STRATEGIC REALTY TRUST, INC. The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto.
As used herein, the terms "we," "our," "us," and "Company" refer toStrategic Realty Trust, Inc. , and, as required by context,Strategic Realty Operating Partnership, L.P. , aDelaware limited partnership, which we refer to as our "operating partnership" or "OP", and to their respective subsidiaries. References to "shares" and "our common stock" refer to the shares of our common stock.
Special Note Regarding Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not
historical facts (including any statements concerning investment objectives,
other plans and objectives of management for future operations or economic
performance, or assumptions or forecasts related thereto) are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). These statements are only predictions. We
caution that forward-looking statements are not guarantees. Actual events or our
investments and results of operations could differ materially from those
expressed or implied in any forward-looking statements. Forward-looking
statements are typically identified by the use of terms such as "may," "should,"
"expect," "could," "intend," "plan," "anticipate," "estimate," "believe,"
"continue," "predict," "potential" or the negative of such terms and other
comparable terminology.
The forward-looking statements included herein are based upon our current
expectations, plans, estimates, assumptions and beliefs, which involve numerous
risks and uncertainties. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual results and
performance could differ materially from those set forth in the forward-looking
statements. The following are some of the risks and uncertainties, although not
all of the risks and uncertainties, that could cause our actual results to
differ materially from those presented in our forward-looking statements:
•The potential adverse effect of the ongoing public health crisis of the novel
coronavirus disease (COVID-19) pandemic, or any future pandemic, epidemic or
outbreak of infectious disease, on the financial condition, results of
operations, cash flows and performance of the Company and its tenants, the real
estate market, in particular with respect to retail commercial properties and
the global economy and financial markets.
•Our executive officers and certain other key real estate professionals are also
officers, directors, managers, key professionals and/or holders of a direct or
indirect controlling interest in our advisor. As a result, they face conflicts
of interest, including conflicts created by our advisor's compensation
arrangements with us and conflicts in allocating time among us and other
programs and business activities.
•We are uncertain of our sources for funding our future capital needs. If we
cannot obtain debt or equity financing on acceptable terms, our ability to
continue to acquire real properties or other real estate-related assets, fund or
expand our operations and pay distributions to our stockholders will be
adversely affected.
•We depend on tenants for our revenue and, accordingly, our revenue is dependent
upon the success and economic viability of our tenants. Revenues from our
properties could decrease due to a reduction in tenants (caused by factors
including, but not limited to, tenant defaults, tenant insolvency, early
termination of tenant leases and non-renewal of existing tenant leases) and/or
lower rental rates, making it more difficult for us to meet our financial
obligations, including debt service and our ability to pay distributions to our
stockholders.
•All our assets are concentrated in one state and in urban retail properties,
any adverse economic, real estate or business conditions in this geographic area
or in the urban retail market could affect our operating results and our ability
to pay distributions to our stockholders.
•Our current and future investments in real estate and other real estate-related
investments may be affected by unfavorable real estate market and general
economic conditions, which could decrease the value of those assets and reduce
the investment return to our stockholders. Revenues from our properties could
decrease. Such events would make it more difficult for us to meet our debt
service obligations and limit our ability to pay distributions to our
stockholders.
•Certain of our debt obligations have variable interest rates with interest and
related payments that vary with the movement of LIBOR or other indices.
Increases in these indices could increase the amount of our debt payments and
limit our ability to pay distributions to our stockholders.
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All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report on Form 10-K"). Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Moreover, you should interpret many of the risks identified in this Quarterly Report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of the 2021 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved. 21
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Overview
We are aMaryland corporation that was formed onSeptember 18, 2008 , to invest in and manage a portfolio of income-producing retail properties, located inthe United States , real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development, one of which was substantially completed during the year endedDecember 31, 2020 . We have elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the taxable year endedDecember 31, 2009 , and we have operated and intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership. Since our inception, our business has been managed by an external advisor. We do not have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised bySRT Advisor, LLC , aDelaware limited liability company (the "Advisor") pursuant to an advisory agreement with the Advisor (the "Advisory Agreement") initially executed onAugust 10, 2013 , and subsequently renewed every year through 2022. The current term of the Advisory Agreement terminates onAugust 9, 2022 . The Advisor is an affiliate ofPUR Management LLC , which is an affiliate ofL3 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 tierU.S. metropolitan markets.
