PILLARSTONE CAPITAL REIT Unless the context otherwise requires, all references in this report to the
"Company," "we," "us" or "our" are to
Forward-Looking Statements
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as "may," "will," "should," "potential," "predicts," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:
• uncertainties related to the COVID-19 pandemic, including the unknown duration
and economic, operational and financial impacts of the COVID-19 pandemic and
the actions taken or contemplated by
or others in response to the pandemic on our business, employees and tenants,
including, among others, (a) changes in tenant demand for our properties; (b)
financial challenges confronting tenants, including as a result of decreased
customers' willingness to visit our tenants' businesses, and potential renewed
mandated shelter in place orders that may prevent customers from visiting some
of our tenants' businesses and the impact of these issues on our ability to
collect rent from our tenants; (c) limited ability to access the capital
markets and other sources of financing on attractive terms or at all, and (d)
prolonged measures to contain the spread of COVID-19;
• legislative or regulatory changes, including the impact of the legislation
commonly known as the Tax Cuts and Jobs Act;
• adverse economic or real estate developments or conditions in
as a result of a surge in COVID-19 cases in such areas and the impact on our
tenants' ability to pay their rent, which could result in bad debt allowances
or straight-line rent reserve adjustments;
• increases in interest rates and operating costs;
• availability and terms of capital and financing, both to fund our operations
and to refinance our indebtedness as it matures, in each case, on terms
favorable to the Company;
• decreases in rental rates or increases in vacancy rates;
• litigation risks, including risks relating to the lawsuit discussed under the
heading "Lawsuit and Termination of Management Agreements" is below;
• lease-up risks, including leasing risks arising from exclusivity and consent
provisions in leases with significant tenants;
• the impact of public health crises and pandemics, such as the COVID-19
outbreak;
• cybersecurity attacks, loss of confidential information and other business
disruptions;
• our inability to renew tenants or obtain new tenants upon the expiration of
existing leases;
• our inability to generate sufficient cash flows due to market conditions,
competition, uninsured losses, changes in tax or other applicable laws; and
• risks related to our internalization of the management discussed under the
heading "Lawsuit and Termination of Management Agreements" below.
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In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:
• our cash resources are limited; • we have a history of losses; • we have not raised funds through a public equity offering; • our trustees control a significant percentage of our voting shares;
• shareholders could experience possible future dilution through the issuance of
additional shares;
• we are dependent on a small number of key senior professionals who are
part-time employees; and
• we currently do not plan to distribute dividends to the holders of our shares.
Overview The Company is aMaryland real estate investment trust ("REIT") engaged in investing in, owning and operating commercial properties. Future real estate opportunities may include (i) acquisition and development of retail, office, office warehouse, industrial, multifamily, hotel and other commercial properties, (ii) acquisition of or merger with a REIT or real estate operating company, (iii) sales of existing properties, (iv) redevelopment of existing properties, and (v) joint venture investments. Substantially all of our business is conducted through our operating partnership Pillarstone OP. We are the sole general partner of Pillarstone OP. As ofJune 30, 2022 , we owned approximately 18.6% of the outstanding equity in Pillarstone OP and we fully consolidate it on our condensed consolidated financial statements. As ofJune 30, 2022 , the Company is a smaller reporting company current in its quarterly and annual financial statement filings with theSEC , that may make future real estate investments. There can be no assurance that we will be able to close additional transactions. Even if our management is successful in closing additional transactions, investors may not value the transactions or the Company in the same manner as we do, and investors may not value the transactions as they would value other transactions or alternatives. Failure to obtain additional sources of capital will materially and adversely affect the Company's ability to continue operations, as well as its liquidity and financial results. Brief History Pillarstone was formed onMarch 15, 1994 as a Maryland REIT. The Company operated as a traditional REIT by buying, selling, owning and operating commercial and residential properties throughDecember 31, 1999 . In 2000, the Company purchased a software technology company, resulting in the Company not meeting the qualifications to be a REIT under the Code. In 2002, the Company discontinued the operations of the technology segment, and from 2003 