NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS
Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008, as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations.
Since the Company’s inception, its business has been managed by an external advisor. The Company has no direct employees and all management and administrative personnel responsible for conducting the Company’s business are employed by its advisor. As of June 30, 2022, the Company was externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2022. The current term of the Advisory Agreement terminates on August 9, 2023. The advisor is an affiliate of PUR Management LLC (“PUR”), which is an affiliate of L3 Capital, LLC. L3 Capital, LLC is a real estate investment firm focused on institutional quality, value-add, prime urban retail and mixed-use investment within first tier U.S. metropolitan markets.
Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (the “OP”). During the Company’s initial public offering (“Offering”), as the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. The Company is the sole general partner of the OP. As of June 30, 2022 and December 31, 2021, the Company owned 98.1% of the limited partnership interests in the OP.
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders, and investments in development of properties. Substantially all of the proceeds of the Offering, which terminated in February 2013, have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.
The Company invests in and manages a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets. The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. During the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development. During the third quarter of 2020, construction of one of the development projects was completed and placed in service. As of June 30, 2022, this property was classified as held for sale and had approximately 12,000 rentable square feet of retail space, which was 42% leased.
As of June 30, 2022, in addition to one development project and the property placed in service and currently classified as held for sale, the Company’s portfolio of wholly-owned properties was comprised of six properties, with approximately 27,000 rentable square feet of retail space located in California, as well as an improved land parcel. As of June 30, 2022, the rentable space at the Company’s retail properties was 88% leased, excluding the property placed in service and currently classified as held for sale.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
COVID-19 Pandemic and Liquidity
The adverse effect of the public health crisis of the coronavirus disease (COVID-19) pandemic continues to pose material risk and uncertainty to the Company and the retail industry, which is the focus of the Company’s real estate investments. A majority of the Company’s tenants requested rent deferral or rent abatement at the start of the pandemic. Recently, some of the tenants have resumed paying full or partial rent. However, the Company is unable to predict the full impact that the pandemic will have on its financial condition, results of operations and cash flows which is dependent on the long-term impact of the pandemic on retail commercial real estate and whether customers will engage with the Company’s retail tenants at pre-pandemic levels.
Since the termination of the Offering in 2013, the Company’s cash flows have been primarily funded by cash provided by property operations, debt financings and the sales of properties. The COVID-19 pandemic has had a material detrimental impact on the Company’s retail tenants and their ability to pay rent and consequently on the Company’s liquidity. As of June 30, 2022, the Company had approximately $0.9 million in cash and cash equivalents. In addition, the Company had approximately $0.4 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs). The Company has taken several steps to preserve capital and increase liquidity, such as:
•On March 27, 2020, the Company’s board of directors (the “Board”) decided to suspend the payment of any dividend for the quarter ending March 31, 2020, and will consider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as of June 30, 2022.
•Effective May 21, 2020, the Company suspended its Amended and Restated Share Redemption Program (the “SRP”). The SRP will remain suspended and no further redemptions will be made unless and until the Board approves the resumption of the SRP.
•The Company obtained a $4.0 million unsecured loan from PUR Holdings Lender, LLC, an affiliate of the Advisor (the “Unsecured Loan”), to be used for working capital and other general corporate purposes. The Unsecured Loan does not have covenants that could trigger a default. Pursuant to the loan documents, the Unsecured Loan matures on December 30, 2022, with an option for the Company to extend the maturity date until June 30, 2023. On August 2, 2022, PUR Holdings Lender, LLC agreed to an additional six month extension at the option of the Company to extend the maturity date until December 31, 2023. As of June 30, 2022, there was approximately $1.6 million of unfunded commitment.