Impact of COVID-19
SinceMarch 2020 , COVID-19 and the efforts to contain its spread have significantly impacted the global economy, theU.S. economy, the economies of the local markets throughoutCalifornia in which our properties are predominately located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and theU.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and shelter-in-place or stay-at-home orders.California , where all of our properties are located instituted various measures that required closure of retail businesses or limited the ability of our tenants to operate their businesses. As ofJune 30, 2021 , the state ofCalifornia lifted COVID-19 related restrictions. However, there remains uncertainty as to whether customers will re-engage with retail tenants at pre-pandemic levels. As a result of the containment measures instituted in response to the pandemic, some of our tenants have been experiencing hardships, as they were unable to operate at full capacity until the middle ofJune 2021 .
We believe that the COVID-19 outbreak has and could continue to negatively impact our financial condition and results of operations, including but not limited to, declines in real estate rental revenues, the inability to sell certain properties at a favorable price, and a decrease in construction and leasing activity.
To mitigate the impact of COVID-19 on our operations and liquidity, we have taken a number of proactive measures, which include the following:
•We are in constant communication with our tenants and have assisted 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. •We believe we will be able to service our debts and pay for our ongoing general and administrative expenses for the foreseeable future. As ofMarch 31, 2022 , we have approximately$2.1 million in cash and cash equivalents. In addition, we had approximately$0.5 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). •OnDecember 30, 2021 , we obtained a$4.0 million unsecured loan (the "Unsecured Loan") fromPUR Holdings Lender, LLC , an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately$0.3 million . The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. OnMarch 15, 2022 , we andPUR Holdings Lender, LLC , amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, fromDecember 30, 2022 toJune 30, 2023 , if we providePUR Holdings Lender, LLC , with notice, pay an extension fee, and no event of default has occurred. The Unsecured Loan is guaranteed by us. As ofMarch 31, 2022 , the Unsecured Loan had an outstanding balance of approximately$2.4 million . 22
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•The SRT Loan is secured by six of our core urban properties inLos Angeles andSan 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. •As ofMarch 31, 2022 , we were in compliance with all the terms of the Wilshire Construction Loan (as defined below), which was scheduled to mature onMay 10, 2022 , with options to extend for two additional twelve-month periods, subject to certain conditions. The lender for the Wilshire Construction Loan has informed us that the maturity date will be extended toSeptember 22, 2022 . Similarly, as ofMarch 31, 2022 , we were in compliance with the Sunset &Gardner Loan (as defined below), which matures onOctober 31, 2022 .
•We are actively exploring options should cash flow from operations not sufficiently improve, such as a sale of one or more assets that are not generating positive cash flow.
•To further preserve cash and liquidity, we suspended our Amended and Restated Share Redemption Program (the "SRP"), effective onMay 21, 2020 . The SRP will remain suspended and no further redemptions will be made unless and until our board of directors (the "Board") approves the resumption of the SRP. In addition, onMarch 27, 2020 , the board of directors suspended the payment of any dividend for the quarter endingMarch 31, 2020 , and will reconsider future dividend payments on a quarter-by-quarter basis. Dividend payments were not reinstated as ofMarch 31, 2022 . Given the uncertainty of the COVID-19 pandemic's impact on our business, the full extent of the financial impact cannot be reasonably estimated at this time. There remains uncertainty with respect to the demand for retail space and the success of our tenants given the potential change in consumer behavior as a result of the COVID-19 pandemic.