through 2006, pursued a value-added business plan primarily focused on acquiring well located, under-performing multifamily residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding. From 2006 untilDecember 2016 , the Company continued its existence as a corporate shell current in itsSEC filings. OnDecember 8, 2016 , Pillarstone and Pillarstone OP entered into the Contribution Agreement with Whitestone OP, a subsidiary and the operating partnership of Whitestone, both of which are related parties to Pillarstone and Pillarstone OP, pursuant to which Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, aDelaware limited liability company ("CP Woodland");Whitestone Industrial-Office, LLC , aTexas limited liability company ("Industrial-Office");Whitestone Offices, LLC , aTexas limited liability company ("Whitestone Offices"); andWhitestone Uptown Tower, LLC , aDelaware limited liability company ("Uptown Tower") that owned 14 real estate assets (the "Real Estate Assets") for aggregate consideration of approximately$84 million , consisting of (1) approximately$18.1 million of Class A units representing limited partnership interests in Pillarstone OP issued at a price of$1.331 per OP Unit; and (2) the assumption of approximately$65.9 million of liabilities by Pillarstone OP (collectively, the "Acquisition"). Whitestone OP is the 81.4% limited partner of Pillarstone OP. In connection with the Contribution Agreement, onDecember 8 ,
2016,
Pillarstone entered into management agreements withWhitestone TRS, Inc. , a subsidiary of Whitestone ("Whitestone TRS"). Pursuant to the management agreements with respect to each property, other than Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such properties in exchange for (1) a monthly property management fee equal to 5.0% of the monthly revenues of each property and (2) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services in exchange for (1) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (2) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower.
Lawsuit and Termination of Management Agreements
On July 12, 2022 , after the quarterly period ended June 30 , 2022,
Pillarstone was named as a defendant in a lawsuit filed in theCourt of Chancery of the State of Delaware by Whitestone OP. The suit challenges Pillarstone's rights agreement, dated as ofDecember 27, 2021 (as the same may be amended from time to time, the "Rights Agreement"), between Pillarstone andAmerican Stock Transfer & Trust Company, LLC , as rights agent, and claims that Pillarstone's adoption of the Rights Agreement breached the Amended and Restated Agreement of Limited Partnership, and that Pillarstone breached its fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership. OnJuly 21, 2022 , Whitestone OP filed a Motion to Preserve the Status Quo requesting broad restrictions on Pillarstone's ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. Pillarstone believes that these allegations are without merit, intends to vigorously defend against them, and is considering its rights and potential claims for affirmative relief with respect to the lawsuit. However, an unfavorable outcome of this lawsuit is unpredictable and could result in substantial costs to Pillarstone. OnJuly 19, 2022 , Pillarstone received written notice that Whitestone TRS confirmed termination of the management agreements for the Real Estate Assets. Pillarstone had previously communicated to Whitestone its plan to internalize the management of the Real Estate Assets, but Pillarstone had not made efforts to terminate the management agreements. However, Whitestone TRS stated in its notice letter that while it had not received written notice of the termination of the management agreements, it "confirms receipt of your intent to terminate, and hereby confirms termination of the Agreements effective 30 days from"July 19, 2022 . Following the transition of management from Whitestone TRS, Pillarstone intends to internalize the management of its Real Estate Assets and to continue to pursue its business without the management services provided by Whitestone TRS under the management agreements. Prior to receiving the termination notice, Pillarstone had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe. The management agreements provided for Whitestone TRS to provide such services, or in certain cases contracting with other providers to perform such services, as:
? providing management, leasing, and maintenance personnel to operate the Real
Estate Assets;
? maintaining the Real Estate Assets;
? maintaining connected utility services at the Real Estate Assets;
? invoice and collect the monthly rent from the tenants; default and pursue
collection for delinquent tenants;
? pay monthly invoices to vendors, including loan payments to lenders;
? maintain monthly accounting records and provide monthly operating statements
for each Real Estate Asset;
? perform an annual audit of the financial statements, prepare workpapers for
the annual audit, and assist the auditors to complete the annual audit;
? assist in the preparation of the annual tax returns for Pillarstone,
Pillarstone OP and the owners of the Real Estate Assets; and
? assist in the preparation of the Pillarstone SEC financial reports and other
filings.