•The Company is actively exploring options to provide additional liquidity, such as a sale of one or more assets that are not generating positive cash flow. On August 10, 2022, the due diligence period expired under the Purchase and Sale Agreement the Company entered with an unrelated third-party for the sale of the Wilshire Joint Venture Property located in Santa Monica, California, for a sale price of $16.5 million. Pursuant to the Purchase and Sale Agreement, the purchaser would be obligated to purchase the property and the Company would be obligated to sell the property only after satisfaction of agreed upon closing conditions. The closing date is expected to be October 10, 2022. There can be no assurance that the Company will complete the sale. In certain circumstances, if the purchaser fails to complete the acquisition, it may forfeit up to approximately $0.5 million of earnest money. The Purchase and Sale Agreement was entered on June 30, 2022, and as a result, the Wilshire Joint Venture Property was classified as held for sale in the consolidated balance sheets as of June 30, 2022.
As of June 30, 2022, the Company was in compliance with all the terms of the Wilshire Construction Loan (as defined below). The Wilshire Construction Loan was scheduled to mature on May 10, 2022; however, the lender has informed us that the maturity date will be extended to November, 10, 2022 on the same terms and conditions as currently in effect. At June 30, 2022, the 3032 Wilshire Joint Venture Property, was classified as held for sale in the condensed consolidated balance sheets. Similarly, as of June 30, 2022, the Company was in compliance with the Sunset & Gardner Loan (as defined below), which matures on October 31, 2022.
The SRT Loan (as defined below) is secured by six of the Company’s core urban properties in Los Angeles and San Francisco. The SRT Loan does not have restrictive covenants that could trigger a default caused by tenants not paying rent or seeking rent relief. The SRT Loan has two extension options available subject to satisfaction of certain covenants and conditions, and while there is no guarantee of meeting the covenants and conditions, management believes they could exercise the extension options, or refinance the SRT loan if necessary.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-K and Regulation S-X.
The interim unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s condensed consolidated financial position, results of operations and cash flows have been included.
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. During the three and six months ended June 30, 2022 and 2021, the Company held variable interests in two variable interest entities, one of which is classified as held for sale, and consolidated those entities. Refer to Note 3. “Variable Interest Entities” for additional information.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents represent current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.
Restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statement of cash flows (amounts in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 |
Cash and cash equivalents | $ | 948 | | | $ | 3,967 | |
Restricted cash | 430 | | | 805 | |
Total cash, cash equivalents, and restricted cash | $ | 1,378 | | | $ | 4,772 | |
Reclassifications
Certain prior period amounts have been reclassified to conform with current period’s presentation. The reclassifications had no effect on the Company’s condensed consolidated financial condition, results of operations, or cash flows.
Recent Accounting Pronouncements
The FASB issued the following ASUs, which could have potential impact to the Company’s condensed consolidated financial statements:
In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments (“ASU 2021-05”). ASU 2021-05 amends the lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease, if both of the following criteria are met: (1) the lease would have been classified as a sales-type lease or a direct financing lease; (2) the lessor would have otherwise recognized a day-one loss. ASU 2021-05 is effective for fiscal years beginning after December 31, 2021. The adoption of ASU 2021-05 on January 1, 2022, did not have an impact on the Company’s condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time through December 31, 2022. The Company is evaluating the impact of reference rate reform and whether it will apply any of these practical expedients.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 was effective for fiscal years beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Adjustments resulting from adopting ASU 2016-13 shall be applied through a cumulative-effect adjustment to retained earnings. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates (“ASU 2019-10”). ASU 2019-10 extended the mandatory effective date for smaller reporting companies to beginning after December 15, 2022. The Company is evaluating the impact of Financial Instruments - Credit Losses on the Company’s condensed consolidated financial statements.
3. VARIABLE INTEREST ENTITIES
The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in (i) the Sunset & Gardner Joint Venture and (ii) the 3032 Wilshire Joint Venture. The Company has consolidated the accounts of these variable interest entities.
Through June 30, 2022, post the initial capital contributions, the Company made additional capital contributions totaling $9.0 million and $10.0 million to the Sunset & Gardner Joint Venture and Wilshire Joint Venture, respectively.
