UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-54376
____________________
STRATEGIC REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
____________________
| Maryland | 90-0413866 |
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification No.) |
|
400 South El Camino Real, Suite 1100 San Mateo, California, 94402
|
(650) 343-9300 |
| (Address of Principal Executive Offices; Zip Code) | (Registrant’s Telephone Number, Including Area Code) |
____________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 5, 2014, there were 10,969,714 shares of the Registrant’s common stock issued and outstanding.
STRATEGIC REALTY TRUST, INC.
INDEX
FINANCIAL INFORMATION
The accompanying condensed consolidated unaudited financial statements as of and for the three months ended March 31, 2014 have been prepared by Strategic Realty Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2013, as filed with the SEC on March 31, 2014. The financial statements herein should also be read in conjunction with the condensed notes to the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.
| 1 |
| STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES | |||
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||
| (Unaudited) |
| March 31, 2014 | December 31, 2013 | |||||||
| ASSETS | ||||||||
| Investments in real estate | ||||||||
| Land | $ | 49,546,000 | $ | 49,546,000 | ||||
| Building and improvements | 115,218,000 | 115,218,000 | ||||||
| Tenant improvements | 9,498,000 | 9,371,000 | ||||||
| 174,262,000 | 174,135,000 | |||||||
| Accumulated depreciation | (13,307,000 | ) | (12,009,000 | ) | ||||
| Investments in real estate, net | 160,955,000 | 162,126,000 | ||||||
| Cash and cash equivalents | 4,412,000 | 2,346,000 | ||||||
| Restricted cash | 4,518,000 | 4,362,000 | ||||||
| Prepaid expenses and other assets, net | 1,727,000 | 1,698,000 | ||||||
| Tenant receivables, net | 2,988,000 | 3,131,000 | ||||||
| Lease intangibles, net | 15,830,000 | 16,341,000 | ||||||
| Assets held for sale | - | 20,890,000 | ||||||
| Deferred financing costs, net | 1,860,000 | 2,063,000 | ||||||
| TOTAL ASSETS | $ | 192,290,000 | $ | 212,957,000 | ||||
| LIABILITIES AND EQUITY | ||||||||
| LIABILITIES | ||||||||
| Notes payable | $ | 123,625,000 | $ | 124,017,000 | ||||
| Accounts payable and accrued expenses | 2,332,000 | 2,143,000 | ||||||
| Amounts due to affiliates | 367,000 | 442,000 | ||||||
| Other liabilities | 2,538,000 | 3,220,000 | ||||||
| Liabilities related to assets held for sale | - | 19,987,000 | ||||||
| Below market lease intangibles, net | 5,932,000 | 6,065,000 | ||||||
| TOTAL LIABILITIES | 134,794,000 | 155,874,000 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| EQUITY | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 400,000,000 shares authorized, 10,969,714 issued and outstanding at March 31, 2014 and at December 31, 2013 | 110,000 | 110,000 | ||||||
| Additional paid-in capital | 96,269,000 | 96,261,000 | ||||||
| Accumulated deficit | (43,212,000 | ) | (43,266,000 | ) | ||||
| Total stockholders' equity | 53,167,000 | 53,105,000 | ||||||
| Non-controlling interests | 4,329,000 | 3,978,000 | ||||||
| TOTAL EQUITY | 57,496,000 | 57,083,000 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 192,290,000 | $ | 212,957,000 | ||||
| See accompanying notes to condensed consolidated financial statements. |
| 2 |
| STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES | ||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||
| (Unaudited) |
| Three Months Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenue: | ||||||||
| Rental and reimbursements | $ | 5,311,000 | $ | 5,642,000 | ||||
| Expense: | ||||||||
| Operating and maintenance | 1,918,000 | 1,950,000 | ||||||
| General and administrative | 1,360,000 | 1,596,000 | ||||||
| Depreciation and amortization | 1,990,000 | 2,081,000 | ||||||
| Transaction expenses | - | (6,000 | ) | |||||
| Interest expense | 2,219,000 | 2,270,000 | ||||||
| 7,487,000 | 7,891,000 | |||||||
| Loss from continuing operations | (2,176,000 | ) | (2,249,000 | ) | ||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations | (14,000 | ) | (1,406,000 | ) | ||||
| Gain on disposal of real estate | 3,192,000 | 4,838,000 | ||||||
| Income from discontinued operations | 3,178,000 | 3,432,000 | ||||||
| Net income | 1,002,000 | 1,183,000 | ||||||
| Net income attributable to non-controlling interests | 400,000 | 45,000 | ||||||
| Net income attributable to common stockholders | $ | 602,000 | $ | 1,138,000 | ||||
| Basic earnings (loss) per common share: | ||||||||
| Continuing operations | $ | (0.19 | ) | $ | (0.20 | ) | ||
| Discontinued operations | 0.25 | 0.30 | ||||||
| Net earnings attributable to common shares | $ | 0.06 | $ | 0.10 | ||||
| Diluted earnings (loss) per common share: | ||||||||
| Continuing operations | $ | (0.19 | ) | $ | (0.19 | ) | ||
| Discontinued operations | 0.24 | 0.29 | ||||||
| Net earnings attributable to common shares | $ | 0.05 | $ | 0.10 | ||||
| Weighted average shares outstanding used to calculate earnings (loss) per common share: | ||||||||
| Basic | 10,969,714 | 10,935,089 | ||||||
| Diluted | 11,401,510 | 11,366,885 | ||||||
| See accompanying notes to condensed consolidated financial statements. |
| 3 |
| STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES | ||||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF EQUITY | ||||||||||||||
| (Unaudited) |
| Total | ||||||||||||||||||||||||||||
| Number of | Additional | Accumulated | Stockholders' | Non-controlling | Total | |||||||||||||||||||||||
| Shares | Par Value | Paid-in Capital | Deficit | Equity | Interests | Equity | ||||||||||||||||||||||
| BALANCE — December 31, 2013 | 10,969,714 | $ | 110,000 | $ | 96,261,000 | $ | (43,266,000 | ) | $ | 53,105,000 | $ | 3,978,000 | $ | 57,083,000 | ||||||||||||||
| Stock compensation expense | - | - | 8,000 | - | 8,000 | - | 8,000 | |||||||||||||||||||||
| Distributions | - | - | - | (548,000 | ) | (548,000 | ) | (49,000 | ) | (597,000 | ) | |||||||||||||||||
| Net income | - | - | - | 602,000 | 602,000 | 400,000 | 1,002,000 | |||||||||||||||||||||
| BALANCE — March 31, 2014 | 10,969,714 | $ | 110,000 | $ | 96,269,000 | $ | (43,212,000 | ) | $ | 53,167,000 | $ | 4,329,000 | $ | 57,496,000 | ||||||||||||||
| See accompanying notes to condensed consolidated financial statements. |
| 4 |
| STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES | ||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||
| (Unaudited) |
| Three Months Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,002,000 | $ | 1,183,000 | ||||
| Adjustments to reconcile income from continuing operations to net cash used in operating activities: | ||||||||
| Gain on disposal of real estate | (3,192,000 | ) | (4,838,000 | ) | ||||
| Straight-line rent | (130,000 | ) | (363,000 | ) | ||||
| Amortization of deferred costs and notes payable premium/discount | 203,000 | 532,000 | ||||||
| Depreciation and amortization | 1,990,000 | 3,266,000 | ||||||
| Amortization of above and below-market leases | 25,000 | 138,000 | ||||||
| Bad debt expense (income) | (36,000 | ) | 174,000 | |||||
| Stock-based compensation expense | 8,000 | 15,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (55,000 | ) | (138,000 | ) | ||||
| Tenant receivables | 328,000 | (894,000 | ) | |||||
| Prepaid rent | (101,000 | ) | (257,000 | ) | ||||
| Accounts payable and accrued expenses | 194,000 | (620,000 | ) | |||||
| Amounts due to affiliates | (75,000 | ) | 380,000 | |||||
| Other liabilities | (746,000 | ) | (1,471,000 | ) | ||||
| Net change in restricted cash for operational expenditures | 113,000 | 710,000 | ||||||
| Net cash used in operating activities | (472,000 | ) | (2,183,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Net proceeds from the sale of real estate | 20,455,000 | 8,468,000 | ||||||
| Improvements, capital expenditures, and leasing costs | (441,000 | ) | (173,000 | ) | ||||
| Tenant lease incentive | - | (19,000 | ) | |||||
| Net change in restricted cash for capital expenditures | (269,000 | ) | (975,000 | ) | ||||
| Net cash provided by investing activities | 19,745,000 | 7,301,000 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | - | 502,000 | ||||||
| Distributions | (602,000 | ) | (415,000 | ) | ||||
| Payment of offering costs | - | (28,000 | ) | |||||
| Repayment of notes payable | (16,605,000 | ) | (5,254,000 | ) | ||||
| Net change in restricted cash for financing activities | - | (504,000 | ) | |||||
| Net cash used in financing activities | (17,207,000 | ) | (5,699,000 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 2,066,000 | (581,000 | ) | |||||
| Cash and cash equivalents – beginning of period | 2,346,000 | 1,707,000 | ||||||
| Cash and cash equivalents – end of period | $ | 4,412,000 | $ | 1,126,000 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Issuance of common stock under the DRIP | $ | - | $ | 246,000 | ||||
| Notes payable balance assumed on sale of real estate | $ | - | $ | 19,717,000 | ||||
| Cash distributions declared but not paid | $ | 597,000 | $ | - | ||||
| Cash paid for interest | $ | 2,085,000 | $ | 3,473,000 | ||||
| See accompanying notes to condensed consolidated financial statements. |
| 5 |
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(Unaudited)
1. ORGANIZATION AND BUSINESS
Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008 as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations. The Company was initially capitalized by the sale of shares of common stock to Thompson National Properties, LLC (“TNP LLC”) on October 16, 2008.
