STRATEGIC REALTY TRUST, INC. The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSecurities and Exchange Commission , orSEC , onMarch 18, 2020 , which we refer to herein as our "2019 Annual Report on Form 10-K." 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 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, theyface 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 isdependent 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.
• A significant portion of 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 realestate-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
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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.
All forward-looking statements should be read in light of the risks identified
in Part I, Item 1A of our 2019 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 our 2019 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.
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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. 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 2020. The current term of the Advisory Agreement terminates onAugust 9, 2021 . The Advisor is an affiliate ofGlenborough, LLC (together with its affiliates, "Glenborough"), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties. Impact of COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has caused state and local governments to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate, and the types of construction projects that may continue.California , where the majority of our properties are located, declared a state of emergency onMarch 4, 2020 and instituted a shelter-in-place order onMarch 19, 2020 to reduce the spread of COVID-19. OnMay 7, 2020 ,California moved into Stage 2 of its four-stage reopening roadmap, permitting certain sectors of the economy to reopen provided that there were significant safety measures in place. OnJune 12, 2020 ,California permitted businesses such as movie theaters, restaurants, wineries, bars, zoos, museums, gyms, fitness centers, hotels, cardrooms, racetracks, and campgrounds to re-open. OnJuly 13, 2020 ,California re-instituted a state-wide closure on many types of businesses that were previously permitted to re-open such as indoor dining, bars, movie theaters, and museums. 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. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed, lifted or reinstated, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or when customers will re-engage with tenants as they have in the past. Due to this uncertainty, some of our tenants are experiencing hardships, as they are unable to operate at full capacity. We believe that there is a reasonable risk that the COVID-19 outbreak could 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. The majority of our tenants have recently requested rent deferral or rent abatement as a result of the pandemic. These tenants account for approximately 95% of our annualized rents. To date only a small percent of the requests for rent relief resulted in modified agreements, however we are reviewing requests on a case by case basis and are continuing to monitor and communicate with our commercial tenants to assess their needs and ability to make either full or partial rent payments. In most cases, it is in our best interest to help our tenants remain in business and reopen when shelter-in-place orders or other mandated closures are lifted. If these tenants fail, finding replacement tenants may be costly and time-consuming. In addition, while the majority of our properties are fully leased as ofJune 30, 2020 , we expect that the effects of the COVID-19 pandemic may impact our ability to lease up available commercial space at certain properties. For example, potential tenant interest in the Wilshire Property has slowed in light of the COVID-19 pandemic. As ofJune 30, 2020 , we had approximately 8,900 square feet of vacant commercial space and no commercial lease expirations scheduled for the remainder of 2020. 23
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To mitigate the impact of COVID-19 on our operations and liquidity, we have taken a number of proactive measures, which include the following: • Our Advisor has been able to transition all employees and operations to a
remote work environment, beginning on March 16, 2020 , and we have been
fortunate that our operations have continued successfully during these
difficult times.
• We are in constant communication with our tenants and are assisting
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 have adequate cash and cash equivalents to service our debts
and pay for our ongoing general and administrative expenses for the
foreseeable future. As of
million in cash and cash equivalents. In addition, we have approximately
taxes, insurance, tenant improvements, leasing commissions, capital
expenditures, rollover reserves and other financing needs). Furthermore,
the Shops at
financing to provide us funds if needed.
• We fully paid off the revolving line of credit with the SRT Loan (as
defined below) from PFP Holding Company, LLC (the "SRT Lender"). The SRT
Loan is secured by six of our core urban properties in
Francisco. The SRT Loan does not have the sort of restrictive covenants
and ongoing debt coverage ratios that could trigger a default caused by
tenants not paying rent or seeking rent relief (unlike the former line of
credit).
• We remain in compliance with all the terms of the
Loan (as defined below), which matures on
extend for two additional twelve-month periods, subject to certain
conditions. Similarly, we remain in compliance with the Sunset & Gardner
Loan (as defined below), which matures on October 31, 2020 . On July 31,
2020 , we negotiated an extension to the maturity date of the Sunset &
Gardner Loan . Refer to the Subsequent Events section for additional
information.