Assets Held for Sale
At June 30, 2022, the 3032 Wilshire Joint Venture Property, located in Santa Monica, California, was classified as held for sale in the condensed consolidated balance sheets.
Since the sale of this property does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations of this property were not reported as discontinued operations in the Company’s condensed consolidated financial statements.
The Company’s condensed consolidated statements of operations include net operating losses of approximately $2.8 million and $0.6 million for the three months ended June 30, 2022 and 2021, respectively, and approximately $3.2 million and $1.0 million for the six months ended June 30, 2022 and 2021, respectively, related to the asset held for sale.
There were no assets classified as held for sale at December 31, 2021.
The major classes of assets related to assets held for sale included in the condensed consolidated balance sheets are as follows (amounts in thousands):
| | | | | |
| |
| June 30, |
| 2022 |
ASSETS | |
Investments in real estate | |
Land | $ | 13,026 | |
Building and improvements | 2,866 | |
Tenant improvements | 614 | |
| 16,506 | |
Accumulated depreciation | (611) | |
Investments in real estate, net | 15,895 | |
| |
Tenant receivables, net | 99 | |
Deferred leasing costs, net | 125 | |
| |
Assets held for sale | $ | 16,119 | |
| |
| |
| |
| |
| |
Amounts above are being presented at the lower of their carrying value or their estimated fair value less costs to sell.
Joint Ventures
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table reflects the aggregate assets and liabilities of the Sunset & Gardner Joint Venture and the Wilshire Joint Venture, excluding assets held for sale, which were consolidated by the Company, as of June 30, 2022 and December 31, 2021 (amounts in thousands):
| | | | | | | | | | | |
| |
| June 30, | | December 31, |
| 2022 | | 2021 |
ASSETS | | | |
Investments in real estate | | | |
Land | $ | — | | | $ | 13,026 | |
Building and improvements | — | | | 5,218 | |
Tenant improvements | — | | | 467 | |
| — | | | 18,711 | |
Accumulated depreciation | — | | | (520) | |
Investments in real estate, net | — | | | 18,191 | |
Property under development and development costs: | | | |
Land | 12,958 | | | 12,958 | |
| | | |
Development costs | 687 | | | 3,189 | |
Property under development and development costs | 13,645 | | | 16,147 | |
| | | |
Cash, cash equivalents and restricted cash | 346 | | | 371 | |
Prepaid expenses and other assets, net | 2 | | | 13 | |
Other receivables, net | — | | | 69 | |
Deferred leasing costs, net | — | | | 29 | |
| | | |
TOTAL ASSETS (1) | $ | 13,993 | | | $ | 34,820 | |
| | | |
LIABILITIES | | | |
Notes payable, net (2) | $ | 21,352 | | | $ | 21,063 | |
Accounts payable and accrued expenses | 296 | | | 347 | |
Amounts due to affiliates | — | | | 4 | |
Other liabilities | 70 | | | 71 | |
TOTAL LIABILITIES | $ | 21,718 | | | $ | 21,485 | |
(1)The assets of the Sunset & Gardner Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.
(2)As of both June 30, 2022 and December 31, 2021, includes approximately $0.1 million and $0.2 million, respectively, of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the Wilshire Joint Venture is partially guaranteed by the Company, refer to Note 7, “Notes Payable, Net”. The notes payable of the Sunset & Gardner Joint Venture is not guaranteed by the Company.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. LEASES
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of June 30, 2022, the leases at the Company’s properties, excluding properties classified as held for sale, have remaining terms (excluding options to extend) of up to 9.9 years with a weighted-average remaining term (excluding options to extend) of approximately 6.2 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying condensed consolidated balance sheets and totaled approximately $0.1 million as of June 30, 2022 and December 31, 2021, respectively.
