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 March 31, 2021, the Company was externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2021. The current term of the Advisory Agreement terminates on August 9, 2021. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties. On March 1, 2021, but 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.
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 March 31, 2021 and December 31, 2020, the Company owned 98.0% of the limited partnership interests in the OP.
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders, and investments in development of properties. Substantially all of the proceeds of the Offering, which terminated in February 2013, have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.
The Company invests in and manages a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets. The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. During the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development. During the third quarter of 2020, construction of one of the development projects was completed and placed in service. As of March 31, 2021, this property had approximately 12,000 rentable square feet of retail space, which was 73% leased.
As of March 31, 2021, in addition to one development project and the property recently placed in service, the Company’s portfolio of wholly-owned properties was comprised of 7 properties, including one property held for sale, with approximately 43,000 rentable square feet of retail space located in two states, as well as an improved land parcel. As of March 31, 2021, the rentable space at the Company’s retail properties was 79% leased.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
COVID-19 Pandemic
Currently, a material risk and uncertainty facing the Company, the retail industry, the real estate industry and the economy generally is the adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. The Company continues to monitor the impact of the COVID-19 pandemic on all aspects of its business, including how the pandemic is impacting its tenants and business partners. A majority of the Company’s tenants requested rent deferral or rent abatement as a result of the pandemic. Recently, some of the tenants have resumed paying full or partial rent, as some restrictions have been partially lifted. As such, the Company is unable to predict the full impact that the pandemic will have on its financial condition, results of operations and cash flows. The full extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants will depend on future developments, which are uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
Since the termination of the Offering in 2013, the Company’s cash flows have been primarily funded by cash provided by property operations and the sales of properties. The COVID-19 pandemic has had a material detrimental impact on the Company’s retail tenants and their ability to pay rent and consequently on the Company’s liquidity. As of March 31, 2021, the Company had approximately $0.7 million in cash and cash equivalents. In addition, the Company had approximately $0.8 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 Board decided to suspend the payment of any dividend for the quarter ending March 31, 2020, and will reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of March 31, 2021.
•Effective May 21, 2020, the Company suspended its Amended and Restated Share Redemption Program (the “SRP). The SRP will remain suspended and no further redemptions will be made unless and until the Company’s board of directors (the “Board”) approves the resumption of the SRP.
•Furthermore, prior to its sale on April 27, 2021, which provided the Company with $3.8 million in proceeds as additional liquidity, the Shops at Turkey Creek was unencumbered by debt and was available for financing to provide funds for the Company, if needed. Refer to Note 11, “Related Party Transactions” for additional information regarding a Standby Loan Commitment executed between the Company and Glenborough Property Partners, LLC. Refer to Note 13, “Subsequent Events” for additional information regarding the sale of Shops of Turkey Creek.
The Company remains in compliance with all the terms of the Wilshire Construction Loan (as defined below), which matures on May 10, 2022 with the options to extend for two additional twelve-month periods, subject to certain conditions. Similarly, the Company remains in compliance with the Sunset & Gardner Loan (as defined below), which matures on October 21, 2021.
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 and ongoing debt coverage ratios that could trigger a default caused by tenants not paying rent or seeking rent relief.
The Company is in constant communication with its tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-K and Regulation S-X.
The interim unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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. As of March 31, 2021 and 2020, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 4. “Variable Interest Entities” for additional information.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents represent current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.
Restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the consolidated balance sheets that sum to the total of the same such amounts shown on the consolidated statement of cash flows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
Cash and cash equivalents
|
$
|
714
|
|
|
$
|
1,816
|
|
Restricted cash
|
767
|
|
|
806
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
1,481
|
|
|
$
|
2,622
|
|
Reclassifications
Certain prior period amounts have been reclassified to conform with current period’s presentation. The reclassifications had no effect on the Company’s condensed consolidated financial condition, results of operations, or cash flows.
Recent Accounting Pronouncements
The FASB issued the following ASUs, which could have potential impact to the Company’s condensed consolidated financial statements:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time through December 31, 2022. The Company is evaluating the impact of reference rate reform and whether it will apply any of these practical expedients.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 was effective for fiscal years beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Adjustments resulting from adopting ASU 2016-13 shall be applied through a cumulative-effect adjustment to retained earnings. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates (“ASU 2019-10”). ASU 2019-10 extended the mandatory effective date for smaller reporting companies to beginning after December 15, 2022. The adoption of Financial Instruments - Credit Losses is not expected to have an impact on the Company’s consolidated financial statements.