On November 4, 2008, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 in shares of its common stock to the public in its primary offering at $10.00 per share and 10,526,316 shares of its common stock to the Company’s stockholders at $9.50 per share pursuant to its distribution reinvestment plan (“DRIP”) (collectively, the “Offering”). On August 7, 2009, the SEC declared the registration statement effective and the Company commenced the Offering. On February 7, 2013, the Company terminated the Offering and ceased offering shares of common stock in the primary offering and under the DRIP. As of the termination of the Offering on February 7, 2013 and as of March 31, 2014, the Company had accepted subscriptions for, and issued, 10,969,714 shares of common stock (net of share redemptions), including 391,182 shares of common stock pursuant to the DRIP, resulting in gross offering proceeds of $108,357,000.
On June 15, 2012, the Company filed a registration statement on Form S-11 with the SEC to register up to $900,000,000 in shares of the Company’s common stock in a follow-on public offering. The Company subsequently determined not to proceed with the follow-on public offering and on March 1, 2013, the Company requested that the SEC withdraw the registration statement for the follow-on public offering, effective immediately. As a result of the termination of the Offering and the withdrawal of the registration statement for the Company’s follow-on public offering, offering proceeds are not currently available to fund the Company’s cash needs, and will not be available until the Company is able to successfully engage in an offering of its securities.
On August 7, 2013, the Company allowed its existing advisory agreement (the “Prior Advisory Agreement”) with the Company’s prior advisor, TNP Strategic Retail Advisor, LLC (the “Prior Advisor”), to expire without renewal. On August 10, 2013, the Company entered into a new advisory agreement (the “Advisory Agreement”) with SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”). Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Advisor is an affiliate of Glenborough, 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.
Beginning in December 2012 and ending August 10, 2013, Glenborough performed certain services for the Company pursuant to a Consulting Agreement (“Consulting Agreement”), which Consulting Agreement was cancelled when Glenborough became the Company’s Advisor. The Company entered into the Consulting Agreement to assist it through the process of transitioning to a new external advisor as well as to provide other services. Pursuant to the Consulting Agreement, from December 2012 through April 2013, the Company agreed to pay Glenborough a monthly consulting fee of $75,000 and reimburse Glenborough for its reasonable out-of-pocket expenses. Effective May 1, 2013, the Company amended the Consulting Agreement to expand the services to include accounting provided to it by Glenborough and increased the monthly consulting fee payable to Glenborough to $90,000. On August 10, 2013, in connection with the execution of the Advisory Agreement with its advisor, Glenborough rebated $150,000 of consulting fees to the Company.
Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (formerly TNP Strategic Retail Operating Partnership, L.P.), a Delaware limited partnership (the “OP”). The initial limited partners of the OP were Prior Advisor and TNP Strategic Retail OP Holdings, LLC, a Delaware limited liability company (“TNP Holdings”) affiliated with Prior Advisor. Prior Advisor invested $1,000 in the OP in exchange for common units of the OP (“Common Units”) and TNP Holdings invested $1,000 in the OP in exchange for a separate class of limited partnership units (the “Special Units”). As the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. As of March 31, 2014 and December 31, 2013, the Company owned 96.2% of the limited partnership interest in the OP. As of December 31, 2013, Prior Advisor owned 0.01% of the limited partnership interest in the OP which was sold to Glenborough Property Partners, LLC (“GPP”), an affiliate of Glenborough, on January 24, 2014. Following the expiration of the Prior Advisory Agreement, the Special Units owned by TNP Holdings were redeemed for cause, as defined in the Prior Advisory Agreement. In connection with the execution of the Advisory Agreement, the Advisor or its affiliate was to contribute $1,000 to the OP in exchange for a separate class of Special Units. This transaction has been completed as of April 30, 2014.
| 6 |
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness and the payment of distributions to stockholders. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future. The Company has suspended its share redemption program and, until recently, its distributions to stockholders.
The Company has invested in a portfolio of income-producing retail properties located throughout the United States, with a focus on grocery anchored multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. As of March 31, 2014, the Company’s portfolio was comprised of 16 properties with approximately 1,521,000 rentable square feet of retail space located in 11 states. As of March 31, 2014, the rentable space at the Company’s retail properties was 87% leased.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Regulation S-X.
The condensed consolidated financial statements include the accounts of the Company, the OP, and their direct and indirect owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included.
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as, whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of March 31, 2014, the Company did not have any joint ventures or variable interests in any unconsolidated variable interest entities.
Non-Controlling Interests
The Company’s non-controlling interests are comprised primarily of the Common Units in the OP and membership interest in SRT Secured Holdings, LLC (“Secured Holdings”), formerly known as TNP SRT Secured Holdings, LLC, one of the Company’s subsidiaries. The Company accounts for non-controlling interests in accordance with ASC 810. In accordance with ASC 810, the Company reports non-controlling interests in subsidiaries within equity in the condensed consolidated financial statements, but separate from common stockholders’ equity. Net income (loss) attributable to non-controlling interests is presented as a reduction from net income (loss) in calculating net income (loss) attributable to common stockholders on the condensed consolidated statement of operations. Acquisitions or dispositions of non-controlling interests that do not result in a change of control are accounted for as equity transactions. In addition, ASC 810 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. In accordance with ASC 480-10, Distinguishing Liabilities from Equity, non-controlling interests that are determined to be redeemable are carried at their fair value or redemption value as of the balance sheet date and reported as liabilities or temporary equity depending on their terms. The Company periodically evaluates individual non-controlling interests for the ability to continue to recognize the non-controlling interest as permanent equity in the condensed consolidated balance sheets. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as liabilities or temporary equity. All non-controlling interests at March 31, 2014, qualified as permanent equity.
| 7 |
Use of Estimates
The preparation of the Company’s condensed consolidated 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 the Company’s disclosure of contingent assets and liabilities at the dates of the condensed consolidated 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 the Company’s condensed consolidated financial statements, and actual results could differ from the estimates or assumptions used by management. Additionally, other companies may utilize different estimates that may impact the comparability of the Company’s condensed consolidated results of operations to those of companies in similar businesses. The Company considers significant estimates to include the carrying amounts and recoverability of investments in real estate, impairments, real estate acquisition purchase price allocations, allowance for doubtful accounts, estimated useful lives to determine depreciation and amortization and fair value determinations, among others.
Cash and Cash Equivalents
Cash and cash equivalents represents current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.
Restricted Cash
Restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders.
Revenue Recognition
Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
| • | whether the lease stipulates how a tenant improvement allowance may be spent; |
| • | whether the amount of a tenant improvement allowance is in excess of market rates; |
| • | whether the tenant or landlord retains legal title to the improvements at the end of the lease term; |
| • | whether the tenant improvements are unique to the tenant or general-purpose in nature; and |
| • | whether the tenant improvements are expected to have any residual value at the end of the lease. |
For leases with minimum scheduled rent increases, the Company recognizes income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue amounts which differ from those that are contractually due from tenants on a cash basis. If the Company determines the collectability of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed and paid, and, when appropriate, establishes an allowance for estimated losses.
The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants on an ongoing basis. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. The Company’s straight-line rent receivable, which is included in tenant receivables, net on the condensed consolidated balance sheets, was $1,593,000 and $1,411,000 at March 31, 2014 and December 31, 2013, respectively.
| 8 |
Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, insurance and CAM is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.
The Company recognizes gains or losses on sales of real estate in accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”). Gains are not recognized until (a) a sale has been consummated; (b) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (c) the Company’s receivable, if any, is not subject to future subordination; and (d) the Company has transferred to the buyer the usual risks and reward of ownership, and the Company does not have a substantial continuing involvement with the property. The results of operations of income producing properties where the Company does not have a continuing involvement are presented in the discontinued operations section of the Company’s condensed consolidated statements of operations when the property has been classified as held-for-sale or sold.
Valuation of Tenant Receivables
The Company makes estimates of the collectability of its tenant receivables related to base rents, including deferred rents receivable, expense reimbursements and other revenue or income.
The Company analyzes tenant receivables, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Concentration of Credit Risk
A concentration of credit risk arises in the Company’s business when a nationally or regionally-based tenant occupies a substantial amount of space in multiple properties owned by the Company. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to the Company, exposing the Company to potential losses in rental revenue, expense recoveries, and percentage rent. Generally, the Company does not obtain security from the nationally-based or regionally-based tenants in support of their lease obligations to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk. As of March 31, 2014, Schnucks Markets, Inc. is the Company’s largest tenant (by square feet) and accounted for approximately 128,000 square feet, or approximately 8% of the Company’s gross leasable area, and approximately $833,000, or 5%, of the Company’s annual minimum rent. Publix, another large tenant, accounted for approximately 7% of the Company’s annual minimum rent. No other tenant accounted for over 5% of the Company’s annual minimum rent. There were $132,000 and $87,000 in outstanding receivables from Schnucks Markets, Inc. and Publix, respectively, at March 31, 2014, compared to $35,000 and $87,000, respectively, at December 31, 2013.
Business Combinations
The Company records the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination when the acquired property meets the definition of a business. Assets acquired and liabilities assumed in a business combination are generally measured at their acquisition-date fair values, including tenant improvements and identifiable intangible assets or liabilities. Tenant improvements recognized represent the tangible assets associated with the existing leases valued on a fair value basis at the acquisition date. Tenant improvements are classified as assets under investments in real estate and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases which come in three forms: (1) leasing commissions and legal costs, which represent the value associated with “cost avoidance” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in markets in which the Company operates; (2) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased; and (3) above- or below-market value of in-place leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks. The value of in-place leases is recorded in acquired lease intangibles and amortized over the remaining lease term. Above- or below-market-rate leases are classified in acquired lease intangibles, or in acquired below-market lease intangibles, depending on whether the contractual terms are above- or below-market. Above-market leases are amortized as a decrease to rental revenue over the remaining non-cancelable terms of the respective leases and below-market leases are amortized as an increase to rental revenue over the remaining initial lease term and any fixed rate renewal periods, if applicable.
| 9 |
Acquisition costs are expensed as incurred. During the three months ended March 31, 2014 and 2013, the Company did not acquire any properties. Costs incurred in pursuit of targeted properties for acquisitions not yet closed or those determined to no longer be viable and costs incurred which are expected to result in future period disposals of property not currently classified as held for sale properties have been expensed and are also classified in the condensed consolidated statement of operations as transaction expenses.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s results of operations. These allocations also impact depreciation expense, amortization expense and gains or losses recorded on future sales of properties.
