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 of
As of
Brief History
Pillarstone was formed on
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"). OnDecember 27, 2018 , the Company sold a portfolio of three Real Estate Assets, resulting in 11 Real Estate Assets in the Company's real estate portfolio atDecember 31, 2018 . OnOctober 8, 2019 , Pillarstone OP, through an indirect wholly owned subsidiary,Whitestone Industrial-Office, LLC , sold a portfolio of three Real Estate Assets inHouston, Texas to an unaffiliated third party for$39.7 million in cash. Pillarstone OP used the net proceeds, after customary closing deductions, to pay off mortgage debt on several of the remaining Real Estate Assets, and repaid the remaining$5.7 million loan from Whitestone. In addition to the$5.7 million loan repayment, Whitestone received a$5.4 million cash distribution from its stake in Pillarstone OP as a result of the sale. The sale of the 2019 Real Estate Assets Sold resulted in eight Real Estate Assets remaining in the Company's real estate portfolio atDecember 31, 2019 . 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 ended
December 31, 2019 compared to the year ended December 31, 2018 .
• 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 year ended December 31,
2019 and 2018, and how we intend to generate cash for long-term
capital needs.
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• 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,
2019 2018
Number of properties 8 11
Aggregate GLA (sq. ft.) 926,798 1,307,930
Ending occupancy rate 75 % 80 %
Total revenues $ 14,253 $ 17,180
Total operating expenses 10,208 12,036
Total other income (14,534 ) (4,891 )
Provision for income taxes 280 229
Net income 18,299 9,806
Less: Non-controlling interest in subsidiary 15,232 8,490
Net income available to Common Shareholders
Revenues from Operations
We had total revenues for the years ended
Expenses from Operations
Our operating expenses were approximately
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Year Ended December 31,
2019 2018 Decrease % Decrease
Operating and maintenance,
excluding bad debt $ 3,480 $ 3,674 $ (194 ) (5 )%
Real estate taxes 2,257 2,720 (463 ) (17 )%
General and administrative 753 776 (23 ) (3 )%
Depreciation and amortization 2,901 3,566 (665 ) (19 )%
Management fees 817 1,008 (191 ) (19 )%
Bad debt - 292 (292 ) (100 )%
Total property expenses $ 10,208 $ 12,036 $ (1,828 ) (15 )%
Gain on Sale of Properties
On
On
Provision for Federal and State Income Taxes
Our provision for income taxes 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
Liquidity and Capital Resources
Cash Flows
As of
During the year ended
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Future Obligations
As part of the Acquisition on
As of
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 marketable securities.
From 2006 until
Currently, Pillarstone intends to develop strategies for the properties in order to create value for the enterprise and our shareholders. 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
As of
The income tax expense included in the consolidated statements of operations for the years endedDecember 31, 2019 and 2018 was comprised of the following components (in thousands): Twelve Months Ended December 31, 2019 2018 Federal $ 39$ 141 Texas franchise tax 241 88 $ 280$ 229 10
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Interest Rates and Inflation
The Company was not significantly affected by inflation during the periods
presented in this report due primarily to the relatively low nationwide
inflation rates and the Company having 100% of its debt with fixed rates as of
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 with
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. 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. Additionally, we may have tenants who pay real estate taxes directly to the taxing authority. We exclude these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property operating expense.
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 of
Valuation Allowance of Deferred Tax Asset. We account for income taxes using the asset and liability method under
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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
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