• To further preserve cash and liquidity, we suspended our Amended and
Restated Share Redemption Program (the "SRP"), such suspension to be
effective on
redemptions will be made unless and until our board of directors (the
"Board") approves the resumption of the SRP. During the suspension, wewill continue to accept death and qualifying disability redemption filings
from stockholders, but will not take any action with regard to those
requests until the Board has elected to lift the suspension and provided
the terms and conditions for any continuation of the program. In addition,
on
of any dividend for the quarters ending
reconsider future dividend payments on a quarter by quarter basis as more
information becomes available on the impact of COVID-19 and related impact
to us. Dividend payments were not reinstated as of June 30, 2020 .
Given the uncertainty of the COVID-19 pandemic's near and potential long-term
impact on our business, the full extent of the financial impact cannot be
reasonably estimated at this time. However, there are those who believe that, as
more tools are developed to fight COVID-19 - increased testing, enhanced
monitoring, data analysis and identification of effective therapeutics-the
country can, anchored by advice of healthcare specialists, incrementally foster
economic activity in the near term and at some point with a vaccine and time,
the country should return to a more normal state as with other pandemics in the
past.
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Property Portfolio As ofJune 30, 2020 , our property portfolio included 7 retail properties, excluding a land parcel, which we refer to as "our properties" or "our portfolio," comprising an aggregate of approximately 43,000 square feet of multi-tenant, commercial retail space located in two states. We purchased our properties for an aggregate purchase price of approximately$39.6 million . As ofJune 30, 2020 approximately 79% of our portfolio was leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 7.7 years. As ofDecember 31, 2019 , approximately 90% of our portfolio was leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 6.8 years. (dollars in thousands) Rentable Effective Original Property Square Percent Rent (3) Date Purchase Name (1) Location Feet Leased (2) (per
Sq. Foot) Acquired Price (4) Debt (5)
Shops at
Turkey Creek
61 % $ 30.59 3/12/2012 $ 4,300 $ -
400 Grove
Street San Francisco, CA 2,000 100 % 63.04 6/14/2016 2,890 1,450
8 Octavia
Street San Francisco, CA 3,640 47 %
61.56
84 %
63.63
93.08
68.13
68.80 1/11/2017 13,300 6,900
43,053 $ 39,587 $ 18,000 (1) List of properties does not include a residual parcel at
as of June 30, 2020 .
(2) Percentage is based on leased rentable square feet of each property as of
June 30, 2020 .
(3) Effective rent per square foot is calculated by dividing the annualized
property. The contractual base rent does not include other items such as
tenant concessions (e.g., free rent), percentage rent, and expense
recoveries.
(4) The purchase price for Shops at Turkey Creek includes the issuance of
common units in our operating partnership to the sellers.
(5) Debt represents the outstanding balance as of
reclassification of approximately
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 on Form 10-Q.
Properties Under Development As ofJune 30, 2020 , we had two properties under development. The properties are identified in the following table (dollar amounts in thousands): Estimated Estimated Expected Properties Under Development Location Completion Date Square Feet Debt Wilshire Property Santa Monica, CA November, 2020 12,500$ 11,417 Sunset & Gardner Property Hollywood, CA December, 2022 100,000 8,700 Total 112,500$ 20,117 25
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Results of Operations Comparison of the three and six months endedJune 30, 2020 , versus the three and six months endedJune 30, 2019 . The following table provides summary information about our results of operations for the three and six months endedJune 30, 2020 and 2019 (amounts in thousands): Three Months Ended June 30, 2020 2019 $ Change % Change Rental revenue and reimbursements$ 654 $ 939 $ (285 ) (30.4 )% Operating and maintenance expenses 359 586 (227 ) (38.7 )% General and administrative expenses 443 396 47 11.9 % Depreciation and amortization expenses 301 378 (77 ) (20.4 )% Interest expense 66 130 (64 ) (49.2 )% Operating loss (515 ) (551 ) 36 (6.5 )% Other loss, net - (2 ) 2 (100.0 )% Income taxes (9 ) (44 ) 35 (79.5 )% Net loss$ (524 ) $ (597 ) $ 73 (12.2 )% Six Months Ended June 30, 2020 2019 $ Change % Change Rental revenue and reimbursements$ 1,461 $ 1,883 $ (422 ) (22.4 )% Operating and maintenance expenses 809 856 (47 ) (5.5 )% General and administrative expenses 848 795 53 6.7 % Depreciation and amortization expenses 602 755 (153 ) (20.3 )% Interest expense 237 319 (82 ) (25.7 )% Operating loss (1,035 ) (842 ) (193 ) 22.9 % Other income (loss), net 947 (22 ) 969 (4,404.5 )% Income taxes (11 ) (44 ) 33 (75.0 )% Net loss$ (99 ) $ (908 ) $ 809 (89.1 )% Our results of operations for the three and six months endedJune 30, 2020 , are not necessarily indicative of those expected in future periods. Revenue The decrease in revenue during the three and six months endedJune 30, 2020 , compared to the same period in 2019, was primarily due to the sales of a significant portion ofTopaz Marketplace inFebruary 2020 as well as rent concessions provided to our tenants as a result of the COVID-19 pandemic. Operating and maintenance expenses Operating and maintenance expenses decreased during the three and six months endedJune 30, 2020 , when compared to the same period in 2019, consistent with the sale ofTopaz Marketplace . Lower management fees and lower bad debt reserves also contributed to the decrease in operating and maintenance expenses. General and administrative expenses General and administrative expenses increased during the three and six months endedJune 30, 2020 , compared to the same period in 2019 primarily due to increased legal fees related to a previous contract to sell Shops atTurkey Creek . The buyer canceled the contract due to the uncertainty related to COVID-19. 26