3. REAL ESTATE INVESTMENTS
Assets Held for Sale
At March 31, 2021, Shops at Turkey Creek, located in Knoxville, Tennessee, was classified as held for sale in the condensed consolidated balance sheets.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 income of approximately $60 thousand and $33 thousand, respectively, for the three months ended March 31, 2021 and 2020, related to the assets held for sale.
The major classes of assets held for sale included in the condensed consolidated balance sheets are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2021
|
|
2020
|
ASSETS
|
|
|
|
Investments in real estate
|
|
|
|
Land
|
$
|
1,416
|
|
|
$
|
1,416
|
|
Building and improvements
|
2,224
|
|
|
2,224
|
|
Tenant improvements
|
141
|
|
|
141
|
|
|
3,781
|
|
|
3,781
|
|
Accumulated depreciation
|
(662)
|
|
|
(662)
|
|
Investments in real estate, net
|
3,119
|
|
|
3,119
|
|
|
|
|
|
|
|
|
|
Lease intangibles, net
|
114
|
|
|
105
|
|
|
|
|
|
Assets held for sale
|
$
|
3,233
|
|
|
$
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts above are being presented at their carrying value, which the Company believes to be lower than their estimated fair value less costs to sell.
4. VARIABLE INTEREST ENTITIES
The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in (i) the Sunset & Gardner Joint Venture and (ii) the 3032 Wilshire Joint Venture. The Company has consolidated the accounts of these variable interest entities.
Through March 31, 2021, post the initial capital contributions, the Company made additional capital contributions totaling $7.6 million and $8.1 million to the Sunset & Gardner Joint Venture and Wilshire Joint Venture, respectively.
During the year ended December 31, 2020, construction of the Wilshire Property was completed and placed in service.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table reflects the aggregate assets and liabilities of the Sunset & Gardner Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of March 31, 2021 and December 31, 2020 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2021
|
|
2020
|
ASSETS
|
|
|
|
Investments in real estate
|
|
|
|
Land
|
$
|
13,026
|
|
|
$
|
13,026
|
|
Building and improvements
|
10,635
|
|
|
10,624
|
|
Tenant improvements
|
522
|
|
|
547
|
|
|
24,183
|
|
|
24,197
|
|
Accumulated depreciation
|
(298)
|
|
|
(209)
|
|
Investments in real estate, net
|
23,885
|
|
|
23,988
|
|
Properties under development and development costs:
|
|
|
|
Land
|
12,958
|
|
|
12,958
|
|
|
|
|
|
Development costs
|
2,910
|
|
|
2,441
|
|
Properties under development and development costs
|
15,868
|
|
|
15,399
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
484
|
|
|
340
|
|
Prepaid expenses and other assets, net
|
50
|
|
|
11
|
|
Other receivables, net
|
32
|
|
|
—
|
|
Lease intangibles, net
|
88
|
|
|
73
|
|
TOTAL ASSETS (1)
|
$
|
40,407
|
|
|
$
|
39,811
|
|
|
|
|
|
LIABILITIES
|
|
|
|
Notes payable, net (2)
|
$
|
20,948
|
|
|
$
|
20,868
|
|
Accounts payable and accrued expenses
|
405
|
|
|
212
|
|
Amounts due to affiliates
|
3
|
|
|
—
|
|
Other liabilities
|
47
|
|
|
33
|
|
TOTAL LIABILITIES
|
$
|
21,403
|
|
|
$
|
21,113
|
|
(1)The assets of the Sunset & Gardner Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.
(2)As of both March 31, 2021 and December 31, 2020, includes reclassification of approximately $0.3 million, respectively, of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the Wilshire Joint Venture is partially guaranteed by the Company, refer to Note 7, “Notes Payable, Net”. The notes payable of the Sunset & Gardner Joint Venture is not guaranteed by the Company.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. LEASES
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2021, the leases at the Company’s properties, excluding the property classified as held for sale, have remaining terms (excluding options to extend) of up to 10.7 years with a weighted-average remaining term (excluding options to extend) of approximately 6.0 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled approximately $94 thousand and $0.1 million as of March 31, 2021 and December 31, 2020, respectively.
The following table presents the components of income from real estate operations for the years ended March 31, 2021 and 2020 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2021
|
|
2020
|
Lease income - operating leases
|
|
|
|
|
$
|
594
|
|
|
$
|
636
|
|
Variable lease income (1)
|
|
|
|
|
121
|
|
|
171
|
|
Rental and reimbursements income
|
|
|
|
|
$
|
715
|
|
|
$
|
807
|
|
(1)Primarily includes tenant reimbursements for real estate taxes, insurance and common area maintenance.