The following table presents the components of income from real estate operations for the three and six months ended June 30, 2022 and 2021 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Lease income - operating leases | $ | 480 | | | $ | 463 | | | $ | 1,057 | | | $ | 1,057 | |
Variable lease income (1) | 241 | | | 175 | | | 398 | | | 296 | |
Rental and reimbursements income | $ | 721 | | | $ | 638 | | | $ | 1,455 | | | $ | 1,353 | |
(1)Primarily includes tenant reimbursements for real estate taxes, insurance, consideration based on sales, common area maintenance, utilities, marketing, and certain other items including negative variable lease income.
As of June 30, 2022, the future minimum rental income from the Company’s properties under non-cancelable operating leases, excluding the property classified as held for sale, was as follows (amounts in thousands):
| | | | | |
Remainder 2022 | $ | 905 | |
2023 | 1,833 | |
2024 | 1,863 | |
2025 | 1,757 | |
2026 | 1,468 | |
Thereafter | 5,840 | |
Total | $ | 13,666 | |
5. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of June 30, 2022 and December 31, 2021, the Company’s above-market lease intangibles, at-market lease intangibles and below-market lease liabilities were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| At-Market Lease Intangibles | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles | | At-Market Lease Intangibles | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles |
Cost | $ | 1,485 | | | $ | — | | | $ | (388) | | | $ | 1,661 | | | $ | 82 | | | $ | (388) | |
Accumulated amortization | (1,139) | | | — | | | 269 | | | (1,176) | | | (67) | | | 258 | |
Total | $ | 346 | | | $ | — | | | $ | (119) | | | $ | 485 | | | $ | 15 | | | $ | (130) | |
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amortization of at-market lease intangible assets is recorded in depreciation and amortization expense and amortization of above-market rent and below-market rent is recorded as a reduction to and increase to rental and reimbursements, respectively, in the consolidated statements of operations. The Company’s amortization of above-market lease intangibles, at-market lease intangibles and below-market lease liabilities for the three and six months ended June 30, 2022 and 2021, were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization | | | | | | | |
At-Market lease intangibles | $ | (21) | | | $ | (35) | | | $ | (43) | | | $ | (77) | |
| | | | | | | |
Above-Market lease intangibles | $ | — | | | $ | (4) | | | $ | (1) | | | $ | (6) | |
| | | | | | | |
Below-Market lease liabilities | $ | 6 | | | $ | 8 | | | $ | 11 | | | $ | 17 | |
6. DEFERRED LEASING COSTS, NET
Deferred leasing costs consist primarily of initial direct costs in connection with lease originations. We record amortization of deferred leasing costs on a straight-line basis over the terms of the related leases. As of June 30, 2022 and December 31, 2021, details of these deferred costs, excluding deferred leasing costs classified as held for sale, were as follows (amounts in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Deferred leasing costs | $ | 296 | | | $ | 350 | |
Accumulated amortization | (91) | | | (80) | |
Deferred leasing costs, net | $ | 205 | | | $ | 270 | |
Amortization of deferred leasing costs is recorded in depreciation and amortization expense in the consolidated statements of operations. The Company’s deferred leasing costs amortization for the three and six months ended June 30, 2022 and 2021, were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization of deferred leasing costs | $ | (11) | | | $ | (8) | | | $ | (22) | | | $ | (13) | |
7. NOTES PAYABLE, NET
On December 24, 2019, the Company entered into a Loan Agreement (the “SRT Loan Agreement”) with PFP Holding Company, LLC (the “SRT Lender”) for a non-recourse secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on the Company’s five San Francisco assets (Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and 388 Fulton Street) as well as the Company’s Silverlake Collection located in Los Angeles. The SRT Loan matures on January 9, 2023. The Company has an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. The Company has the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement.
As of June 30, 2022, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating Secured Overnight Financing Rate (“SOFR”) rate loan which bears interest at 30-day SOFR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity. Effective December 24, 2019, the Company entered into a derivative transaction with a financial institution with a notional amount of $18,000,000, representing an interest rate cap. The Company will receive a payment from the counterparty if the SOFR on the SRT Loan exceeds 3.5%. The instrument is measured at fair value using readily observable market inputs, such as quotations on interest rates, and classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
active market. The Company paid $17 thousand for the derivative and it matures on January 9, 2023.The impact of the interest rate cap is immaterial for all periods reported and is included as a component of interest expense in the consolidated statements of operations.
