amortization expenses
|
1,756
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|
|
988
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|
|
768
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|
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77.7
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%
|
|
|
|
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|
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Interest expense
|
947
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|
|
467
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|
|
480
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|
|
102.8
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%
|
Loss on impairment of real estate
|
5,628
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—
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5,628
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100.0
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%
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Operating loss
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(9,328)
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|
|
(2,014)
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|
|
(7,314)
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363.2
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%
|
Other income, net
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422
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|
947
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|
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(525)
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(55.4)
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%
|
|
|
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|
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Net loss
|
$
|
(8,906)
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|
|
$
|
(1,067)
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|
|
$
|
(7,839)
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|
|
734.7
|
%
|
Our results of operations for the three and nine months September 30, 2021, are not necessarily indicative of those expected in future periods.
Revenue
The decrease in revenue during the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily due to the sale of Shops at Turkey Creek, partially offset by the expiration of rent concessions provided to our tenants as a result of the COVID-19 pandemic. Additionally, rent concessions provided to replacement tenants also contributed to the decrease in revenue.
Operating and maintenance expenses
Operating and maintenance expenses increased during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to additional reserves and write-off of uncollectible rents. Additionally, placement of the Wilshire Property in service in August 2020, contributed to the increase in operating and maintenance expenses. This was partially offset by the sale of Shops at Turkey Creek.
General and administrative expenses
General and administrative expenses decreased during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to lower asset management fees, estimated tax compliance fees and legal fees.
Depreciation and amortization expenses
Depreciation and amortization expenses increased during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to the disposal of assets related to terminated leases and placement of the Wilshire Property in service in August 2020.
Interest expense
Interest expense increased during the three and nine months ended September 30, 2021, compared to the same period in 2020, due to the placement of the Wilshire Property in service. Capitalization of interest expense related to the Wilshire Property construction loan ceased in August 2020.
Loss on impairment of real estate
Loss on impairment of approximately $5.6 million related to an operating property we own through a joint venture.
Other income, net
Other income, net for the nine months ended September 30, 2021, consisted of a gain on sale of Shops at Turkey Creek of approximately $0.4 million. Other income, net for the nine months ended September 30, 2020, consisted of a gain on sale of Topaz Marketplace of approximately $0.9 million.
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
As of September 30, 2021, our cash and cash equivalents were approximately $1.7 million and we had $1.0 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs).
Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of September 30, 2021 and December 31, 2020, our borrowings were approximately 111.5% and 90.1%, respectively, of the carrying value of our net assets.
The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (amounts in thousands):
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Nine Months Ended
September 30,
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|
2021
|
|
2020
|
|
$ Change
|
Net cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
(1,775)
|
|
|
$
|
(2,510)
|
|
|
$
|
735
|
|
Investing activities
|
1,838
|
|
|
5,034
|
|
|
(3,196)
|
|
Financing activities
|
(38)
|
|
|
(5,918)
|
|
|
5,880
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
25
|
|
|
$
|
(3,394)
|
|
|
|
Cash Flows from Operating Activities
Cash used in operating activities during the nine months ended September 30, 2021 was primarily due to an increase in our accrued property tax expenses, partially offset by a higher operating loss during the nine months ended September 30, 2021 as compared to the same period in 2020, due to higher operating and maintenance expenses and lower revenues.
Cash used in operating activities during the nine months ended September 30, 2020, was primarily due to lower operating income, which resulted from sale of Topaz Marketplace during the three months ended March 31, 2020, as well as increased accounts receivable and rent deferral balances resulting from the COVID-19 pandemic. Additionally, decreases in our accrued expense balances contributed to the decrease in cash flows from operations.
Cash Flows from Investing Activities
Cash flows provided by investing activities during the nine months ended September 30, 2021, primarily consisted of approximately $3.8 million in proceeds from the sale of Turkey Creek and partially offset by $1.3 million of additional investment in the Sunset and Gardner Joint Venture.
Cash flows provided by investing activities during the nine months ended September 30, 2020 primarily consisted of approximately $9.9 million of proceeds from sale of Topaz Marketplace. These were partially offset by our aggregate additional $4.2 million investment in the Wilshire and Sunset and Gardner Joint Ventures.
Cash Flows from Financing Activities
Cash flows used in financing activities during the nine months ended September 30, 2021, primarily consisted of payment of financing costs related to the extension of the Sunset & Gardner loan, partially offset by construction loan proceeds.
Cash flows used in financing activities during the nine months ended September 30, 2020, primarily consisted of approximately $8.9 million in repayments of our line of credit. This was partially offset by approximately $3.5 million from construction loan proceeds.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment on our outstanding indebtedness. To date, our cash needs for operations have been funded by cash provided by property operations, the sales of properties and the sale of shares of our common stock. We may fund our short-term operating cash needs from operations, from the sales of properties and from debt.
On November 9, 2021, we obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. We have the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 7. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness.
Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs could be affected by the effects of the COVID-19 pandemic. The full impact of the COVID-19 pandemic on our rental revenue and, as a result, future cash from operations cannot be determined at present.
The sale of Shops at Turkey Creek on April 27, 2021, provided us $3.8 million in additional liquidity as a result of the sales proceeds. Refer to Note 3, “Real Estate Investments” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the sale of the Shops at Turkey Creek.