At the start of the COVID-19 pandemic and shelter-in-place orders, a majority of the Company’s tenants requested rent deferral or rent abatement due to the pandemic and government-mandated restrictions. These tenants totaled approximately 94% of the leased square footage in the Company’s wholly-owned properties. Not all tenant requests resulted in modified agreements nor did the Company forgo its contractual rights under its lease agreements. The Company reviewed these requests on a case-by-case basis and agreed to modifications to some of the tenant leases, while other leases were not modified. Of the total leased square footage in the Company’s wholly-owned properties, 47% of the leases were either (i) not modified and the tenants were able to continue to make their payments or (ii) the leases were modified to provide for a short-term temporary rent deferral or abatement. The rent deferrals generally were one to two months and were to be repaid within 12 months. Any rent abatement was typically one to two months and involved an extension of the tenant's lease. Another 28% of the leases in the Company’s wholly-owned properties were modified to provide ongoing rent relief to the tenant. These lease modifications involved some combination of lease extensions, application of security deposits, temporary rent deferrals, partial rent forgiveness or abatement, and new percentage rent clauses to protect the landlord in the event sales returned to prior levels during the period of the lease modifications. Temporary deferrals resulted in increased receivable balances, with continued recognition of revenue during the deferral period. Lease term extensions with partial rent forgiveness and/or abatement, resulted in adjustments to the amount of revenue recognized on a straight-line basis. The tenants making up the remaining 25% of the Company’s wholly-owned properties’ leased square footage requested lease concessions; however, the Company could not agree with these tenants on lease changes acceptable to both parties. As of March 31, 2021, these tenants were in default under their leases; however, the Company is temporarily unable to evict them under state and local statutes and moratoria. The Company is working with these tenants to find replacement tenants and terminate their leases.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of March 31, 2021, approximately $0.7 million of rental income due and payable was outstanding. The Company collected a total of approximately $38 thousand, or 5%, of the outstanding balance in April 2021. Additionally, approximately $43 thousand of rental income earned and recognized to date, was deferred and is expected to be collected in future periods.
As of March 31, 2021, the future minimum rental income from the Company’s wholly-owned properties under non-cancelable operating leases, excluding the property classified as held for sale, was as follows (amounts in thousands):
|
|
|
|
|
|
Remainder 2021
|
$
|
1,315
|
|
2022
|
1,803
|
|
2023
|
1,828
|
|
2024
|
1,850
|
|
2025
|
1,638
|
|
Thereafter
|
3,434
|
|
Total
|
$
|
11,868
|
|
6. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of March 31, 2021 and December 31, 2020, the Company’s acquired lease intangibles and below-market lease liabilities, excluding intangibles and below-market lease liabilities classified as held for sale, were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Intangibles
|
|
Below-Market Lease Liabilities
|
|
March 31, 2021
|
|
December 31, 2020
|
|
March 31, 2021
|
|
December 31, 2020
|
Cost
|
$
|
1,948
|
|
|
$
|
1,892
|
|
|
$
|
(389)
|
|
|
$
|
(389)
|
|
Accumulated amortization
|
(765)
|
|
|
(716)
|
|
|
151
|
|
|
142
|
|
Total
|
$
|
1,183
|
|
|
$
|
1,176
|
|
|
$
|
(238)
|
|
|
$
|
(247)
|
|
The Company’s amortization of lease intangibles and below-market lease liabilities for the three months ended March 31, 2021 and 2020, were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Intangibles
|
|
Below-Market Lease Liabilities
|
|
Three Months Ended
March 31,
|
|
Three Months Ended
March 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Amortization
|
$
|
(49)
|
|
|
$
|
(63)
|
|
|
$
|
9
|
|
|
$
|
15
|
|
7. NOTES PAYABLE, NET
Multi-Property Secured Financing
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. Proceeds from the SRT Loan were used by the Company to pay down the Company’s credit facility and in connection with such payment, the properties referenced above were released from liens related to that credit facility. The SRT Loan matures on January 9, 2023. The Company has an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. The Company has the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of yield maintenance payments if such prepayment occurs in the first 18 months of the loan term, calculated through the 18th monthly payment date, as well as certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. Any prepayment or repayment on or before the first 12 months of the loan term in connection with a bona fide third-party sale of a property securing the SRT Loan shall only require the payment of yield maintenance payments calculated through the 12th monthly payment date.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of March 31, 2021, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating LIBOR rate loan which bears interest at 30-day LIBOR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity.
Pursuant to the SRT Loan, the Company must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on the Company’s liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates. At March 31, 2021, the Company was in compliance with the loan requirements in effect as of that date.
In connection with the SRT Loan, the Company executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the San Francisco assets.
