PILLARSTONE CAPITAL REIT Overview
The Company is a Maryland REIT engaged in investing in, owning and operating commercial properties. Future real estate investments 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, and (iii) 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 ofDecember 31, 2021 , we owned approximately 18.6% of the outstanding equity in Pillarstone OP and we fully consolidate it on our consolidated financial statements. As ofDecember 31, 2021 , 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: CP Woodland; Industrial-Office; Whitestone Offices; andUptown Tower that own 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").
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.
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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 and net income for
the years ended
•Explanation of changes in the results of operations in the Consolidated Statements of Operations for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . •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 years endedDecember 31, 2021 and 2020, 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 consolidated financial statements and notes thereto appearing elsewhere herein.
Comparison of the Year Ended
Leasing Activity
For the year ended
Results of Operations
The following table provides a general comparison of our results of operations
for the years ended
Year Ended December 31,
2021 2020
Number of properties 8 8
Aggregate GLA (sq. ft.) 926,798 926,798
Ending occupancy rate 58 % 61 %
Total revenues $ 9,273 $ 9,671
Total operating expenses 8,009 8,120
Total other expense 788 928
Income tax provision (benefit) 2 (35)
Net income 474
658
Less: Noncontrolling interest in subsidiary 733
1,029
Net loss available to Common Shareholders$ (259) $ (371) Revenues from Operations We had total revenues for the years endedDecember 31, 2021 and 2020 of approximately$9,273,000 and$9,671,000 , respectively, for a decrease of approximately$398,000 , or 4%. The difference was comprised of a decrease of approximately$343,000 in rental revenues,$155,000 in expense reimbursements, and$4,000 in other revenue and offset by a decrease of$104,000 in bad debt, which is classified as a reduction of revenue. The overall decrease was primarily due to lower occupancy, which was 3% lower as ofDecember 31, 2021 compared toDecember 31, 2020 . 8 --------------------------------------------------------------------------------
Expenses from Operations
Our operating expenses were approximately$8,009,000 for the year endedDecember 31, 2021 compared to approximately$8,120,000 for the year endedDecember 31, 2020 , a decrease of approximately$111,000 . The overall decrease was due to decreases in trustee fee expense, forfeited employee shares and real estate taxes, offset by increases in miscellaneous repairs, contract services, and electricity usage at our properties for the twelve months endedDecember 31, 2021 , compared to the twelve months endedDecember 31, 2020 . The primary components of property expenses are detailed in the table below (in thousands): Year Ended December 31, % 2021 2020 Change Change Depreciation and amortization$ 2,055 $ 2,055 $ - - % Operating and maintenance 3,041 2,644 397 15 % Real estate taxes 1,646 1,824 (178) (10) % General and administrative 699 1,006 (307) (31) % Management fees 568 591 (23) (4) % Total operating expenses$ 8,009 $ 8,120 $ (111) (1) %
Federal and State Income Tax Provision (Benefit)
Our income tax provision (benefit) was approximately
Non-Controlling Interest
Our non-controlling interest represents 81.4% of the total outstanding units of Pillarstone OP which is owned by Whitestone OP. Net income from our non-controlling interest was$0.7 million for the year endedDecember 31, 2021 compared to$1.0 million for the year endedDecember 31, 2020 . The majority of the decrease in net income for the non-controlling interest was due to a decrease in occupancy.
Liquidity and Capital Resources
Cash Flows
As of
During the year endedDecember 31, 2021 , the Company's cash balance increased by$97,000 from$5,109,000 atDecember 31, 2020 to$5,206,000 atDecember 31, 2021 . This increase in cash was due to cash provided by operating activities of approximately$1,403,000 , offset by cash used in investing activities of$1,012,000 , and cash used in financing activities of approximately$294,000 .
Our ability to access the capital markets will be dependent on a number of factors as well, including general market conditions and market perceptions about our Company.
Future Obligations
As part of the Acquisition onDecember 8, 2016 , Pillarstone OP assumed approximately$65.9 million of liabilities related to the Real Estate Assets contributed by Whitestone OP. Pillarstone OP repaid approximately$50.9 million of the liabilities using cash from operations and proceeds from the sales of six Real Estate Assets in 2018 and 2019. The remaining liability of approximately$15.0 million is a mortgage loan secured by one of the Real Estate Assets. We expect the balance to be repaid from raising capital, selling assets, and/or refinancing the loan.
In addition to the mortgage loan, the Company has approximately
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--------------------------------------------------------------------------------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 •proceeds from the sales of our real estate, a technology segment, and maketable secuirities From 2006 untilDecember 2016 , the Company continued its existence as a corporate shell filing its periodic reports with theSEC so that the Company could be used for future real estate transactions or sold to another company. During this time, the Company was funded by the trustees who contributed$500,000 in exchange for 125,000 ClassC Convertible Preferred Shares and approximately$198,000 in exchange for convertible notes payable.
Currently, Pillarstone intends to develop strategies for the properties in order to create value for the enterprise and our shareholders. The strategies may include, among other things, selling properties for future investment opportunities. To implement the strategy to create value with the remaining eight Real Estate Assets additional capital will need to be raised.
Current Tax Status
As of
The income tax provision (benefit) included in the consolidated statements of operations for the years endedDecember 31, 2021 and 2020 was comprised of the following components (in thousands): Year Ended December 31, 2021 2020 Federal $ (46)$ (86) Texas franchise tax 48 51 $ 2$ (35)
Interest Rates and Inflation
The Company was not significantly affected by rising interest rates during the periods presented in this report due primarily to having 100% of its debt with a fixed rate as ofDecember 31, 2021 . We anticipate that the majority of our leases will continue to be triple-net leases or otherwise provide that tenants pay for increases in operating expenses and will contain provisions that we believe will mitigate the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon our operating results.
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 consolidated financial statements are prepared in accordance withU.S. GAAP, which requires 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 consolidated financial statements. Revenue recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. For the year endedDecember 31, 2021 , we recognized a straight-line rent reserve adjustment decreasing rental revenue by approximately$23,000 for the conversion of one tenant to 10
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cash basis revenue as a result of our COVID-19 collectability analysis. For the year endedDecember 31, 2020 , we recognized a straight-line rent reserve adjustment decreasing rental revenue by approximately$51,000 for the conversion of four tenants to cash basis revenue as a result of our COVID-19 collectability 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 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. Due to COVID-19, we are carefully evaluating acquisitions, development and redevelopment opportunities on an individual basis. 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 ofDecember 31, 2021 . Valuation Allowance of Deferred Tax Asset. We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. The Company had net deferred tax liabilities of approximately$36,000 as ofDecember 31, 2021 , and approximately$82,000 as ofDecember 31, 2020 .
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