The services under the management agreements are extensive and material to the
operation of Pillarstone's business and financial reporting. Pillarstone
believes the management functions as operated by Whitestone were deeply
integrated with Whitestone's management functions for its own business and may
be difficult, expensive, and time-consuming to separate. If the timeframe to
internalize the management functions based on the termination notice is too
short, and if Whitestone does not cooperate with an orderly transfer of the
management of the Real Estate Assets, Pillarstone's business, income, cash flow,
results of operations, financial condition, liquidity, and prospects could be
materially and adversely affected.
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Table of Contents Impact of COVID-19 The ongoing COVID-19 pandemic has in the past and may continue to materially and adversely impact and disrupt our business, financial condition, results of operations and cash flows. Any future outbreak of any COVID-19 variants or any other highly infectious or contagious disease could have a similar impact. The impact of COVID-19, including any resurgences, future pandemics or other health crises may adversely affect our business, financial condition, results of operations, cash flows and market value. These type of health crises may impact our business in the following ways:
• closures of, or other operational issues at, our properties resulting from
government or tenant action;
• reduced economic activity impacting our tenants' ability to meet their rental
and other obligations to us in full or at all;
• the ability of our tenants who have been granted rent deferrals to timely pay
deferred rent;
• an inability to renew leases or lease vacant space on favorable terms or at
all;
• tenant bankruptcies;
• liquidity issues resulting from reduced cash flows from operations;
• negative impacts to the credit and/or capital markets making it difficult to
access capital on favorable terms or at all;
• impairment in value of our properties;
• a general decline in business activity and demand for real estate transactions
adversely affecting our portfolio of properties and our ability to service our
indebtedness;
• supply chain disruptions adversely affecting our tenants' operations; and
• impacts on the health of our personnel and a disruption in the continuity of
our business.
Because substantially all of our income is derived from rentals of commercial
real property, our business, income, cash flow, results of operations, financial
condition, liquidity, prospects and ability to service our debt obligation would
be adversely affected if a significant number of tenants are unable to meet
their obligations or their revenues decline. The extent to which the COVID-19
pandemic, or a future pandemic, impacts our operations and those of our tenants
will depend on future developments, which are highly uncertain and cannot be
predicted with confidence.
Results of Operations
The following is a discussion of our results of operations for the three and six
months ended
• Explanation of changes in the results of operations in the Condensed
Consolidated Statements of Operations for the three and six months ended June
30, 2022 and 2021.
• Our critical accounting policies and estimates that require our subjective
judgment and are important to the presentation of our financial condition and
results of operations.
• Our primary sources and uses of cash for the six month periods ended
2022 and 2021, and how we intend to generate cash for long-term capital needs.
• Our current income tax status.
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report.
Comparison of the Six Month Periods Ended
Leasing Activity For the six month period endedJune 30, 2022 , we executed 32 leases for a total lease value of$1.7 million compared to 46 leases for a total lease value of$3.2 million for the six month period endedJune 30, 2021 . 20
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Table of Contents Results of Operations
The following provides a general comparison of our results of operations for the
six month periods ended
Six Months Ended June 30,
2022 2021
Number of properties 8 8
Aggregate GLA (sq. ft.) 926,798 926,798
Ending occupancy rate 56 % 61 %
Total revenues $ 4,604 $ 4,462
Total operating expenses 4,009 3,922
Total other expenses 399 383
Provision for income tax expense (benefit) (5 ) (12 )
Net income 201 169
Less: Non-controlling interest in subsidiary 293
314
Net loss available to Common Shareholders $ (92 )