We believe that our cash on hand, along with other potential aforementioned sources of liquidity that we may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, this forward-looking statement is subject to a number of uncertainties, including with respect to the duration of the COVID-19 pandemic, and there can be no guarantee that we will be successful with our plan. Moreover, over the long term, if our cash flow from operations does not increase from current levels, we may have to address a liquidity deficiency. We are actively exploring options should cash flow from operations not sufficiently improve, such as a sale of one or more assets that are not generating positive cash flow or the sale of equity to an institutional investor.
Recent Financing Transactions
Multi-Property Secured Financing
On December 24, 2019, we entered into a Loan Agreement (the “SRT Loan Agreement”) with PFP Holding Company, LLC (the “SRT Lender”) for a non-recourse secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on our five San Francisco assets (Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and 388 Fulton Street) as well as our Silverlake Collection located in Los Angeles. The SRT Loan matures on January 9, 2023. We have an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. We have the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of yield maintenance payments if such prepayment occurs in the first 18 months of the loan term, calculated through the 18th monthly payment date, as well as certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. Any prepayment or repayment on or before the first 12 months of the loan term in connection with a bona fide third-party sale of a property securing the SRT Loan shall only require the payment of yield maintenance payments calculated through the 12th monthly payment date.
As of September 30, 2021, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating LIBOR rate loan which bears interest at 30-day LIBOR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity.
Pursuant to the SRT Loan, we must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on our liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates.
In connection with the SRT Loan, we executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the San Francisco assets.
Loans Secured by Properties
On May 7, 2019, we refinanced and repaid our financing with Loan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of September 30, 2021, the Wilshire Construction Loan had a principal balance of approximately $12.6 million, with future funding available up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Construction Loan is scheduled to mature on May 10, 2022, with options to extend for two additional twelve-month periods, subject to certain conditions as stated in the loan agreement. The Wilshire Construction Loan is secured by a first Deed of Trust on the Wilshire Property. We executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of our joint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of borrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. We executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. We used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
Loans Secured by Properties Under Development
On October 29, 2018, we entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and had an interest rate of 6.9% per annum. The original Sunset & Gardner Loan agreement matured on October 31, 2019. We extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 6.5% per annum. On July 31, 2020, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. On July 21, 2021, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same
terms, with an interest rate of 7.9% per annum. The new maturity date is October 31, 2022. The Sunset & Gardner Loan is secured by a first Deed of Trust on the Sunset & Gardner Property.
Line of Credit
On February 10, 2020, we used proceeds from the sale of Topaz Marketplace to repay the line of credit in its entirety. The line of credit expired of its own accord on February 15, 2020, with no balance outstanding. As part of the payoff, Shops at Turkey Creek was released from the line of credit.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three and nine months ended September 30, 2021 and 2020, our total operating expenses did not exceed the 2%/25% Guidelines.
On August 2, 2018, we entered into the Sixth Amendment to the Advisory Agreement. The Advisory Agreement Amendment provides that the Advisor shall not be required to reimburse to us any operating expenses incurred during a given period that exceed the applicable limit on “Total Operating Expenses” (as defined in the Advisory Agreement) to the extent that such excess operating expenses are incurred as a result of certain unusual and non-recurring factors approved by our board of directors, including some related to the execution of our investment strategy as directed by our board of directors. These provisions were also included in the Ninth Amendment to the Advisory Agreement entered into August 5, 2021.
Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly Distributions
As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue to be paid, from sources other than cash flows from operations.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, our board of directors decided to suspend the payment of any dividend for the quarters ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of September 30, 2021.
Funds From Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of a real estate company’s operating performance. The National Association of Real Estate Investment Trusts, or “NAREIT”, an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real
estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.
We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows (amounts in thousands, except shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
FFO
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net loss
|
|
$
|
(6,976)
|
|
|
$
|
(968)
|
|
|
$
|
(8,906)
|
|
|
$
|
(1,067)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of assets
|
|
—
|
|
|
—
|
|
|
(422)
|
|
|
(947)
|
|
|
|
|
|
|
|
|
|
|
Depreciation of real estate
|
|
416
|
|
|
326
|
|
|
1,174
|
|
|
807
|
|
Amortization of in-place leases and leasing costs
|
|
264
|
|
|
60
|
|
|
582
|
|
|
181
|
|
Loss on impairment of real estate
|
|
5,628
|
|
|
—
|
|
|
5,628
|
|
|
—
|
|
FFO attributable to common shares and Common Units (1)
|
|
$
|
(668)
|
|
|
$
|
(582)
|
|
|
$
|
(1,944)
|
|
|
$
|
(1,026)
|
|
|
|
|
|
|
|
|
|
|
FFO per share and Common Unit (1)
|
|
$
|
(0.06)
|
|
|
$
|
(0.05)
|
|
|
$
|
(0.18)
|
|
|
$
|
(0.09)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and units outstanding (1)
|
|
10,957,204
|
|
|
10,957,204
|
|
|
10,957,204
|
|
|
10,966,939
|
|
(1)Our common units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to common units in the computation of FFO and including the common units together with weighted average shares outstanding for the computation of FFO per share and common unit.
Related Party Transactions and Agreements
We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 11. “Related Party Transactions” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Critical Accounting Policies
Our interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of additional accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2020 Annual Report on Form 10-K.
Subsequent Events
On November 9, 2021, we obtained a $4.0 million unsecured loan (the “Unsecured Loan”) from PUR Holdings Lender LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. We have the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us.