Loans Secured by Properties
On May 7, 2019, the Company refinanced and repaid its financing from Loan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of March 31, 2021, the Wilshire Construction Loan had a principal balance of approximately $12.5 million, with future funding available up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Loan is scheduled to mature on May 10, 2022, with options to extend for two additional twelve-month periods, subject to certain conditions as stated in the loan agreement. The Wilshire Construction Loan is secured by a first Deed of Trust on the Wilshire Property. The Company executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of the Company’s joint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of borrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. The Company executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. The Company used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
Line of Credit
On February 10, 2020, the Company 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.
Loans Secured by Properties Under Development
On October 29, 2018, the Company entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and had an interest rate of 6.9% per annum. The original Sunset & Gardner Loan agreement matured on October 31, 2019. The Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 6.5% per annum. On July 31, 2020, the Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. The new maturity date is October 31, 2021. The Sunset & Gardner Loan is secured by a first Deed of Trust on the Sunset & Gardner Property.
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of March 31, 2021 (amounts in thousands):
|
|
|
|
|
|
Remainder of 2021
|
$
|
8,700
|
|
2022
|
12,510
|
|
2023
|
18,000
|
|
Total (1)
|
$
|
39,210
|
|
(1)Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $0.7 million deferred financing costs, net.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
During the three months ended March 31, 2021, the Company incurred and expensed approximately $0.3 million of interest costs, which included the amortization of deferred financing costs of approximately $0.1 million. During the three months ended March 31, 2020, the Company incurred and expensed approximately $0.2 million of interest costs, which consisted of amortization of deferred financing costs. Also during the three months ended March 31, 2021 and 2020, the Company incurred and capitalized approximately $0.4 million and $0.6 million, respectively, of interest expense related to the variable interest entities which included amortization of deferred financing costs of approximately $44 thousand and $80 thousand, respectively, for each period.
As of both March 31, 2021 and December 31, 2020, interest expense payable was approximately $0.2 million, including an amount related to the variable interest entities of approximately $0.1 million, for each period.
8. FAIR VALUE DISCLOSURES
The Company believes the total carrying values reflected on its consolidated balance sheets for cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to affiliates, mortgage loan and construction loan secured by properties under development, and the Company’s multi-property secured financing, reasonably approximated their fair values based on their nature, terms, and interest rates that approximate current market rates at March 31, 2021.
As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the operating properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.
For both the three months ended March 31, 2021 and 2020, 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) and adopted the SRP. Under the SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder are eligible for repurchase by the Company. Under the current SRP, as amended to date, the number of shares to be redeemed is limited to the lesser of (i) a total of $3.8 million for redemptions sought upon a stockholder’s death and a total of $1.2 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted-average number of shares of the Company’s common stock outstanding during the prior calendar year. Share repurchases pursuant to the SRP are made at the sole discretion of the Company. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.
The redemption price for shares that are redeemed is 100% of the Company’s most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or qualifying disability.
The SRP provides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If the Company cannot honor all redemption requests received in a given quarter, all requests, including death and qualifying disability redemptions, will be honored on a pro rata basis. If the Company does not completely satisfy a redemption request in one quarter, it will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. The Company may increase or decrease the amount of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
In order to preserve cash in light of the uncertainty relating to the duration of shelter-in-place orders and the economic impact of COVID-19 on the Company, by unanimous written consent executed on April 21, 2020, the board of directors approved the suspension of the SRP, which offered redemption opportunities only in connection with a stockholder’s death or qualifying disability. The suspension of the SRP became effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made until the board of directors approves the resumption of the SRP. During the suspension, the Company will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the board of directors has elected to lift the suspension and provided the terms and
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
conditions for any continuation of the SRP. There is no guarantee if or when the board of directors will lift the suspension, and if they do, what the terms will be.
The following table summarizes share redemption activity during the three months ended March 31, 2021 and 2020 (amounts in thousands, except shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2021
|
|
2020
|
Shares of common stock redeemed
|
|
|
|
|
—
|
|
|
19,907
|
|
Purchase price
|
|
|
|
|
$
|
—
|
|
|
$
|
117
|
|
Cumulatively, through March 31, 2021, pursuant to the Original Share Redemption Program and the Amended and Restated SRP, the Company has redeemed 878,458 shares sold in the Offering and/or its dividend reinvestment plan for $6.2 million.
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, the board of directors of the Company voted to suspend the payment of any dividend for the quarter ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of March 31, 2021.