Property Portfolio
As ofMarch 31, 2022 , our wholly-owned property portfolio included six retail properties, excluding a land parcel, which we refer to as "our properties" or "our portfolio," comprising an aggregate of approximately 27,000 square feet of multi-tenant, commercial retail space located in one state. We purchased our properties for an aggregate purchase price of approximately$35.3 million . As ofMarch 31, 2022 approximately 86% of our wholly-owned real estate investments were leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 8.0 years. As ofDecember 31, 2021 , approximately 86% of our portfolio was leased (based on rentable square footage as ofDecember 31, 2021 ), with a weighted-average remaining lease term of approximately 6.3 years. (dollars in thousands) Effective Original Rentable Square Percent Rent (3) Date Purchase Property Name (1) Location Feet Leased (2) (per Sq. Foot) Acquired Price Debt (4)
Wholly-owned Real Estate Investments
400 Grove Street San Francisco, CA 2,000 100 %$ 48.00 6/14/2016$ 2,890 $ 1,450 8 Octavia Street San Francisco, CA 3,640 47 % 63.41 6/14/2016 2,740 1,500 Fulton Shops San Francisco, CA 3,758 50 % 61.20 7/27/2016 4,595 2,200 450 Hayes San Francisco, CA 3,724 100 % 98.97 12/22/2016 7,567 3,650 388 Fulton San Francisco, CA 3,110 100 % 72.28 1/4/2017 4,195 2,300 Silver Lake Los Angeles, CA 10,497 100 % 84.15 1/11/2017 13,300 6,900 26,729 35,287 18,000
Real Estate Investments owned through Joint Ventures 3032 Wilshire Property
Santa Monica, CA 12,208 42 % 94.71 3/8/2016 13,500 12,711
38,937 $ 48,787 $ 30,711 (1)List of properties does not include a residual parcel at
(2)Percentage is based on leased rentable square feet of each property as of
(3)Effective rent per square foot is calculated by dividing the annualizedMarch 31, 2022 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries. 23
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(4) Debt represents the outstanding balance as ofMarch 31, 2022 , and excludes reclassification of approximately$0.2 million deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 7. "Notes Payable, Net" to our condensed consolidated financial statements included in this Quarterly Report.Properties Under Development
As of
Results of Operations
Comparison of the three months ended
The following table provides summary information about our results of operations
for the three months ended
Three Months Ended
March 31,
2022 2021 $ Change % Change
Rental revenue and reimbursements$ 734 $ 715
Operating and maintenance expenses 485 506
(21) (4.2) %
General and administrative expenses 437 410
27 6.6 %
Depreciation and amortization expenses 294 357 (63) (17.6) % Interest expense 320 313 7 2.2 % Net loss$ (802) $ (871) $ 69 (7.9) %
Our results of operations for the three months
Revenue
The increase in revenue during the three months ended
Operating and maintenance expenses
Operating and maintenance expenses decreased during the three months endedMarch 31, 2022 , compared to the same periods in 2021, primarily due to lower bad debt reserves and the of sale of Shops atTurkey Creek . Increase partially offset by higher security and legal costs.
General and administrative expenses
General and administrative expenses increased during the three months ended
Depreciation and amortization expenses
Depreciation and amortization expenses decreased during the three months ended
Interest expense
Interest expense increased during the three months ended
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. Prior to the termination of our initial public offering inFebruary 2013 we used offering proceeds to fund our acquisition activities and our other cash needs. Currently we have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs. 24
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As ofMarch 31, 2022 , our cash and cash equivalents were approximately$2.1 million and we had$0.5 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). Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our "charter," we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As ofMarch 31, 2022 andDecember 31, 2021 , our borrowings were approximately 125.7% and 120.2%, respectively, of the carrying value of our net assets.