Reportable Segments
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. The Company has one reportable segment, income-producing retail properties, which consists of activities related to investing in real estate. The retail properties are geographically diversified throughout the United States, and the Company evaluates operating performance on an overall portfolio level.
Investments in Real Estate
Real property is recorded at estimated fair value at time of acquisition with subsequent additions at cost, less accumulated depreciation and amortization. Costs include those related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of predevelopment and certain direct and indirect costs of development.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
| Years | ||
| Buildings and improvements | 5 - 48 years | |
| Exterior improvements | 10 - 20 years | |
| Equipment and fixtures | 5 - 10 years |
Tenant improvement costs recorded as capital assets are depreciated over the shorter of (1) the tenant’s remaining lease term or (2) the life of the improvement.
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized.
Impairment of Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that the Company estimates in this analysis include projected rental rates, capital expenditures and property sale capitalization rates. The Company did not record any impairment losses on its investments in real estate and related intangible assets during the three months ended March 31, 2014 and 2013.
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Assets Held-for-Sale and Discontinued Operations
When certain criteria are met, long-lived assets are classified as held-for-sale and are reported at the lower of their carrying value or their fair value, less costs to sell, and are no longer depreciated. Discontinued operations is a component of an entity that has either been disposed of or is deemed to be held-for-sale and (i) the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.
Fair Value Measurements
Under GAAP, the Company is required to measure or disclose certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
| • | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
| • | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| • | Level 3: prices or valuation techniques where little or no market data is available for inputs that are both significant to the fair value measurement and unobservable. |
When available, the Company utilizes quoted market prices or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to use significant judgment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for an asset owned by it to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another a present value technique that considers the future cash flows based on contractual obligations discounted by an observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
The Company considers the following factors to be indicators of an inactive market: (1) there are few recent transactions, (2) price quotations are not based on current information, (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (6) there is a wide bid-ask spread or significant increase in the bid-ask spread, (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (8) little information is released publicly (for example, a principal-to-principal market).
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The Company considers the following factors to be indicators of non-orderly transactions: (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.
Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the straight-line method which approximates the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financings that do not close are expensed in the period in which it is determined that the financing will not close.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax 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 qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT. The Company may also be subject to certain state or local income taxes, or franchise taxes.
The Company evaluates tax positions taken in the condensed consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, the Company may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.
When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.
The Company’s tax returns remain subject to examination and consequently, the taxability of the distributions is subject to change.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company accounts for non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) applicable to common stockholders in the Company’s computation of EPS.
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Reclassification
Assets sold or held-for-sale have been reclassified on the condensed consolidated balance sheets and the related operating results reclassified from continuing to discontinued operations on the condensed consolidated statements of operations. Certain amounts from the prior year have been reclassified to conform to current period presentation.
Recent Accounting Pronouncements
In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment”. ASU No. 2014-08 raises the criteria for reporting discontinued operations on an entity’s financial statements. Under the revised standard, a disposal of a component of an entity is required to be reported as discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU No. 2014-08 is effective for annual periods beginning on or after December 15, 2014, and early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. As the Company’s disposals generally do not represent a strategic shift, the adoption of ASU No. 2014-08 should eliminate the need to report such disposals as discontinued operations on the Company’s financial statements for any new disposals beginning in 2014.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
The Company reports as discontinued operations properties held-for-sale and operating properties sold in the current or prior periods. The results of these discontinued operations are included as a separate component on the condensed consolidated statements of operations under the caption “Discontinued operations”.
On January 8, 2014, the Company completed the sale of the Visalia Marketplace property in Visalia, California for a gross sales price of $21,100,000. The Company originally acquired the Visalia Marketplace property in June 2012 for $19,000,000. In accordance with the terms of the loan documents with KeyBank, 80% of the net proceeds from the sale were released from escrow to pay down and reduce the line of credit balance with KeyBank to $4,403,000 as of March 31, 2014. The Company classified assets and liabilities (including the line of credit) related to Visalia Marketplace as held for sale in the consolidated balance sheet at December 31, 2013. The results of operations related to Visalia Marketplace were classified as discontinued operations for the three months ended March 31, 2014 and 2013.
On November 9, 2012, TNP SRT Lahaina Gateway, LLC, the Company’s wholly-owned subsidiary (“TNP SRT Lahaina”), financed TNP SRT Lahaina’s acquisition of a ground lease interest in the Lahaina Gateway property, a multi-tenant necessity retail center located in Lahaina, Maui, Hawaii, with the proceeds of a loan (the “Lahaina Loan”) from DOF IV REIT Holdings, LLC (the “Lahaina Lender”). On August 1, 2013, in order to resolve its obligations under the Lahaina Loan, mitigate certain risks presented by the terms of the Lahaina Loan and avoid potential litigation and foreclosure proceedings (and the associated costs and delays), TNP SRT Lahaina granted and conveyed all of TNP SRT Lahaina’s right, title and interest in and to the leasehold estate in the Lahaina Gateway property, including all leases, improvements, licenses and permits and personal property related thereto, to DOF IV Lahaina, LLC, an affiliate of the Lahaina Lender, pursuant to a Deed In Lieu Of Foreclosure Agreement by and among the Company, TNP SRT Lahaina and the Lahaina Lender. For the year ended December 31, 2013, the Company realized a loss of $5,394,000 associated with the Deed In Lieu transaction (see Note 6. “Notes Payable”).
On December 4, 2012, the Company entered into a purchase and sale agreement, as amended, with a third party for the sale of the office building at the Aurora Commons property (acquired in March 2012). On or about May 9, 2013, the purchase and sale agreement, as amended, for the sale of the office building at the Aurora Commons property expired and the buyer did not release the contingencies in the purchase and sale agreement. The results of operations related to the office building at Aurora Commons, previously classified as discontinued operations for the three months ended March 31, 2013, have been reclassified and included within continuing operations for the three months ended March 31, 2014 and 2013, and all previously unrecorded depreciation was recorded.
Discontinued operations for the three months ended March 31, 2013 included the operating results related to Wainane Mall, Lahaina Gateway, Willow Run Shopping Center, and Craig Promenade, which were all disposed of in 2013, and Visalia Marketplace, which was disposed of in January 2014.
The components of income and expense relating to discontinued operations for the three months ended March 31, 2014 and 2013, are shown below.
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| Three Months Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenues from rental property | $ | 59,000 | $ | 2,601,000 | ||||
| Rental property expenses | 61,000 | 1,173,000 | ||||||
| Depreciation and amortization expenses | - | 1,101,000 | ||||||
| Transaction expenses | - | 57,000 | ||||||
| Interest expense | 12,000 | 1,676,000 | ||||||
| Operating loss from discontinued operations | (14,000 | ) | (1,406,000 | ) | ||||
| Gain on disposal of real estate | 3,192,000 | 4,838,000 | ||||||
| Income from discontinued operations | $ | 3,178,000 | $ | 3,432,000 | ||||
There were no properties held for sale as of March 31, 2014. The major classes of assets and liabilities related to assets held for sale included in the condensed consolidated balance sheets as of December 31, 2013, were as follows:
| December 31, 2013 | ||||
| ASSETS | ||||
| Investments in real estate | ||||
| Land | $ | 5,449,000 | ||
| Building and improvements | 10,683,000 | |||
| Tenant improvements | 1,235,000 | |||
| 17,367,000 | ||||
| Accumulated depreciation | (1,305,000 | ) | ||
| Investments in real estate, net | 16,062,000 | |||
| Tenant receivables | 84,000 | |||
| Lease intangibles, net | 4,744,000 | |||
| Assets held for sale | $ | 20,890,000 | ||
| LIABILITIES | ||||
| Notes payable | $ | 16,213,000 | ||
| Other liabilities | 165,000 | |||
| Below market lease intangibles, net | 3,609,000 | |||
| Liabilities related to assets held for sale | $ | 19,987,000 | ||
Amounts above are being presented at their carrying value which the Company believes to be lower than their estimated fair value less costs to sell.
4. FUTURE MINIMUM RENTAL INCOME
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2014, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 22 years with a weighted-average remaining term (excluding options to extend) of seven years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying condensed consolidated balance sheets and totaled $405,000 and $391,000 as of March 31, 2014 and December 31, 2013, respectively.
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As of March 31, 2014, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows:
| April 1 through December 31, 2014 | $ | 11,505,000 | ||
| 2015 | 14,724,000 | |||
| 2016 | 13,469,000 | |||
| 2017 | 12,284,000 | |||
| 2018 | 10,516,000 | |||
| Thereafter | 54,393,000 | |||
| Total | $ | 116,891,000 |
5. ACQUIRED LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES
As of March 31, 2014 and December 31, 2013, the Company’s acquired lease intangibles and below-market lease liabilities were as follows:
| Lease Intangibles | Below - Market Lease Liabilities | |||||||||||||||
| March 31, 2014 | December 31, 2013 | March 31, 2014 | December 31, 2013 | |||||||||||||
| Cost | $ | 22,987,000 | $ | 23,243,000 | $ | (7,108,000 | ) | $ | (7,133,000 | ) | ||||||
| Accumulated amortization | (7,157,000 | ) | (6,902,000 | ) | 1,176,000 | 1,068,000 | ||||||||||
| $ | 15,830,000 | $ | 16,341,000 | $ | (5,932,000 | ) | $ | (6,065,000 | ) | |||||||
Increases (decreases) in net income (loss) as a result of amortization of the Company’s lease intangibles and below-market lease liabilities for the three months ended March 31, 2014 and 2013 were as follows:
| Lease Intangibles | Below - Market Lease Liabilities | |||||||||||||||
| For the Three Months Ended Mar. 31, | For the Three Months Ended Mar. 31, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Amortization and accelerated amortization | $ | (739,000 | ) | $ | (817,000 | ) | $ | 133,000 | $ | 172,000 | ||||||
6. NOTES PAYABLE
As of March 31, 2014 and December 31, 2013, the Company’s notes payable, excluding notes payable that are classified under liabilities related to assets held for sale, consisted of the following:
| Principal Balance | Interest Rates At | |||||||||||
| March 31, 2014 | December 31, 2013 | March 31, 2014 | ||||||||||
| KeyBank Credit Facility | $ | 4,403,000 | $ | 4,403,000 | 5.50 | % | ||||||
| Secured term loans | 57,755,000 | 57,934,000 | 5.10% - 5.93 | % | ||||||||
| Mortgage loans | 60,217,000 | 60,430,000 | 4.50% - 15.00 | % | ||||||||
| Unsecured loans | 1,250,000 | 1,250,000 | 8.00 | % | ||||||||
| Total | $ | 123,625,000 | $ | 124,017,000 | ||||||||
During the three months ended March 31, 2014 and 2013, the Company incurred $2,219,000 and $2,270,000, respectively, of interest expense, which included the amortization and write-off of deferred financing costs of $203,000 and $256,000, respectively.
