The following discussion should be read in conjunction with our consolidated financial statements and related notes in Part II, Item 8 of this Report.
Management's Overview
We are an externally advised and managed company that invests in notes
receivable that are collateralized by income-producing properties in the
We have historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition, dispositions and financings. Transactions involving related parties cannot be presumed to be carried out on an arm's length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest. Our operations are managed by Pillar in accordance with an Advisory Agreement. Pillar's duties include, but are not limited to, locating, evaluating and recommending investment opportunities. We have no employees. Employees of Pillar render services to us in accordance with the terms of the Advisory Agreement. Pillar is considered to be a related party due to its common ownership with TCI, who is our controlling stockholder. 6 Critical Accounting Policies
The preparation of our consolidated financial statements in conformity withUnited States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgments on the provisions for uncollectible accounts and fair value measurements. Our significant accounting policies are described in more detail in Note 2-Summary of Significant Accounting Policies in our notes to the consolidated financial statements. However, the following policies are deemed to be critical.
Non-performing Notes Receivable
The Company considers a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.
Interest recognition on Notes Receivable
We record interest income as earned in accordance with the terms of the related loan agreements.
Allowance for Estimated Losses
We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership's real estate that represents the primary source of loan repayment. (See Note 3, below, Notes and Interest Receivable from Related Parties, for details on our notes receivable.)
Fair Value of Financial Instruments
We apply the guidance in ASC Topic 820, "Fair Value Measurements and Disclosures," to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity's own data.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:
Level 1-Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2-Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3-Unobservable inputs that are significant to the fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Related Parties We apply ASC Topic 805, "Business Combinations", to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing our own separate interests, or affiliates of the entity. 7 Inflation The effects of inflation on our operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, our earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, we may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials. We are not aware of any environmental liability relating to the above matters that would have a material adverse effect on our business, assets or results of operations. Results of Operations
The following discussion is based on our Consolidated Financial Statements Consolidated Statement of Operations, for the years endedDecember 31, 2022 , 2021, and 2020 from Part II, Item 8. Financial Statements and Supplementary Data and is not meant to be an all-inclusive discussion of the changes in our net income applicable to common shares. Instead, we have focused on significant fluctuations within our operations that we feel are relevant to obtain an overall understanding of the change in income applicable to common shareholders.
Our operating expenses consist primarily of general and administrative costs such as audit and legal fees and administrative fees paid to a related party.
We also have other income and expense items. We receive interest income from the funds deposited with our Advisor at a rate of prime plus 1.0%. We have receivables from related parties which also provide interest income.
Comparison of the year ended
Our
? The
in interest rates in 2022.
? The
recovery of a note receivable that had previously been written off.
Comparison of the year ended
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended
Liquidity and Capital Resources
Our principal liquidity needs are to fund normal recurring expenses. Our principal sources of cash are and will continue to be the collection of mortgage notes receivables, and the collections of receivables and interests from related companies. We anticipate that our cash and cash equivalents as ofDecember 31, 2022 , along with cash that will be generated in 2023 from notes and interest receivables, will be sufficient to meet all of our cash requirements. 8 Cash Flow Summary The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data" and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands): Year Ended December 31, 2022 2021 Incr /(Decr)
Net cash provided by (used in) operating activities $ 4 $ (2,980 )
2,970$ (2,970 )
The increase in cash from operating activities is primarily due to the collection of a note receivable in 2021.
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