The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (amounts in thousands):
Three Months Ended
March 31,
2022 2021 $ Change
Net cash provided by (used in):
Operating activities $ (824) $ (679) $ (145)
Investing activities (510) (462) (48)
Financing activities 1,502 - 1,502Net increase (decrease) in cash, cash equivalents and restricted cash
$ 168
Cash Flows from Operating Activities
The change in cash flows from operating activities was primarily due to lower provisions for losses on tenant receivables and the payment of accounts payable and accrued expenses related to repair work at the Silverlake Property and building improvements at the Wilshire Property during the three months endedMarch 31, 2022 as compared to the same period in 2021.
Cash Flows from Investing Activities
Cash flows used in investing activities during the three months endedMarch 31, 2022 and 2021, primarily consisted of$0.4 million of additional investment in the Sunset and Gardner Joint Venture, respectively.
Cash Flows from Financing Activities
Cash flows provided by financing activities during the three months endedMarch 31, 2022 , primarily consisted of proceeds of approximately$1.4 million from a draw down on the Unsecured Loan fromPUR Holdings Lender, LLC , an affiliate of the Advisor. Additional cash provided by construction loan proceeds of approximately$0.2 million .
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment on our outstanding indebtedness. To date, our cash needs for operations have been funded by cash provided by property operations, the sales of properties, debt refinancing, and the sale of shares of our common stock. We may fund our short-term operating cash needs from operations, from the sales of properties and from debt. OnDecember 30, 2021 , in order to fund our short-term liquidity needs we obtained a$4.0 million Unsecured Loan fromPUR Holdings Lender, LLC , an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately$0.3 million . The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. OnMarch 15, 2022 , we andPUR Holdings Lender, LLC , amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, fromDecember 30, 2022 toJune 30, 2023 , if we providePUR Holdings Lender, LLC , with notice, pay an extension fee, and no event of default has occurred. The Unsecured Loan is guaranteed by us. 25
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Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments, additional investment in our development projects and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 7. "Notes Payable, Net" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs could be affected by the effects of the COVID-19 pandemic. The full impact of the COVID-19 pandemic on our rental revenue and, as a result, future cash from operations cannot be determined at present. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that we may be able to obtain, will be sufficient to fund our working capital needs and debt obligations for at least the next twelve months and beyond. However, this forward-looking statement is subject to a number of uncertainties, including with respect to the duration of the COVID-19 pandemic, and there can be no guarantee that we will be successful with our plan. Moreover, over the long term, if our cash flow from operations does not increase from current levels, we may have to address a liquidity deficiency. We are actively exploring options should cash flow from operations not sufficiently improve, such as a sale of one or more assets that are not generating positive cash flow or the sale of equity to an institutional investor.
Recent Financing Transactions
Multi-Property Secured Financing
On
The SRT Loan is secured by first deeds of trust on our fiveSan Francisco assets (Fulton Shops , 8 Octavia, 400 Grove, 450 Hayes and388 Fulton Street ) as well as our Silverlake Collection located inLos Angeles . The SRT Loan matures onJanuary 9, 2023 . We have 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. We have 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. As ofMarch 31, 2022 , 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, we 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 our 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.
In connection with the SRT Loan, we executed customary non-recourse carveout and
environmental guaranties, together with limited additional assurances with
regard to the condominium structures of the
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Loans Secured by Properties
OnMay 7, 2019 , we refinanced and repaid our financing withLone Oak Fund, LLC with a new construction loan fromReadyCap Commercial, LLC (the "Lender") (the "Wilshire Construction Loan"). As ofMarch 31, 2022 , theWilshire Construction Loan had a principal balance of approximately$12.7 million , with future funding available up to a total of approximately$13.9 million , and bears an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Construction Loan was scheduled to mature onMay 10, 2022 , with options to extend for two additional twelve-month periods, subject to certain conditions as stated in the loan agreement. The lender has informed us that the maturity date will be extended toSeptember 22, 2022 . The Wilshire Construction Loan is secured by a first Deed ofTrust on the Wilshire Property . We 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 our 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. We 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. We 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.