As of March 31, 2014 and December 31, 2013, interest expense payable was $1,168,000 and $979,000, respectively.
| 15 |
The following is a schedule of principal payments for all of the Company’s notes payable outstanding as of March 31, 2014:
| Amount | ||||
| April 1 through December 31, 2014 | $ | 11,035,000 | ||
| 2015 | 3,245,000 | |||
| 2016 | 18,593,000 | |||
| 2017 | 61,839,000 | |||
| 2018 | 639,000 | |||
| Thereafter | 28,274,000 | |||
| $ | 123,625,000 | |||
KeyBank Credit Facility and Forbearance Agreement
On December 17, 2010, the Company, through its subsidiary, Secured Holdings, entered into a line of credit with KeyBank and certain other lenders (collectively, the “Lenders”) to establish a secured revolving credit facility with an initial maximum aggregate commitment of $35 million (the “Credit Facility”). The Credit Facility initially consisted of an A tranche (“Tranche A”) with an initial aggregate commitment of $25 million, and a B tranche (“Tranche B”) with an initial aggregate commitment of $10 million. Tranche B under the Credit Facility terminated as of June 30, 2011. The aggregate commitment under Tranche A was subsequently increased on multiple occasions to a maximum of $45 million. As of March 31, 2014, as a consequence of the Company’s default under the Credit Facility, the Company has no additional availability under the Tranche A commitment.
As of March 31, 2014, the outstanding principal balance on the Credit Facility was $4,403,000. Borrowings under the Credit Facility are secured by (1) pledges by the Company, the OP, Secured Holdings, and certain subsidiaries of Secured Holdings, of their respective direct and indirect equity ownership interests in, as applicable, any subsidiary of Secured Holdings or the Company which directly or indirectly owns real property, subject to certain limitations and exceptions, (2) guarantees, granted by the Company and the OP on a joint and several basis, of the prompt and full payment of all of the obligations under the Credit Facility, (3) a security interest granted in favor of KeyBank with respect to all operating, depository, escrow and security deposit accounts and all cash management services of the Company, the OP, Secured Holdings and any other borrower under the Credit Facility, and (4) a deed of trust, assignment agreement, security agreement and fixture filing in favor of KeyBank with respect to the San Jacinto Esplanade and Aurora Commons properties. As discussed below, due to the Company’s events of default under the Credit Facility, the Company has entered into a forbearance agreement with KeyBank.
Under the Credit Facility, the Company is required to comply with certain restrictive and financial covenants. In January 2013, the Company became aware of a number of events of default under the Credit Facility relating to, among other things, the Company’s failure to use the net proceeds from its sale of shares in the Offering and the sale of its assets to repay borrowings under the Credit Facility as required by the Credit Facility and its failure to satisfy certain financial covenants under the Credit Facility (collectively, the “Existing Events of Default”). The Company also failed to comply with certain financial covenants at March 31, 2013. Due to the Existing Events of Default, the Lenders became entitled to exercise all of their rights and remedies under the Credit Facility and applicable law.
On April 1, 2013, the Company, the OP, certain subsidiaries of the OP which are borrowers under the Credit Facility (collectively, the “Borrowers”) and KeyBank, as lender and agent for the other Lenders, entered into a forbearance agreement (the “Forbearance Agreement”) which amended the terms of the Credit Facility and provides for certain additional agreements with respect to the Existing Events of Default. On July 31, 2013, the OP, the Borrowers and KeyBank entered into an amendment to the Forbearance Agreement which extended the forbearance period under the Forbearance Agreement. Pursuant to the terms of the Forbearance Agreement (as amended), KeyBank and the other Lenders agreed to forbear the exercise of their rights and remedies with respect to the Existing Events of Default until the earliest to occur of (1) January 31, 2014, (2) the Company’s default under or breach of any of the representations or covenants under the Forbearance Agreement or (3) the date any additional events of defaults (other than the Existing Events of Default) under the Credit Facility occur or become known to KeyBank or any other Lender.
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On December 11, 2013, the Company, the OP, the Borrowers and KeyBank entered into the second amendment to Forbearance Agreement. The second forbearance amendment amended the Forbearance Agreement and the Credit Facility as follows:
| · | The Lenders’ obligation to provide forbearance will terminate on the first to occur of (1) July 31, 2014, (2) a default under or breach of any of the representations, warranties or covenants of the Forbearance Agreement, or (3) an event of default (other than the Existing Events of Default) under the loan documents related to the Credit Facility occurring or becoming known to any Lender (such date the “Forbearance Expiration Date”). |
| · | The entire outstanding principal balance, and all interest thereon, of the outstanding Tranche A loans under the Credit Facility will become due and payable in full on July 31, 2014, instead of January 31, 2014. |
| · | The Company, the OP and the Borrowers are required to apply eighty percent (80%), as opposed to one hundred percent (100%), of the net proceeds received from specified capital events, including a sale or refinancing of the Company’s properties, to Tranche A loans, unless an event of default, other than the Existing Events of Default, occurs, in which case they must apply one hundred percent (100%) of the net proceeds to Tranche A loans. |
| · | The Company, the OP and the Borrowers are permitted to pay distributions, provided that the aggregate amount of such distributions does not exceed one hundred percent (100%) of the Company’s Adjusted Funds from Operations (on a trailing 12-month basis commencing on April 1, 2013), as defined in the Credit Facility agreement. |
Upon the Forbearance Expiration Date, all forbearances, deferrals and indulgences granted by the Lenders pursuant to the Forbearance Agreement will automatically terminate and the Lenders will be entitled to enforce, without further notice of any kind, any and all rights and remedies available to them as creditors at law, in equity, or pursuant to the Credit Facility or any other agreement as a result of the Existing Events of Default or any additional events of default which occur or come to light following the date of the Forbearance Agreement.
As previously reported, in connection with the Forbearance Agreement, the Borrowers and KeyBank entered into a Fee Letter pursuant to which the Borrowers paid KeyBank a forbearance fee (the “Fee Letter”). On July 31, 2013 in connection with the first amendment to the Forbearance Agreement, the Borrowers and KeyBank amended the Fee Letter and the Borrowers paid KeyBank an additional forbearance fee. On December 11, 2013, in connection with the second forbearance amendment, the Borrowers and KeyBank further amended the Fee Letter and the Borrowers agreed to pay an additional forbearance fee.
Waianae Loan Assumption
On January 22, 2013, the Company sold the Waianae Mall in Waianae, Hawaii to an unaffiliated buyer for a final sales price of $29,763,000. The mortgage loan secured by the Waianae Mall with an outstanding balance of $19,717,000 was assumed by the buyer in connection with the sale. The Company incurred a disposition fee to Prior Advisor of $893,000 in connection with the sale.
Lahaina Loan
In connection with the acquisition of Lahaina Gateway property on November 9, 2012, the Company, through TNP SRT Lahaina, borrowed $29,000,000 from the Lahaina Lender. The entire unpaid principal balance of the Lahaina Loan and all accrued and unpaid interest thereon was due and payable in full on October 1, 2017. The Lahaina Loan bore interest at a rate of 9.483% per annum for the initial 12 months, and then 11.429% for the remainder of the term of the loan. On each of December 1, 2012, January 1, 2013, and February 1, 2013, the Company was required to make a mandatory principal prepayment of $333,333, such that the Company would prepay an aggregate $1,000,000 of the outstanding principal balance of the Lahaina Loan, no later than February 1, 2013.
On January 14, 2013, the Company received a letter of default from the Lahaina Lender in connection with the certain Guaranty of Recourse Obligations by the Company and Anthony W. Thompson, the Company’s chairman and co-chief executive officer at the time, for the benefit of the Lahaina Lender, pursuant to which the Company and Mr. Thompson guaranteed the obligations of TNP SRT Lahaina under the Lahaina Loan. The letter of default stated that two events of default existed under the Lahaina Loan as a result of the failure of TNP SRT Lahaina to (1) pay a deposit into a rollover account, and (2) pay two mandatory principal payments. The Lahaina Lender requested payment of the missed deposit into the rollover account, the two overdue mandatory principal payments, and late payment charges and default interest in the aggregate amount of $1,281,000 by January 18, 2013. On January 22, 2013, the Company used a portion of the proceeds from the sale of the Waianae Mall (discussed above) to pay the entire amount requested by Lahaina Lender and cure the events of default described in the letter of default under the Lahaina Loan.