Pursuant to the SRT Loan, the Company must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on the Company’s liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates. At June 30, 2022, the Company was in compliance with the loan requirements.
In connection with the SRT Loan, the Company executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the San Francisco assets.
On May 7, 2019, the Company refinanced and repaid its financing from Lone Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of June 30, 2022, the Wilshire Construction Loan had a principal balance of approximately $12.7 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 was 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 lender has informed us that the maturity date will be extended to November 10, 2022 on the same terms and conditions as currently in effect. The Wilshire Construction Loan is secured by a first Deed of Trust on the Wilshire Property. The Company executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of the Company’s joint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of borrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. The Company executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. The Company used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
Pursuant to the Wilshire Construction Loan, the Company must comply with certain matters contained in the loan documents including but not limited to minimum limits on the Company’s liquidity and tangible net worth. The Company remains in compliance with all the terms of the Wilshire Construction Loan. The Company expects to repay the Wilshire Construction Loan with the proceeds from the sale of the 3032 Wilshire Joint Venture Property.
On October 29, 2018, the Company entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and had an initial interest rate of 6.9% per annum. At each maturity date in October 2019, 2020, and 2021, in connection with an extension of the loan for an additional twelve-month period, the interest rate of the loan was changed to 6.5%, 7.3%, and 7.9%, respectively. The current maturity date of the Sunset & Gardner Loan is October 31, 2022. The Sunset & Gardner Loan is secured by a first Deed of Trust on the Sunset & Gardner Property.
As of June 30, 2022, the Unsecured Loan from PUR Holdings Lender, LLC, an affiliate of the Advisor, had an outstanding balance of approximately $2.4 million. Refer to Note 11. “Related Party Transactions” for further information.
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of June 30, 2022 (amounts in thousands):
| | | | | |
Remainder of 2022 | $ | 23,761 | |
2023 | 18,000 | |
| |
Total future principal payments | 41,761 | |
Unamortized financing costs, net | 200 | |
Notes payable, net | $ | 41,561 | |
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table sets forth interest costs incurred by the Company for the periods presented (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Expensed | | | | | | | |
Interest costs, net of amortization of deferred financing costs | $ | 228 | | | $ | 212 | | | $ | 440 | | | $ | 422 | |
Amortization of deferred financing costs | 84 | | | 103 | | | 192 | | | 206 | |
Total interest expensed | $ | 312 | | | $ | 315 | | | $ | 632 | | | $ | 628 | |
| | | | | | | |
Capitalized | | | | | | | |
Interest costs, net of amortization of deferred financing costs | $ | 396 | | | $ | 354 | | | $ | 779 | | | $ | 707 | |
Amortization of deferred financing costs | 43 | | | 44 | | | 87 | | | 87 | |
Total interest capitalized | $ | 439 | | | $ | 398 | | | $ | 866 | | | $ | 794 | |
As of June 30, 2022 and December 31, 2021, interest expense payable was approximately $0.3 million and $0.2 million, respectively, including an amount related to the variable interest entities of approximately $0.1 million, for each period.
8. FAIR VALUE DISCLOSURES
The Company believes the total carrying values reflected on its consolidated balance sheets for cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to affiliates, mortgage loan and construction loan secured by properties under development, and the Company’s multi-property secured financing, reasonably approximated their fair values based on their nature, terms, and interest rates that approximate current market rates at June 30, 2022.
As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the operating properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.