Loans Secured by
OnOctober 29, 2018 , we entered into a loan agreement withLone 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 onOctober 31, 2019 . We extended the Sunset &Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 6.5% per annum. OnJuly 31, 2020 , we extended the Sunset &Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.3% per annum. OnJuly 21, 2021 , we extended the Sunset &Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 7.9% per annum. The new maturity date isOctober 31, 2022 . The Sunset &Gardner Loan is secured by a first Deed ofTrust on the Sunset & Gardner Property .
Loan with Affiliate
OnDecember 30, 2021 , we obtained a$4.0 million unsecured loan (the "Unsecured Loan") fromPUR Holdings Lender, LLC , an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately$0.3 million . The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us. OnMarch 15, 2022 , we andPUR Holdings Lender, LLC , amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, fromDecember 30, 2022 toJune 30, 2023 , if we providePUR Holdings Lender, LLC , with notice, pay an extension fee, and no event of default has occurred. As ofMarch 31, 2022 the Unsecured Loan had an outstanding balance of approximately$2.4 million .
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the "2%/25% Guidelines" unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three months endedMarch 31, 2022 and 2021, our total operating expenses did not exceed the 2%/25% Guidelines. Our Advisory Agreement provides that the Advisor shall not be required to reimburse to us any operating expenses incurred during a given period that exceed the applicable limit on "Total Operating Expenses" (as defined in the Advisory Agreement) to the extent that such excess operating expenses are incurred as a result of certain unusual and non-recurring factors approved by our board of directors, including some related to the execution of our investment strategy as directed by our board of directors. 27
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Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless theIRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly Distributions
As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue to be paid, from sources other than cash flows from operations.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, onMarch 27, 2020 , our board of directors determined to suspend the payment of any dividend for the quarters endingMarch 31, 2020 , and to reconsider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as ofMarch 31, 2022 .
Funds From Operations
Funds from operations ("FFO") is a supplemental non-GAAP financial measure of a
real estate company's operating performance. The National Association of Real
Estate Investment Trusts , or "NAREIT", an industry trade group, has promulgated
this supplemental performance measure and defines FFO as net income, computed in
accordance with GAAP, plus real estate related depreciation and amortization and
excluding extraordinary items and gains and losses on the sale of real estate,
and after adjustments for unconsolidated joint ventures (adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect FFO.)
It is important to note that not only is FFO not equivalent to our net income or
loss as determined under GAAP, it also does not represent cash flows from
operating activities in accordance with GAAP. FFO should not be considered an
alternative to net income as an indication of our performance, nor is FFO
necessarily indicative of cash flow as a measure of liquidity or our ability to
fund cash needs, including the payment of distributions.
We consider FFO to be a meaningful, additional measure of operating performance
and one that is an appropriate supplemental disclosure for an equity REIT due to
its widespread acceptance and use within the REIT and analyst communities.
Comparison of our presentation of FFO to similarly titled measures for other
REITs may not necessarily be meaningful due to possible differences in the
application of the NAREIT definition used by such REITs.
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Our calculation of FFO attributable to common shares and Common Units and the
reconciliation of net income (loss) to FFO is as follows (amounts in thousands,
except shares and per share amounts):
Three Months Ended
March 31,
FFO 2022 2021
Net loss $ (802) $ (871)
Adjustments:
Depreciation of real estate 250 310
Amortization of in-place leases and leasing costs 44 47
FFO attributable to common shares and Common Units (1) FFO per share and Common Unit (1)
Weighted average common shares and units outstanding (1) 10,957,289 10,957,204 (1)Our common units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to common units in the computation of FFO and including the common units together with weighted average shares outstanding for the computation of FFO per share and common unit.
Related Party Transactions and Agreements
We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 11. "Related Party Transactions" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Critical Accounting Policies and Estimates
Our interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of theSEC . The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of additional accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2021 Annual Report on Form 10-K.
Subsequent Events
We evaluate subsequent events up until the date the condensed consolidated financial statements are issued.
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