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Since the acquisition of the Lahaina Gateway property on November 9, 2012, cash from operations from the Lahaina Gateway property was not sufficient to support the property’s operating expenses, the debt service obligations under the Lahaina Loan, and the various cash reserve requirements imposed by the Lahaina Lender. As a result, since the acquisition of the Lahaina Gateway property, the Company had supported the property’s cash requirements with cash from operations generated by other properties within the Company’s portfolio. In addition to the property cash flow issues, the Lahaina Loan contained a number of provisions that potentially exposed the Company to increased risk and constrained its ability to make certain strategic decisions. In order to settle the Company’s obligations under the Lahaina Loan and avoid potential litigation and foreclosure proceedings (and the associated delays and expenses), relating to the Lahaina Gateway property, on August 1, 2013, the Company entered into a deed in lieu of foreclosure agreement with the Lahaina Lender (the “DIL Agreement”). Pursuant to the DIL Agreement, the Company conveyed title to the Lahaina Gateway property to a designee of the Lahaina Lender in exchange for the Lahaina Lender’s agreement not to seek payment from the Company for any amounts owed under the Lahaina Loan, subject to certain exceptions as set forth in the DIL Agreement and the agreements entered into in connection therewith. For the year ended December 31, 2013, the Company realized a loss of $5,404,000 associated with the Deed In Lieu transaction which was derived from the carrying value of all of Lahaina Gateway’s assets of $34,070,000 less the carrying value of all of its liabilities of $28,666,000, on August 1, 2013.
KeyBank Mezzanine Loan
On June 13, 2012, the Company, through TNP SRT Portfolio II Holdings, LLC obtained a mezzanine loan from KeyBank in the original principal amount of $2,000,000. The proceeds of the mezzanine loan were used to refinance the portions of the Credit Facility secured by Morningside Marketplace, Cochran Bypass (Bi Lo Grocery Store), Ensenada Square, Florissant Marketplace and Turkey Creek. The mezzanine loan was repaid in full in January 2013 using a portion of the proceeds from the sale of the Waianae Mall.
7. FAIR VALUE DISCLOSURES
The Company believes the total carrying values reflected on its condensed consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and amounts due to affiliates due to their short-term nature, except for the Company’s notes payable, which are disclosed below.
The fair value of the Company’s notes payable is estimated using a present value technique based on contractual cash flows and management’s observations of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. The Company significantly reduces the amount of judgment and subjectivity in its fair value determination through the use of cash flow inputs that are based on contractual obligations. Discount rates are determined by observing interest rates published by independent market participants for comparable instruments. The Company classifies these inputs as Level 2 inputs.
The following table provides the carrying values and fair values of the Company’s notes payable related to continuing operations as of March 31, 2014 and December 31, 2013:
| At March 31, 2014 | Carrying Value (1) | Fair Value (2) | ||||||
| Notes Payable | $ | 123,625,000 | $ | 124,025,000 | ||||
| At December 31, 2013 | Carrying Value (1) | Fair Value (2) | ||||||
| Notes Payable | $ | 124,017,000 | $ | 124,306,000 |
| (1) | The carrying value of the Company’s notes payable represents outstanding principal as of March 31, 2014 and December 31, 2013. |
| (2) | The estimated fair value of the notes payable is based upon indicative market prices of the Company’s notes payable based on prevailing market interest rates. |
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8. EQUITY
Common Stock
Under the Company’s Articles of Amendment and Restatement (the “Charter”), the Company has the authority to issue 400,000,000 shares of common stock. All shares of common stock have a par value of $0.01 per share. On October 16, 2008, the Company issued 22,222 shares of common stock to TNP LLC for an aggregate purchase price of $200,000. As of December 31, 2013, Sharon D. Thompson, the spouse of Anthony W. Thompson, the Company’s former co-chief executive officer and former president, independently owned 111,111 shares of the Company’s common stock for which she paid an aggregate purchase price of $1,000,000 and TNP LLC, which is controlled by Mr. Thompson, owned 22,222 shares of the Company’s common stock. On January 24, 2014, GPP purchased both the 22,222 and 111,111 shares of the Company from TNP LLC and Sharon D. Thompson, respectively, for $8 per share. That share purchase transaction was part of a larger settlement of issues relating to the 2013 annual meeting proxy contest, and does not necessarily reflect a market price or value for such securities.
On February 7, 2013, the Company terminated the Offering and ceased offering shares of common stock in the primary offering and under the DRIP. As of the termination of the Offering on February 7, 2013, the Company had accepted subscriptions for, and issued, 10,969,714 shares of common stock (net of share redemptions), including 391,182 shares of common stock pursuant to the DRIP, resulting in gross offering proceeds of $108,357,000.
Common Units
Prior Advisor invested $1,000 in the OP in exchange for Common Units of the OP which were sold to GPP on January 24, 2014. On May 26, 2011, in connection with the acquisition of Pinehurst Square East, a retail property located in Bismarck, North Dakota, the OP issued 287,472 Common Units to certain of the sellers of Pinehurst Square East who elected to receive Common Units for an aggregate value of approximately $2,587,000, or $9.00 per Common Unit. On March 12, 2012, in connection with the acquisition of Turkey Creek, a retail property located in Knoxville, Tennessee, the OP issued 144,324 Common Units to certain of the sellers of Turkey Creek who elected to receive Common Units for an aggregate value of approximately $1,371,000, or $9.50 per Common Unit.
Member Interests
On July 9, 2013, SRT Secured Holdings Manager, LLC (“SRT Manager”), an affiliate of Glenborough, made a cash investment of $1,929,000 in Secured Holdings pursuant to a Membership Interest Purchase Agreement by and among the Company, SRT Manager, Secured Holdings, and the OP, and, as of March 31, 2014, SRT Manager owned a 12% membership interest in Secured Holdings. Following the acquisition of the membership interest by SRT Manager, the remaining 88% membership interest in Secured Holdings is held by the OP. As of March 31, 2014, Secured Holdings owns two of the 16 multi-tenant retail properties in the Company’s property portfolio. The Company’s independent directors negotiated and approved the transaction in order to help enable the Company to meet its short-term liquidity needs for operations, as well as to build working capital for future operations.
Preferred Stock
The Charter authorizes the Company to issue 50,000,000 shares of $0.01 par value preferred stock. As of March 31, 2014 and December 31, 2013, no shares of preferred stock were issued and outstanding.
Share Redemption Program
The Company’s share redemption program allows for share repurchases by the Company when certain criteria are met by requesting stockholders. Share repurchases pursuant to the share redemption program are made at the sole discretion of the Company. The number of shares to be redeemed during any calendar year is limited to no more than (1) 5% of the weighted average of the number of shares of the Company’s common stock outstanding during the prior calendar year and (2) those that could be funded from the net proceeds from the sale of shares under the DRIP in the prior calendar year plus such additional funds as may be borrowed or reserved for that purpose by the Company’s board of directors. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time.
Effective January 15, 2013, the Company suspended its share redemption program, including redemptions upon death and disability, and the Company did not redeem any common shares under its share redemption program during the three months ended March 31, 2014 and 2013.
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Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.
For so long as the Company remained in default under the terms of the Credit Facility, KeyBank prohibited the payment of distributions to investors in the Company. Effective January 15, 2013, the Company announced that it would no longer be making monthly distributions. On December 9, 2013, the Company announced that it had successfully modified the Credit Facility such that the Company may re-establish distributions so long as the total amount paid does not exceed 100% of the Adjusted Funds from Operations (on a trailing 12-month basis commencing on April 1, 2013), as defined in the Credit Facility agreement. As a result, on December 9, 2013, the Company declared a quarterly distribution in the amount of $0.05 per share on the outstanding common shares of the Company, payable to stockholders of record as of December 31, 2013, which was paid on January 31, 2014. For the three months ended March 31, 2014, the Company declared a quarterly distribution in the amount of $0.05 per share on the outstanding common shares, payable to stockholders of record as of March 31, 2014. This distribution was paid on April 30, 2014. The Company’s board of directors will continue to evaluate the Company’s ability to make future quarterly distributions based on the Company’s other operational cash needs.
The following table sets forth the distributions declared to the Company’s common stockholders and non-controlling Common Unit holders for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively:
| Distribution Record Date | Distribution Payable Date | Distribution Per Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2014 | 3/31/2014 | 4/30/2014 | $ | 0.05000 | $ | 548,000 | $ | 22,000 | $ | 570,000 | ||||||||||
| $ | 548,000 | $ | 22,000 | $ | 570,000 | |||||||||||||||
| Distribution Record Date | Distribution Payable Date | Distribution Per Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2013 | 1/18/2013 | 1/18/2013 | $ | 0.05833 | $ | 636,000 | $ | 25,000 | $ | 661,000 | ||||||||||
| Second Quarter 2013 | N/A | N/A | - | - | - | - | ||||||||||||||
| Third Quarter 2013 | N/A | N/A | - | - | - | - | ||||||||||||||
| Fourth Quarter 2013 | 12/31/2013 | 1/31/2014 | 0.05000 | 548,000 | 22,000 | 570,000 | ||||||||||||||
| $ | 1,184,000 | $ | 47,000 | $ | 1,231,000 | |||||||||||||||
Distribution Reinvestment Plan
The Company adopted the DRIP to allow common stockholders to purchase additional shares of the Company’s common stock through the reinvestment of distributions, subject to certain conditions. The Company registered and reserved 10,526,316 shares of its common stock for sale pursuant to the DRIP. The DRIP was terminated effective February 7, 2013 in connection with the expiration of the Offering and the Company’s deregistration of all of the unsold shares registered for sale pursuant to the Offering. As a result, for the three months ended March 31, 2014, no distributions were reinvested, and no shares of common stock were issued under the DRIP, and for the three months ended March 31, 2013, $246,000 in distributions were reinvested and 25,940 shares of common stock were issued under the DRIP.