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Depreciation and amortization expenses Depreciation and amortization expenses decreased during the three and six months endedJune 30, 2020 , compared to the same period in 2019, primarily due to classification ofTopaz Marketplace as held for sale during the three months ended September, 2019, and subsequent sale inFebruary 2020 . Interest expense Interest expense decreased during the three and six months endedJune 30, 2020 , compared to the same period in 2019, due to decreases in interest rates as well as decreases in debt balances as a result of using the proceeds from property disposition activities to repay debt. Additionally, decreased deferred loan fees amortization also contributed to a decrease in interest expense. Other income (loss), net Other loss, net for the three months endedJune 30, 2019 , primarily consisted of equity in loss resulting from our investment in unconsolidated joint ventures. There was no other income or loss during the three months endedJune 30, 2020 . Other income (loss), net for the six months endedJune 30, 2020 , consisted of gain on sale ofTopaz Marketplace . Other income (loss), net for the six months endedJune 30, 2019 , primarily consisted of equity in loss resulting from our investment in unconsolidated joint ventures. Income Taxes Income taxes for the three and six months endedJune 30, 2020 and 2019, consisted of various state tax payments. 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. OnFebruary 7, 2013 , we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs. As ofJune 30, 2020 , our cash and cash equivalents were approximately$4.3 million and we had$0.8 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 ofJune 30, 2020 andDecember 31, 2019 , our borrowings were approximately 66.0% and 75.1%, 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): Six Months Ended June 30, 2020 2019 $ Change Net cash provided by (used in): Operating activities$ (540 ) $ 241 $ (781 ) Investing activities 4,737 (1,994 ) 6,731 Financing activities (6,347 ) 2,412 (8,759 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ (2,150 ) $ 659 27
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Cash Flows from Operating Activities The decrease in cash flows from operating activities was primarily due to lower operating income during the six months endedJune 30, 2020 as compared to the same period in 2019, which resulted from sale ofTopaz Marketplace during the three months endedMarch 31, 2020 , as well as increased accounts receivable and rent deferral balances resulting from the COVID-19 pandemic. Cash Flows from Investing Activities Cash flows provided by investing activities during the six months endedJune 30, 2020 primarily consisted of approximately$9.9 million of proceeds from sale ofTopaz Marketplace . These were partially offset by our aggregate additional$4.8 million investment in the Wilshire andSunset and Gardner Joint Ventures . Cash flows used in investing activities during the six months endedJune 30, 2019 , primarily consisted of our aggregate additional$1.7 million investment in the Wilshire andSunset and Gardner Joint Ventures . Cash Flows from Financing Activities Cash flows used by financing activities during the six months endedJune 30, 2020 , primarily consisted of approximately$8.9 million in repayments of our line of credit. This was partially offset by approximately$2.9 million from construction loan proceeds. Cash flows provided by financing activities during the six months endedJune 30, 2019 , primarily consisted of approximately$14.8 million from construction loan proceeds and draws on our line of credit. This was partially offset by repayment of our debt balances of approximately$10.3 million , our quarterly dividend payments of approximately$1.3 million , and redemptions of our common stock of approximately$0.4 million . Short-term Liquidity and Capital Resources Our principal short-term demand for funds is for the payment of operating expenses, the payment on our outstanding indebtedness and distributions. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties 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. 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 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 interim unaudited 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. Recent Financing Transactions Multi-Property Secured Financing OnDecember 24,2019 , we entered into a Loan Agreement (the "SRT Loan Agreement") withPFP Holding Company, LLC (the "SRT Lender") for a non-recourse secured loan (the "SRT Loan"). 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 . Proceeds from the SRT Loan were used by us to pay down our credit facility and in connection with such payment, the properties referenced above were released from liens related to that credit facility. 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 28