Revenues from Operations We had total revenues for the six month periods endedJune 30, 2022 and 2021 of approximately$4,604,000 and$4,462,000 , respectively, for an increase of approximately$142,000 , or 3%. The difference was comprised of a decrease of approximately$74,000 in rental revenues, an increase of$216,000 in expense reimbursements, an increase of$10,000 in other revenue, and an increase of$10,000 in bad debt, which is classified as a part of revenue. The majority of the overall increase was due to higher reimbursements from common area maintenance and unbilled recoveries from the prior year. Expenses from Operations Our operating expenses were approximately$4,009,000 for the six months endedJune 30, 2022 compared to approximately$3,922,000 for the six months endedJune 30, 2021 , an increase of approximately$87,000 , or 2%. The overall increase was primarily due to increases in miscellaneous repairs, contract services, and electricity usage at our properties, offset by a decrease in real estate taxes for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . The primary components of operating expenses are detailed in the table below (in thousands): Six Months Ended June 30, 2022 2021 Change % Change Depreciation and amortization$ 990 $ 999 $ (9 ) (1 )% Operating and maintenance 1,623 1,454 169 12 % Real estate taxes 741 802 (61 ) (8 )% General and administrative 372 383 (11 ) (3 )% Management fees 283 284 (1 ) 0 % Total operating expenses$ 4,009 $ 3,922 $ 87 2 %
Comparison of the Three Month Periods Ended
Leasing Activity
For the three month period ended
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Table of Contents Results of Operations
The following provides a general comparison of our results of operations for the
three month periods ended
Three Months Ended June 30,
2022 2021
Number of properties 8 8
Aggregate GLA (sq. ft.) 926,798 926,798
Ending occupancy rate 56 % 61 %
Total revenues $ 2,278 $ 2,272
Total operating expenses 2,099 1,952
Total other expenses 202 180
Provision for income tax expense (benefit) (12 ) (5 )
Net income (11) 145
Less: Non-controlling interest in subsidiary 64
205
Net loss available to Common Shareholders $ (75 ) $
(60 ) Revenues from Operations We had total revenues for the three month periods endedJune 30, 2022 and 2021 of approximately$2,278,000 and$2,272,000 , respectively, for an increase of approximately$6,000 . The difference was comprised of a decrease of approximately$50,000 in rental revenues, an increase of$87,000 in expense reimbursements, an increase of$4,000 in other revenue, and an increase of$35,000 in bad debt, which is classified as a part of revenue. The majority of the overall increase was due to higher reimbursements from common area maintenance and unbilled recoveries from the prior year. Expenses from Operations Our operating expenses were approximately$2,099,000 for the three months endedJune 30, 2022 compared to approximately$1,952,000 for the three months endedJune 30, 2021 , an increase of approximately$147,000 , or 8%. The overall increase was primarily due to increases in miscellaneous repairs, contract services, and electricity usage at our properties for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . The primary components of operating expenses are detailed in the table below (in thousands): Three Months Ended June 30, 2022 2021 Change % Change Depreciation and amortization $ 506 $ 502$ 4 1 % Operating and maintenance 852 736 116 16 % Real estate taxes 413 393 20 5 % General and administrative 185 176 9 5 % Management fees 143 145 (2 ) (1 )% Total operating expenses$ 2,099 $ 1,952 $ 147 8 %
Liquidity and Capital Resources
Cash Flows
As of
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During the six months endedJune 30, 2022 , the Company's cash balance decreased by$410,000 from$5,206,000 atDecember 31, 2021 to$4,796,000 atJune 30, 2022 . This decrease in cash was due to cash provided by operating activities of approximately$608,000 , cash used in investing activities of approximately$700,000 and cash used in financing activities of approximately$318,000 . During the first quarter of 2022,Pillarstone Capital REIT ("Pillarstone REIT") determined that it should be reimbursed for its operating and administrative expenses from Pillarstone OP on a historical and ongoing basis in accordance with the Pillarstone OP operating partnership agreement in which Pillarstone REIT is the general partner and Whitestone OP is the limited partner. Whitestone and Whitestone OP contested the reimbursement of expenses of approximately$1.8 million for the years ended 2017 through 2021 and Pillarstone REIT intends to pursue the reimbursement from Pillarstone OP. The funds are in bank accounts currently controlled by affiliates of Whitestone and Whitestone OP pursuant to Pillarstone OP management agreements with those Whitestone affiliates, and the parties are in the process of transitioning the accounts to Pillarstone's control. For financial reporting purposes, Pillarstone REIT and Pillarstone OP report on a consolidated basis, therefore, the reimbursement of Pillarstone REIT's expenses would not change net income but only the allocations between controlling and noncontrolling interests. For the three months endedMarch 31, 2022 , Pillarstone OP reimbursed Pillarstone REIT inMay 2022 approximately$117,000 for a portion of operating and administrative expenses and Pillarstone REIT will pursue reimbursement from Pillarstone OP for the remaining amount of