9. EARNINGS PER SHARE
EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
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The following table sets forth the computation of the Company’s basic and diluted loss per share:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2014 | 2013 | |||||||
| Numerator - basic and diluted | ||||||||
| Net loss from continuing operations | $ | (2,176,000 | ) | $ | (2,249,000 | ) | ||
| Net income attributable non-controlling interests | 89,000 | 86,000 | ||||||
| Net loss attributable to common shares | (2,087,000 | ) | (2,163,000 | ) | ||||
| Net income from discontinued operations | 3,178,000 | 3,432,000 | ||||||
| Net income attributable to non-controlling interests | (489,000 | ) | (131,000 | ) | ||||
| Net income attributable to common shares | $ | 602,000 | $ | 1,138,000 | ||||
| Denominator - basic and diluted | ||||||||
| Basic weighted average common shares | 10,969,714 | 10,935,089 | ||||||
| Effect of dilutive securities | ||||||||
| Common Units (1) | 431,796 | 431,796 | ||||||
| Diluted weighted average common shares | 11,401,510 | 11,366,885 | ||||||
| Basic Earnings per Common Share | ||||||||
| Net loss from continuing operations attributable to common shares | $ | (0.19 | ) | $ | (0.20 | ) | ||
| Net income from discontinued operations attributable to common shares | 0.25 | 0.30 | ||||||
| Net income attributable to common shares | $ | 0.06 | $ | 0.10 | ||||
| Diluted Earnings per Common Share | ||||||||
| Net loss from continuing operations attributable to common shares | $ | (0.19 | ) | $ | (0.19 | ) | ||
| Net income from discontinued operations attributable to common shares | 0.24 | 0.29 | ||||||
| Net income attributable to common shares | $ | 0.05 | $ | 0.10 | ||||
| (1) | Number of convertible Common Units pursuant to the redemption rights outlined in the Company's registration statement on Form S-11. |
10. INCENTIVE AWARD PLAN
The Company adopted an incentive award plan on July 7, 2009 (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. The Company has reserved 2,000,000 shares of common stock for stock grants pursuant to the Incentive Award Plan.
Pursuant to the Company’s Amended and Restated Independent Directors Compensation Plan, which is a sub-plan of the Incentive Award Plan (the “Directors Plan”), the Company granted each of its independent directors an initial grant of 5,000 shares of restricted stock (the “initial restricted stock grant”) following the Company’s raising of the $2,000,000 minimum offering amount in the Offering on November 12, 2009. Each new independent director that subsequently joined the board of directors received the initial restricted stock grant on the date he or she joined the board of directors. In addition, until the Company terminated the Offering on February 7, 2013, on the date of each of the Company’s annual stockholders meetings at which an independent director was re-elected to the board of directors, he or she may have received 2,500 shares of restricted stock. The restricted stock vests one-third on the date of grant and one-third on each of the next two anniversaries of the grant date. The restricted stock will become fully vested and non-forfeitable in the event of an independent director’s termination of service due to his or her death or disability, or upon the occurrence of a change in control of the Company.
For the three months ended March 31, 2014 and 2013, the Company recognized compensation expense of $8,000 and $15,000, respectively, related to restricted common stock grants to its independent directors, which is included in general and administrative expense in the Company’s accompanying condensed consolidated statements of operations. Shares of restricted common stock have full voting rights and rights to dividends. As of March 31, 2014 and December 31, 2013, there was $10,000 and $18,000, respectively, of total unrecognized compensation expense related to non-vested shares of restricted common stock. As of March 31, 2014, this expense is expected to be realized over the remaining period of the year. As of March 31, 2014 and December 31, 2013, 3,333 shares of restricted common stock remain unvested with a fair value of $30,000. During the three months ended March 31, 2014, there were no restricted stock grants issued and no shares of restricted stock vested.
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A summary of the changes in restricted stock grants for the three months ended March 31, 2014, is presented below:
| Weighted Average | ||||||||
| Restricted Stock | Grant Date | |||||||
| (Number of Shares) | Fair Value | |||||||
| Balance - December 31, 2013 | 3,333 | $ | 9.00 | |||||
| Granted | - | - | ||||||
| Vested | - | - | ||||||
| Balance - March 31, 2014 | 3,333 | $ | 9.00 | |||||
11. RELATED PARTY TRANSACTIONS
Pursuant to the Prior Advisory Agreement by and among the Company, the OP and the Prior Advisor, the Company was obligated to pay Prior Advisor specified fees upon the provision of certain services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services. Pursuant to the dealer manager agreement (the “Dealer Manager Agreement”) by and among the Company, the OP, and TNP Securities, LLC (the “Dealer Manager” or “TNP Securities”), prior to the termination of the Offering, the Company was obligated to pay the Dealer Manager certain commissions and fees in connection with the sales of shares in the Offering. Subject to certain limitations, the Company was also obligated to reimburse Prior Advisor and Dealer Manager for organization and offering costs incurred by Prior Advisor and Dealer Manager on behalf of the Company, and the Company was obligated to reimburse Prior Advisor for acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company. The Company records all related-party fees as incurred, subject to any limitations described in the Prior Advisory Agreement.
On August 7, 2013, the Company allowed the Prior Advisory Agreement with the Prior Advisor to expire without renewal, and on August 10, 2013, the Company entered into the Advisory Agreement with Advisor. Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.
On July 9, 2013, SRT Manager, an affiliate of Advisor, acquired a 12% membership interest in Secured Holdings, the Company’s wholly-owned subsidiary, and on January 24, 2014, GPP purchased 22,222 and 111,111 shares of the Company from TNP LLC and Sharon D. Thompson, respectively, for $8 per share. That share purchase transaction was part of a larger settlement of issues relating to the 2013 annual meeting proxy contest, and does not necessarily reflect a market price or value for such securities (see Note 8. “Equity”).
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Summary of Related Party Fees
Summarized separately below are the Prior Advisor and Advisor related-party costs incurred by the Company for the three months ended March 31, 2014 and 2013, respectively, and payable as of March 31, 2014 and December 31, 2013:
| Prior Advisor Fees | Incurred | Payable as of | ||||||||||||||
| Three Months Ended March 31, | December 31, | |||||||||||||||
| Expensed | 2014 | 2013 | March 31, 2014 | 2013 | ||||||||||||
| Reimbursement of operating expenses | $ | - | $ | (98,000 | ) | $ | - | $ | - | |||||||
| Acquisition fees | - | 13,000 | - | - | ||||||||||||
| Property management fees | - | 344,000 | 163,000 | 163,000 | ||||||||||||
| Guaranty fees | 5,000 | 14,000 | 22,000 | 17,000 | ||||||||||||
| Disposition fees | - | 924,000 | - | - | ||||||||||||
| $ | 5,000 | $ | 1,197,000 | $ | 185,000 | $ | 180,000 | |||||||||
| Capitalized | ||||||||||||||||
| Leasing commission fees | - | 124,000 | - | - | ||||||||||||
| $ | - | $ | 124,000 | $ | - | $ | - | |||||||||
| Additional Paid-In Capital | ||||||||||||||||
| Selling commissions | $ | - | $ | 32,000 | $ | - | $ | - | ||||||||
| Dealer manager fees | - | 15,000 | - | - | ||||||||||||
| Organization and offering costs | - | 7,000 | - | - | ||||||||||||
| $ | - | $ | 54,000 | $ | - | $ | - | |||||||||
| Advisor Fees | Incurred | Payable as of | ||||||||||||||
| Three Months Ended March 31, | December 31, | |||||||||||||||
| Expensed | 2014 | 2013 | March 31, 2014 | 2013 | ||||||||||||
| Consulting and accounting fees | $ | - | $ | 225,000 | $ | - | $ | - | ||||||||
| Asset management fees | 329,000 | - | 114,000 | 179,000 | ||||||||||||
| Reimbursement of operating expenses | - | - | - | 5,000 | ||||||||||||
| Property management fees | 216,000 | - | 68,000 | 78,000 | ||||||||||||
| Disposition fees | 211,000 | - | - | |||||||||||||
| $ | 756,000 | $ | 225,000 | $ | 182,000 | $ | 262,000 | |||||||||
| Capitalized | ||||||||||||||||
| Leasing commission fees | $ | 33,000 | $ | - | $ | - | $ | - | ||||||||
| Legal leasing fees | 25,000 | - | - | - | ||||||||||||
| $ | 58,000 | $ | - | $ | - | $ | - | |||||||||
In March 2012, the Company reimbursed its Prior Advisor $240,000 related to a non-refundable earnest deposit incurred by an affiliate of Prior Advisor in 2010 on a potential acquisition commonly known as Morrison Crossing. The reimbursement was subsequently determined by the Company to be non-reimbursable since the acquisition was not one that was approved by the Company’s board of directors in 2010 and accordingly, the Company recorded the amount as a receivable from Prior Advisor and recorded a provision to reserve the entire amount at December 31, 2012, and until May 2013, when the Company settled with Prior Advisor and determined to not seek reimbursement from Prior Advisor for the amount previously paid.
Organization and Offering Costs
Organization and offering costs of the Company (other than selling commissions and the dealer manager fee described below) were initially paid by Prior Advisor and its affiliates on the Company’s behalf. Such costs include legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses of certain of Prior Advisor’s employees and employees of Prior Advisor’s affiliates and others. Pursuant to the Prior Advisory Agreement, the Company was obligated to reimburse Prior Advisor or its affiliates, as applicable, for organization and offering costs associated with the Offering, provided the Company was not obligated to reimburse Prior Advisor to the extent organization and offering costs, other than selling commissions and dealer manager fees, incurred by the Company exceed 3% of the gross offering proceeds from the Offering. Any such reimbursement will not exceed actual expenses incurred by Prior Advisor.
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As of March 31, 2014, cumulative organization and offering costs incurred by Prior Advisor on the Company’s behalf were $3,272,000, net of a reimbursement discussed below. These costs were payable by the Company to the extent organization and offering costs, other than selling commissions and dealer manager fees, did not exceed 3% of the gross proceeds of the Offering. As of March 31, 2014, cumulative organization and offering costs reimbursed to Prior Advisor or paid directly by the Company were $4,273,000, which amount exceeded 3% of the gross proceeds from the Offering by $1,001,000. This excess amount was billed to Prior Advisor and settled as of January 31, 2013.
Under the new Advisory Agreement, the Company shall reimburse Advisor for all offering and marketing related expenses incurred on the Company’s behalf in connection with any private placement up to 2% of the gross proceeds of such private placement. There were no such expenses under the new Advisory Agreement for the three months ended March 31, 2014.