For the three and six months ended June 30, 2022, the Company recorded impairment losses of approximately $2.4 million and $3.5 million, related to the Wilshire Joint Venture Property and the development property owned by the Sunset & Gardner Joint Venture, respectively. For the Wilshire Joint Venture Property the impairment amount was determined using purchase price per the Purchase and Sale Agreement less estimated costs to sell. For the development property owned by the Sunset & Gardner Joint Venture the impairment amount was determined using Level 3 measurements, including the property’s undiscounted cash flow, which took into account the property’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition.
For the three and six months ended June 30, 2021, the Company did not record any impairment losses.
9. EQUITY
Share Redemption Program
On April 1, 2015, the Company’s board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013). Under the SRP as reinstated, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder are eligible for repurchase by the Company. Under the SRP, as amended to date, the number of shares to be redeemed is limited to the lesser of (i) a total of $3.8 million for redemptions sought upon a stockholder’s death and a total of $1.2 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted-average number of shares of the Company’s common stock outstanding during the prior calendar year. Share repurchases pursuant to the SRP are made at the sole discretion of the Company. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.
The redemption price for shares that are redeemed is 100% of the Company’s most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or qualifying disability.
In order to preserve cash in response to the potential economic impact of COVID-19 on the Company, the board of directors approved the suspension of the SRP effective on May 21, 2020. The SRP will remain suspended and no further
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
redemptions will be made until the board of directors approves the resumption of the SRP. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be.
There were no share redemptions during the three and six months ended June 30, 2022 and 2021.
Cumulatively, through June 30, 2022, the Company has redeemed 878,458 shares for $6.2 million.
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
In response to the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, the board of directors of the Company voted to suspend the payment of any dividend for the quarter ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as of June 30, 2022.
10. EARNINGS PER SHARE
EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period.
The following table sets forth the computation of the Company’s basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021 (amounts in thousands, except shares and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator - basic and diluted | | | | | | | |
Net loss | $ | (7,038) | | | $ | (1,059) | | | $ | (7,840) | | | $ | (1,930) | |
Net loss attributable to non-controlling interests | (131) | | | (21) | | | (146) | | | (38) | |
Net loss attributable to common shares | $ | (6,907) | | | $ | (1,038) | | | $ | (7,694) | | | $ | (1,892) | |
Denominator - basic and diluted | | | | | | | |
Basic weighted average common shares | 10,752,966 | | | 10,739,729 | | | 10,752,966 | | | 10,739,729 | |
| | | | | | | |
Common Units (1) | — | | | — | | | — | | | — | |
Diluted weighted average common shares | 10,752,966 | | | 10,739,729 | | | 10,752,966 | | | 10,739,729 | |
Loss per common share - basic and diluted | | | | | | | |
Net loss attributable to common shares | $ | (0.64) | | | $ | (0.10) | | | $ | (0.72) | | | $ | (0.18) | |
(1)For the three and six months ended June 30, 2022 and 2021, the effect of 204,323 and 217,475 of convertible Common Units, respectively, pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive.
11. RELATED PARTY TRANSACTIONS
On August 7, 2013, the Company entered into the Advisory Agreement with the Advisor, which has been renewed for successive terms with a current expiration date of August 9, 2023. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.
On December 30, 2021, the Company obtained the Unsecured Loan, a $4.0 million unsecured loan from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. The Company has the right to prepay or repay the Unsecured Loan in whole or in part at any time without penalty. The Unsecured Loan will be due and payable upon the earlier of twelve months or the termination of the Advisory Agreement by the Company. On March 15, 2022, the Company and PUR Holdings Lender, LLC, amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, from December 30, 2022 to June 30, 2023, if the Company provides PUR Holdings Lender, LLC, with notice, pays an extension fee,
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
and no event of default has occurred. On August 2, 2022, PUR Holdings Lender, LLC agreed to an additional six month extension at the option of the Company to extend the maturity date until December 31, 2023. The Unsecured Loan is guaranteed by the Company. The Company paid $20 thousand in financing fees, at the close of the loan. As of June 30, 2022 the Unsecured Loan had an outstanding balance of approximately $2.4 million.