approximately$59,000 that Whitestone and Whitestone OP have contested. For the three months endedJune 30, 2022 , Pillarstone determined approximately$95,000 of its operating and administrative expenses should be reimubursed by Pillarstone OP, of which Whitestone and Whitestone OP contested approximately$62,000 . Pillarstone OP will reimburse Pillarstone approximately$33,000 for the uncontested expenses in the third quarter of 2022 and Pillarstone will pursue the contested expenses based on the provisions in the Amended and Restated Agreement of Limited Partnership. . When Pillarstone REIT made its determination for reimbursement of its operating and administrative expenses from Pillarstone OP for the years ended 2017 through 2021, Whitestone and Whitestone OP determined Whitestone OP should be reimbursed for construction and lease commissions of approximately$1.4 million that it paid on behalf of Pillarstone OP for 2017 and 2018. Pillarstone REIT and Pillarstone OP requested additional information from Whitestone and Whitestone OP for these expenditures. If any reimbursement is made to Whitestone OP, then Pillarstone OP would have less cash available for operations and distributions to its partners and Pillarstone OP's investment account with Whitestone OP would be reduced.
Our ability to access the capital markets will be dependent on a number of factors, including general market conditions and market perceptions about our Company.
Future Obligations None.
Long Term Liquidity and Operating Strategies
Historically, we have financed our long term capital needs, including acquisitions, as follows:
• borrowings from new loans;
• additional equity issuances of our common and preferred shares and operating
partnership units; and
• proceeds from the sales of our Real Estate Assets.
From 2006 until December 2016 , the Company continued its existence as a
corporate shell filing its periodic reports with the SEC so that it could be
used for future real estate transactions or sold to another company. During this
time, the Company was funded by its trustees who contributed $500,000 in
exchange for 125,000 Preferred C Shares and $197,780 in exchange for convertible
notes payable.
Subsequent to the Acquisition, Pillarstone has been developing strategies for
the Real Estate Assets in order to create value for the enterprise and our
shareholders and selling assets to pay off some of its debt. To implement the
strategy to create value with the Real Estate Assets, additional capital will
need to be raised.
Current Tax Status
As of June 30, 2022 and December 31, 2021 , we had net deferred tax liabilities
of approximately $11,000 and $36,000 , respectively. As of June 30, 2022 , we have
an operating loss carryforward of approximately $139,000 available to be carried
to future periods.
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The income tax expense (benefit) included in the condensed consolidated
statements of operations for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Federal $ (19) $ (17 ) $ (24 ) $ (35 )
Texas franchise tax 7 12 19 23Provision for income tax expense (benefit) $ (12 ) $
(5 ) $ (5 )$ (12 ) Interest Rates The Company was not significantly affected by interest rates during the periods presented in this report due primarily to the Company having approximately 100% of its debt with fixed rates as ofJune 30, 2022 .
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Application of Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. The following section is a summary of certain estimates that both require our most subjective judgment and are most important to the presentation of our financial condition and results of operations. It is possible that the use of different estimates or assumptions in making these judgments could result in materially different amounts being reported in our condensed consolidated financial statements. Revenue recognition. All leases on our properties are classified as noncancelable operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. For the three months endedJune 30, 2022 , we did not have a straight-line rent reserve adjustment. For the six months endedJune 30, 2022 , we had a straight-line rent reserve adjustment of$1,000 for the conversion of one tenant to cash basis as a result of our COVID-19 collectibility analysis. For the three and six months endedJune 30, 2021 , we had a straight-line rent reserve adjustment of$1,000 for the conversion of one tenant to cash basis as a result of our COVID-19 collectibility analysis. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the condensed consolidated statements of operations. We recognize lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured.Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values at the time of purchase. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt. Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter. Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as ofJune 30, 2022 . 24
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