Selling Commissions and Dealer Manager Fees
Prior to the termination of the Offering, the Dealer Manager received a sales commission of 7% of the gross proceeds from the sale of shares of common stock in the primary offering. The Dealer Manager also received 3% of the gross proceeds from the sale of shares in the primary offering in the form of a dealer manager fee as compensation for acting as the dealer manager. The Company incurred selling commissions and dealer manager fees during the following periods:
| For the Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2014 | 2013 | Inception Through March 31, 2014 | ||||||||||
| Selling Commissions | $ | - | $ | 32,000 | $ | 6,905,000 | ||||||
| Dealer Manager Fee | - | 15,000 | 3,081,000 | |||||||||
| $ | - | $ | 47,000 | $ | 9,986,000 | |||||||
Reimbursement of Operating Expenses
The Company reimbursed Prior Advisor for all expenses paid or incurred by Prior Advisor in connection with the services provided to the Company, subject to the limitation that the Company did not reimburse Prior Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described below) at the end of the four preceding fiscal quarters exceeded the greater of: (1) 2% of its average invested assets (as defined in the Charter), or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). Prior Advisor was required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year. Notwithstanding the above, the Company could reimburse Prior Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determined that such excess expenses were justified based on unusual and nonrecurring factors.
Under the Advisory Agreement, the terms and conditions regarding the reimbursement of operating expenses are generally the same as the Prior Advisory Agreement, except for the following differences. The Company will not reimburse Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and Advisor or its affiliates. Beginning after the first four fiscal quarters following Advisor’s engagement, the Company will not reimburse Advisor or its affiliates at the end of any fiscal quarter in which total operating expenses for the four consecutive fiscal quarters then ended exceeds the 2% /25% guideline. Also, under the Advisory Agreement, for purposes of calculating the excess amount, the Company’s board of directors has determined that “total operating expenses” will not include (a) amounts (i) paid to Prior Advisor or its affiliates related to or in connection with the termination of the Prior Advisory Agreement, the dealer manager agreement, or any property management agreements or other agreements with Prior Advisor or its affiliates, or (ii) amounts incurred in connection with the termination of the agreements described in the foregoing clause (i), including, without limitation, attorney’s fees, litigation costs and expenses and amounts paid in settlement (but excluding costs associated with obtaining lender approvals to any such termination and engagement of our advisor or its affiliates as a replacement under such agreements), and (b) “total operating expenses” incurred prior to the date of the execution of the Advisory Agreement. Under the Advisory Agreement, Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year, or the Company may subtract such excess from the total operating expenses for the subsequent fiscal quarter.
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For twelve months ended March 31, 2014, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
The Company reimbursed Prior Advisor and Advisor for the cost of administrative services, including personnel costs and its allocable share of other overhead of Prior Advisor and Advisor such as rent and utilities; provided, however, that no reimbursement could be made for costs of such personnel to the extent that personnel are used in transactions for which Prior Advisor and Advisor received a separate fee or with respect to an officer of the Company. See the Summary of Related-Party Fees table for incurred administrative services paid to Prior Advisor and Advisor for the three months ended March 31, 2014 and 2013.
Property Management Fee
The Company terminated its property management agreements with TNP Property Manager, LLC, its property manager and an affiliate of Prior Advisor, effective August 9, 2013. The Company entered into new property management agreements with Glenborough effective August 10, 2013. The terms and conditions of the new property management agreements with Glenborough are generally the same as the prior property management agreements except the property management fees are calculated at a maximum of up to 4% of gross revenue (reduced from 5% in the prior agreements) and the terms of the new property management agreements are 12 months (unlike the purported 20-year term of the prior property management agreements). See the Summary of Related-Party Fees table for incurred property management fees for the three months ended March 31, 2014 and 2013.
Acquisition and Origination Fee
The Company paid Prior Advisor an acquisition fee equal to 2.5% of the cost of investments acquired, including acquisition expenses and any debt attributable to such investments. Under the Advisory Agreement, Advisor is entitled to receive an acquisition fee equal to 1% of the costs of investments acquired, including acquisition expenses and any debt attributable to such investments. See the Summary of Related-Party Fees table for incurred acquisition fees for the three months ended March 31, 2014 and 2013.
The Company paid Prior Advisor 2.5% of the amount funded by the Company to acquire or originate real estate-related loans, including third party expenses related to such investments and any debt used to fund the acquisition or origination of the real estate-related loans. Under the Advisory Agreement, Advisor is entitled to receive an origination fee equal to 1% of the amount funded by the Company to acquire or originate real estate-related loans, including any acquisition expenses related to such investment and any debt used to fund the acquisition or origination of the real estate-related loans. See the Summary of Related-Party Fees table for incurred loan origination fees for the three months ended March 31, 2014 and 2013.
Asset Management Fee
The Company paid Prior Advisor a monthly asset management fee equal to one-twelfth (1/12th) of 0.6% of the aggregate cost of all real estate investments the Company acquires; provided, however, that Prior Advisor could not be paid the asset management fee until the Company’s funds from operations exceed the lesser of (1) the cumulative amount of any distributions declared and payable to the Company’s stockholders or (2) an amount that is equal to a 10% cumulative, non-compounded, annual return on invested capital for the Company’s stockholders. On November 11, 2011, the board of directors approved Amendment No. 2 to the Prior Advisory Agreement to clarify that upon termination of the Prior Advisory Agreement, any asset management fees that may have accumulated in arrears, but which had not been earned pursuant to the terms of the Prior Advisory Agreement, will not be paid to Prior Advisor.
Under the Advisory Agreement, Advisor will receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments or (2) the fair market value of investments (before non-cash reserves and deprecation) if the Company’s board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.
See the Summary of Related-Party Fees table for incurred asset management fees for the three months ended March 31, 2014 and 2013.
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Disposition Fee
If Prior Advisor or its affiliates provided a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, Prior Advisor or its affiliates could be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold. Under the Advisory Agreement, the terms and conditions of the disposition fee payable to Advisor are the same as the terms for such fees under the Prior Advisory Agreement. See the Summary of Related-Party Fees table for incurred disposition fees for the three months ended March 31, 2014 and 2013.
Leasing Commission Fee
On June 9, 2011, pursuant to Section 11 of the Prior Advisory Agreement, the Company’s board of directors approved the payment of fees to the Prior Advisor for services it provided in connection with leasing the Company’s properties. Under the new property management agreements, Advisor shall receive a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties. See the Summary of Related- Party Fees table for incurred leasing commission fees for the three months ended March 31, 2014 and 2013.
Legal Leasing Fee
Under the new property management agreements, Advisor shall receive a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments. See the Summary of Related-Party Fees table for incurred legal leasing fees for the three months ended March 31, 2014 and 2013.
Financing Coordination Fee
On January 12, 2012, the board of directors approved Amendment No. 3 to the Prior Advisory Agreement to provide for the payment of a financing coordination fee to Prior Advisor in an amount equal to 1% of any amount financed or refinanced by the Company or the OP. Under the Advisory Agreement, the Advisor will receive a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by the Company or the OP and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by the Company or the OP. There were no financing coordination fees incurred for the three months ended March 31, 2014 and 2013.
Guaranty Fees
In connection with certain acquisition financings, the Company’s former chairman and former co-chief executive officer and/or TNP LLC had executed certain guaranty agreements to the respective lenders. As consideration for such guaranty, the Company entered into a reimbursement and fee agreement to provide for an upfront payment and an annual guaranty fee payment for the duration of the guarantee period. See the Summary of Related-Party Fees table for incurred guaranty fees for the three months ended March 31, 2014 and 2013. As of March 31, 2014, the Company’s outstanding guaranty agreements relate to the guarantee on the financing on Constitution Trail and Osceola Village.
Related Party Loans and Loan Fees
On September 20, 2013, the Company borrowed $500,000 for general working capital purposes from GPP pursuant to an unsecured promissory note by the Company in favor of GPP (the “Glenborough Loan”). The Glenborough Loan carried an interest rate of 7% per annum and maturity date of February 28, 2014. The Company repaid the loan and accrued interest in full, without penalty, in December 2013. There was no interest expense related to the Glenborough Loan during the three months ended March 31, 2014 and 2013.
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12. COMMITMENTS AND CONTINGENCIES
Osceola Village Contingencies
In connection with the acquisition financing on Osceola Village, the Company through its subsidiary, granted a lender a profit participation in the property Osceola Village equal to 25% of the net profits received by the Company upon the sale of the property (the “Profit Participation Payment”). Net profits is calculated as (1) the gross proceeds received by the Company upon a sale of the property in an arms-length transaction at market rates to third parties less (2) the sum of: (a) principal repaid to the lender out of such sales proceeds at the time of such sale; (b) all bona fide closing costs and similar expenses provided that all such closing costs and similar expenses are paid to third parties, unaffiliated with the Company including, without limitation, reasonable brokerage fees and reasonable attorneys’ fees paid to third parties, unaffiliated with the Company and incurred by the Company in connection with the sale; and (c) a stipulated amount of $3,200,000. If for any reason consummation of such sale has not occurred on or before the scheduled maturity date or any earlier foreclosure of the underlying mortgage loan secured by the property, the Company shall be deemed to have sold the property as of the business day immediately preceding the mortgage loan maturity date or the filing date of the foreclosure action, whichever is applicable, for an amount equal to a stipulated sales price and shall pay the lender the Profit Participation Payment. In the event the underlying mortgage loan is prepaid, the Company shall also be required to immediately pay the Profit Participation Payment based upon a deemed sale of the property for a stipulated sales price. Based on the estimated sale price as of March 31, 2014, the Company determined that it does not have any liability under the Profit Participation Payment as of March 31, 2014.