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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 ofJune 30, 2020 , 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 theSan Francisco assets. Loans Secured byProperties Under Development OnMay 7, 2019 , we refinanced and repaid our financing withLoan Oak Fund, LLC with a new construction loan fromReadyCap Commercial, LLC (the "Lender") (the "Wilshire Construction Loan"). As ofJune 30, 2020 , theWilshire Construction Loan had a principal balance of approximately$11.4 million , with future funding availability up to a total of approximately$13.9 million , and bears an interest rate of 1-month LIBOR plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Construction Loan is 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 Wilshire Construction Loan is secured by a first Deed of Trust on the 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. 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 bears an interest rate of 6.9% per annum. The Sunset &Gardner Loan was scheduled to mature 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. The new maturity date isOctober 31, 2020 . We negotiated an additional one year extension with the lender. Refer to the Subsequent Events section for additional information. The Sunset &Gardner Loan is secured by a first Deed of Trust on the property. Line of Credit OnFebruary 10, 2020 , we used proceeds from the sale ofTopaz Marketplace to repay the line of credit in its entirety. The line of credit expired of its own accord onFebruary 15, 2020 , with no balance outstanding. As part of the payoff, Shops atTurkey Creek was released from the line of credit. EffectiveJanuary 8, 2020 , we elected to permanently reduce the maximum aggregate commitment under its line of credit from$30.0 million to$10.5 million . All other terms of the credit facility remained the same. 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 six months endedJune 30, 2020 and 2019, our total operating expenses did not exceed the 2%/25% Guidelines. 29 -------------------------------------------------------------------------------- OnAugust 2, 2018 , we entered into the Sixth Amendment to the Advisory Agreement. The Advisory Agreement Amendment 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. These provisions were also included in the Eighth Amendment to the Advisory Agreement entered intoJuly 30, 2020 . 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. Under the terms of the credit facility, we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds specified in the credit facility; provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. 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 decided 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 as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as ofJune 30, 2020 The following table set forth the quarterly distributions declared to our common stockholders and Common Unit holders for the year ended 2019 (amounts in thousands, except per share amounts): Distribution Per Distribution Distribution Share of Common Stock Total Common Total Common Record Payable / Stockholders Unit Holders Total Date Date Common Unit Distribution Distribution Distribution
First Quarter 2019 3/31/2019 4/30/2019 $ 0.06 $ 651 $ 14 $ 665 Second Quarter 2019 6/30/2019 7/31/2019 0.06 648 14 662 Third Quarter 2019 9/30/2019 10/31/2019 0.06 646 13 659 Fourth Quarter 2019 12/31/2019 1/31/2020 0.02 215 5 220 Total$ 2,160 $ 46$ 2,206 30
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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.
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 Six Months Ended
June 30, June 30,
FFO 2020 2019 2020 2019
Net loss $ (524 ) $ (597 ) $ (99 ) $ (908 )
Adjustments:
Gain on disposal of assets - (13 ) (947 ) (13 )
Adjustment to reflect FFO of
unconsolidated joint ventures - 100 - 178
Depreciation of real estate 241 299 481 598
Amortization of in-place leases and
leasing costs 60 79 121 157
FFO attributable to common shares and
Common Units (1) $ (223 ) $ (132 )
FFO per share and Common Unit (1)
Weighted average common shares and units outstanding (1) 10,957,204 11,074,259
10,966,939 11,086,036
(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 thecomputation 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 interim unaudited 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.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist primarily of carve-out guarantees in
connection with our previous investments in unconsolidated joint ventures as
described in the consolidated financial statements in our 2019 Annual Report on
Form 10-K. These carve-out guarantees do not represent a liability of the
partners other than carve-out guarantees for certain matters such as
environmental conditions, misuse of funds and material misrepresentations. We
have retained certain rights of recovery in connection with these carve-out
guarantees.
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Critical Accounting Policies 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 2019 Annual Report on Form 10-K. Subsequent Events 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. The new maturity date isOctober 31, 2021 . We evaluate subsequent events up until the date the condensed consolidated financial statements are issued.
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