The Company is party to property management agreements with respect to each of its properties pursuant to which PUR was engaged to serve as property manager. The property management agreements expire August 10, 2022 and will automatically renew every year, unless expressly terminated.
Summary of Related Party Fees
The following table sets forth the Advisor related-party costs incurred and payable by the Company for the periods presented (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred | | Payable as of |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | June 30, | | December 31, |
Expensed | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | | | |
Legal leasing fees | | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | | | $ | — | | | $ | — | |
Asset management fees | | 144 | | | 148 | | | 287 | | | 302 | | | 48 | | | 48 | |
Reimbursement of operating expenses | | — | | | — | | | 14 | | | — | | | — | | | — | |
Property management fees | | 31 | | | 15 | | | 55 | | | 35 | | | 14 | | | 11 | |
Disposition fees | | — | | | 50 | | | — | | | 50 | | | — | | | — | |
| | | | | | | | | | | | |
Total | | $ | 175 | | | $ | 215 | | | $ | 356 | | | $ | 389 | | | $ | 62 | | | $ | 59 | |
| | | | | | | | | | | | |
Capitalized | | | | | | | | | | | | |
Acquisition fees | | $ | — | | | $ | 3 | | | $ | — | | | $ | 5 | | | $ | — | | | $ | 4 | |
Leasing fees | | — | | | — | | | — | | | 20 | | | — | | | — | |
Legal leasing fees | | — | | | — | | | — | | | 10 | | | — | | | — | |
Construction management fees | | — | | | 3 | | | — | | | 35 | | | — | | | — | |
| | | | | | | | | | | | |
Total | | $ | — | | | $ | 6 | | | $ | — | | | $ | 70 | | | $ | — | | | $ | 4 | |
Acquisition Fees
Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. An acquisition fee is capitalized by the Company when the related transaction does not qualify as a business combination; otherwise an acquisition fee is expensed.
Asset Management Fees
Under the Advisory Agreement, the Advisor is entitled to receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments, or (2) the fair market value of the Company’s investments (before non-cash reserves and depreciation) if the board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Reimbursement of Operating Expenses
The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described above) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors.
For the three and six months ended June 30, 2022 and 2021, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fees
Under the property management agreements the Company pays property management fees calculated at a maximum of up to 4% of the properties’ gross revenue.
Disposition Fees
Under the Advisory Agreement, if the Advisor or its affiliates provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, the Advisor or its affiliates may be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold.
Leasing Fees
Under the property management agreements, the Company pays a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.
Legal Leasing Fees
Under the property management agreements, the Company pays a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.
Construction Management Fees
In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and in exchange the Company pays a fee equal to 5% of the hard costs for the project in question.
12. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its condensed consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
13. SUBSEQUENT EVENTS
Renewal of Advisory Agreement
On August 12, 2022, the Company, the OP, and the Advisor, entered into the Tenth Amendment to the Advisory Agreement (the “Tenth Amendment”). The Tenth Amendment renews the term of the Advisory Agreement for an additional twelve-month period, beginning on August 10, 2022 and amends certain provisions in the Advisory Agreement with respect to the payment of certain fees as follows. The disposition fee payable to the Advisor will be reduced by half in connection with the sale of certain other properties held by the Company. The financing coordination fee payable to the Advisor will be waived in connection with certain upcoming refinancing’s. The asset management fee payable to the Advisor for the twelve-month period commending August 2022 through July 2023 will be reduced to $250,000 in the aggregate. In all other material respects, the terms of the Advisory Agreement remain unchanged.
Sale of Held for Sale Property
On August 10, 2022, the due diligence period expired under the Purchase and Sale Agreement and escrow instructions with an unrelated third-party, GD Realty Group Inc., for the sale of the Wilshire Joint Venture Property located in Santa Monica, California. The closing date is expected to be October 10, 2022. There can be no assurance that the Company will complete the sale. In certain circumstances, if the purchaser fails to complete the acquisition, it may forfeit up to approximately $0.5 million of earnest money.