10. EARNINGS PER SHARE
EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. There was no unvested stock as of March 31, 2021. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
The following table sets forth the computation of the Company’s basic and diluted earnings per share for the three months ended March 31, 2021 and 2020 (amounts in thousands, except shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2021
|
|
2020
|
Numerator - basic and diluted
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
$
|
(871)
|
|
|
$
|
425
|
|
Net income (loss) attributable to non-controlling interests
|
|
|
|
|
(17)
|
|
|
8
|
|
Net income (loss) attributable to common shares
|
|
|
|
|
$
|
(854)
|
|
|
$
|
417
|
|
Denominator - basic and diluted
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
|
|
10,739,729
|
|
|
10,759,198
|
|
|
|
|
|
|
|
|
|
Common Units (1)
|
|
|
|
|
—
|
|
|
—
|
|
Diluted weighted average common shares
|
|
|
|
|
10,739,729
|
|
|
10,759,198
|
|
Earnings (loss) per common share - basic and diluted
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common shares
|
|
|
|
|
$
|
(0.08)
|
|
|
$
|
0.04
|
|
(1)The effect of 217,475 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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, 2021. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services. Effective April 1, 2021, PUR SRT Advisors LLC, controls SRT Advisor, LLC. Refer to Note 13, “Subsequent Events” for additional information.
On March 3, 2021, the Company obtained a $2.5 million Standby Loan Commitment (the “Loan”) from Glenborough Property Partners, LLC, an affiliate of the Advisor. If the Company elects to act on the Standby Commitment, the Loan would have a term of 12 months with an interest rate of 7.0% per annum, payable monthly. The Company would have the right to prepay or repay the Loan in whole or in part at any time without penalty. There are no other loan fees or financing coordination fees paid or payable in connection with this loan. The Loan would be secured by first deed of trust on Shops at Turkey Creek. As of March 31, 2021, the Company did not elect to act on the Standby Commitment. As a result of the sale of Shops at Turkey Creek, refer to Note 13, “Subsequent Events”, the Loan was not executed and as such, the Standby Commitment expired.
Summary of Related Party Fees
The following table sets forth the Advisor related party costs incurred and payable by the Company for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred
|
|
Payable as of
|
|
|
|
|
Three Months Ended
March 31,
|
|
March 31,
|
|
December 31,
|
Expensed
|
|
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees
|
|
|
|
|
|
$
|
153
|
|
|
$
|
167
|
|
|
$
|
51
|
|
|
$
|
—
|
|
Reimbursement of operating expenses
|
|
|
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Property management fees
|
|
|
|
|
|
20
|
|
|
21
|
|
|
6
|
|
|
9
|
|
Disposition fees
|
|
|
|
|
|
—
|
|
|
157
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
173
|
|
|
$
|
351
|
|
|
$
|
57
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition fees
|
|
|
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Leasing fees
|
|
|
|
|
|
20
|
|
|
39
|
|
|
15
|
|
|
—
|
|
Legal leasing fees
|
|
|
|
|
|
10
|
|
|
8
|
|
|
6
|
|
|
—
|
|
Construction management fees
|
|
|
|
|
|
32
|
|
|
66
|
|
|
32
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
65
|
|
|
$
|
119
|
|
|
$
|
54
|
|
|
$
|
2
|
|
Acquisition Fees
Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. An acquisition fee is capitalized by the Company when the related transaction does not qualify as a business combination; otherwise an acquisition fee is expensed.
Financing Coordination Fees
Under the Advisory Agreement, the Advisor is entitled to receive a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by the Company or the OP and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by the Company or the OP.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Asset Management Fees
Under the Advisory Agreement, the Advisor is entitled to receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments, or (2) the fair market value of the Company’s investments (before non-cash reserves and depreciation) if the board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.
Reimbursement of Operating Expenses
The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described above) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors. Pursuant to an amendment to the Advisory Agreement entered on August 2, 2018, the board of directors, including a majority of the independent directors identified certain unusual and non-recurring factors that would justify reimbursement to the Advisor of amounts in excess of the 2%/25% Guidelines and confirmed that the Advisor would not be obligated to reimburse the Company for these excess amounts to the extent the excess was caused by such factors.
For the three months ended March 31, 2021 and 2020, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fees
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive property management fees calculated at a maximum of up to 4% of the properties’ gross revenue. The property management agreements with Glenborough have been renewed for an additional 12 months, beginning on August 10, 2020. Property management agreements with Glenborough automatically renew every year, unless expressly terminated.
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, Glenborough is entitled to receive 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, Glenborough is entitled to receive 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 is entitled to receive a fee equal to 5% of the hard costs for the project in question.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its condensed consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
13. SUBSEQUENT EVENTS
Other Events
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.
Sale of Property
On April 27, 2021, the Company consummated the disposition of Shops at Turkey Creek, located in Knoxville, Tennessee, for $4.0 million in cash.