Additionally, in connection with the acquisition financing on Osceola Village, the Company entered into a Master Lease Agreement (the “Master Lease”) with TNP SRT Osceola Village Master Lessee, LLC, a wholly owned subsidiary of the OP (the “Master Lessee”). Pursuant to the Master Lease, TNP SRT Osceola Village leased to Master Lessee the approximately 23,000 square foot portion of Osceola Village which was not leased to third-party tenants as of the closing date (the “Premises”). The Master Lease provides that the Master Lessee will pay TNP SRT Osceola Village a monthly rent in an amount equal to $36,425, provided that such monthly amount will be reduced proportionally for each square foot of space at the premises subsequently leased to third-party tenants pursuant to leases that are reasonably acceptable to the lender and that satisfy certain criteria set forth in the Master Lease (“Approved Leases”). The Master Lease has a seven-year term, subject to earlier expiration upon the earlier to occur of (1) the date on which all available rentable space at the Premises is leased to third-party tenants pursuant to Approved Leases and (2) the date on which the mortgage loan is repaid in full in cash (other than as a result of a credit bid by the lender at a foreclosure sale). The Master Lessee has no right to assign or pledge the Master Lease or to sublet any part of the premises without the prior written consent of TNP SRT Osceola Village and the lender. In connection with the acquisition of Osceola Village, TNP SRT Osceola Village obtained a mortgage (the “Osceola Loan”) from American National Insurance Company (“ANICO”). The Master Lease was assigned to ANICO pursuant to the assignment of leases and rents in favor of ANICO entered into by TNP SRT Osceola Village in connection with the Osceola Loan. Pursuant to the Master Lease, the Master Lessee acknowledges and agrees that upon any default by TNP SRT Osceola Village under any of the loan documents related to the Osceola Loan, ANICO will be entitled to enforce the assignment of the Master Lease to ANICO and replace TNP SRT Osceola Village under the Master Lease for all purposes.
Constitution Trail Contingency
In connection with the financing of the Constitution Trail acquisition, SRT Constitution Trail, LLC, a wholly owned subsidiary of the OP (“SRT Constitution Trail”) and SRT Constitution Trail Master Lessee, LLC (the “Starplex Master Lessee”), a wholly owned subsidiary of the OP, entered into a Master Lease Agreement with respect to a portion of Constitution Trail (the “Starplex Master Lease”). Pursuant to the Starplex Master Lease, SRT Constitution Trail leased to the Starplex Master Lessee an approximately 7.78 acre parcel of land included in the Constitution Trail property, and the approximately 44,000 square foot Starplex Cinemas building located thereon (the “Starplex Premises”). The Starplex Master Lease provides that, in the event that the annual gross sales from the Starplex premises are less than $2,800,000, then thereafter the Starplex Master Lessee will pay SRT Constitution Trail a monthly rent in an amount equal to $62,424 ($749,088 annually), subject to an offset based on any minimum annual rent for the Starplex premises received by SRT Constitution Trail. The Starplex Master Lease will expire upon the earlier to occur of (1) December 31, 2018 and (2) the date on which the Constitution Trail mortgage loan is repaid in full in cash (other than as a result of a credit bid by the lender at a foreclosure sale or refinancing of the Constitution Trail Loan). The Starplex Master Lessee has no right to assign or pledge the Starplex Master Lease or to sublet any part of the Starplex premises without the prior written consent of SRT Constitution Trail and the lender of the mortgage loan.
Carson Plaza Contingency
In 2012, the Company pursued an acquisition commonly known as Carson Plaza and placed a non-refundable deposit of $250,000 into escrow which was expensed and included in transaction expense for the year ended December 31, 2012. The acquisition did not materialize as a result of the Company’s claim of certain undisclosed environmental conditions uncovered during due diligence. The seller disagreed with the Company’s claim and the Company filed a lawsuit seeking to recover the deposit. The lawsuit was settled in August 2013 and, as part of that settlement, the Company received $125,000 as a partial refund of the deposit which was recognized as a reduction to transaction expense in the third quarter of 2013.
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Economic Dependency
As disclosed in Note 1. “Organization and Business” the Company has recently transitioned to a new external advisor. The Company is dependent on Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
Legal Matters
The Company continues to be a party to the material legal proceedings previously disclosed in Part I, Item 3 of its Annual Report on Form 10-K as of and for the year ended December 31, 2013. The following disclosure includes material developments that occurred during the three months ended March 31, 2014.
Litigation Concerning Termination of Property Management Agreements
On or about September 9, 2013, TNP Property Manager, LLC (“TNP Property Manager”), the Company’s former property manager, commenced a civil action in the Superior Court of the State of California for Orange County against Glenborough and the Company. The Company was not served until October 15, 2013. The complaint relates to the termination by the Company of the property management agreements between TNP Property Manager and the subsidiaries of the Company that own the various real estate projects in the Company’s portfolio and the selection of Glenborough to act as the Company’s new property manager. TNP Property Manager alleges that there was no valid basis for the Company to terminate the prior property management agreements and that the Company is now in breach of the agreements. In addition, the TNP Property Manager accuses Glenborough of “intentional interference with economic relationship.” From the Company, TNP Property Manager seeks an award of compensatory damages in the amount of at least $5 million. From Glenborough, TNP Property Manager seeks an award of compensatory damages in the amount of at least $5 million, an award of punitive damages in an unspecified amount, and equitable relief. Glenborough has submitted a request for indemnification to the Company, and the Company has agreed to advance Glenborough’s litigation expenses based on the Company’s obligation under the Consulting Agreement. On November 8, 2013, the Company filed a demurrer, seeking dismissal of the complaint on the grounds that the Company is not a proper defendant because it not a party to the agreements in question and that, in any event, the agreements contain mandatory arbitration provisions. On January 28, 2014, TNP Property Manager filed a notice stating that it did not oppose the demurrer but requesting leave to amend its complaint. On March 17, 2014, the Court granted the demurrer and granted TNP Property Manager leave to amend its complaint. On April 9, 2014, rather than amend its complaint, TNP Property Manager dismissed the action as against the Company. The action continues as against Glenborough. The Company believes that it validly terminated the property management agreements and intends to defend vigorously any claims that TNP Property Manager may assert against it in the future. Through March 31, 2014, the Company has incurred $21,000 in indemnification litigation expenses related to this matter.
At this time, the Company cannot reasonably estimate the probability or amount of loss that may arise from any of the legal proceedings to which it is currently a party. As a result, the Company has not recorded any loss contingencies related to these legal proceedings in its condensed consolidated financial statements as of March 31, 2014.
13. SUBSEQUENT EVENTS
Special Units Purchase
On April 30, 2014, GPP purchased 100 units of a separate class of Special Units of the OP for $1,000. This purchase was in connection with the execution of the Advisory Agreement in August 2013.
Distributions
On April 30, 2014, the Company paid a first quarter distribution in the amount of $0.05 per share to stockholders of record as of March 31, 2014, totaling $570,000.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our condensed consolidated unaudited financial statements, 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 2013 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or SEC, on March 31, 2014, which we refer to herein as our “Form 10-K.” As used herein, the terms “we,” “our,” and “us” refer to Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware limited partnership (which we refer to as our “OP”) and to their subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.
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 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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:
| • | 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. |
| • | Our initial public offering has terminated and 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. |
| • | 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 2013 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. 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 2013 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.
Overview
Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., is a Maryland corporation formed on September 18, 2008 to invest in and manage a portfolio of income-producing retail properties, located in the United States, and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. We have elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes, commencing with the taxable year ended December 31, 2009. As used herein, the terms “we” “our” and “us” refer to Strategic Realty Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware 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. 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.
On November 4, 2008, we filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) for our initial public offering of up to $1,000,000,000 in shares of our common stock at $10.00 per share in our primary offering and up to $100,000,000 in shares of our common stock to our stockholders at $9.50 per share pursuant to our distribution reinvestment plan (the “DRIP”). On August 7, 2009, the SEC declared our registration statement effective and we commenced our initial public offering. On February 7, 2013, we terminated our initial public offering and ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan.
From the commencement of our initial public offering through the termination of our initial public offering on February 7, 2013, we accepted subscriptions for, and issued, 10,969,714 shares of our common stock (net of share redemptions), including 391,182 shares of our common stock pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $108,357,000, net of redemptions. Due to short-term liquidity issues and defaults under certain of our loan agreements, we suspended our share redemption program, including with respect to redemptions upon death and disability, effective as of January 15, 2013. As of January 15, 2013, we had redeemed 160,409 shares pursuant to our share redemption program for an aggregate redemption amount of approximately $1,604,000. For more information regarding our share redemption program, see Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Share Redemption Program” in our 2013 Annual Report on Form 10-K.
On June 15, 2012, we filed a registration statement on Form S-11 with the SEC to register a follow-on public offering of up to $900,000,000 in shares of our common stock. However, we subsequently determined not to proceed with our contemplated follow-on public offering and, on March 1, 2013, we requested that the SEC withdraw the registration statement for our contemplated follow-on public offering, effective immediately. We currently do not expect to commence a follow-on offering.
On August 7, 2013, we allowed our advisory agreement (the “Prior Advisory Agreement”) with our prior advisor, TNP Strategic Retail Advisor, LLC (“Prior Advisor”) to expire without renewal. On August 10, 2013, we entered into a new advisory agreement (the “Advisory Agreement”) with SRT Advisor, LLC (our “Advisor”). Our Advisor manages our business as our external advisor pursuant to the Advisory Agreement. Our Advisor is an affiliate of Glenborough, 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. Glenborough and its predecessor entities have over three decades of experience in the commercial real estate industry.
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In December 2012, the Company entered into a consulting agreement with Glenborough to assist the Company with the process of transitioning to a new external advisor as well as to provide other services (the “Consulting Agreement”). Pursuant to the Consulting Agreement, from December 2012 through April 2013, we paid Glenborough a monthly consulting fee of $75,000 and reimbursed Glenborough for its reasonable out-of-pocket expenses. Effective May 1, 2013, we amended the Consulting Agreement to expand the services to include accounting provided to us by Glenborough and increased the monthly consulting fee payable to Glenborough to $90,000. On August 10, 2013, in connection with the execution of the Advisory Agreement, the Company terminated the Consulting Agreement. In connection with the execution of the Advisory Agreement, in August 2013, Glenborough rebated $150,000 of consulting fees to the Company.
Our office is located at 400 South El Camino Real, Suite 1100, San Mateo, California 94402, and our main telephone number is (650) 343-9300.
Properties
As of March 31, 2014, our portfolio included 16 retail properties, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 1,521,000 square feet of single- and multi-tenant, commercial retail space located in 11 states. We purchased our properties for an aggregate purchase price of $189,648,000. As of March 31, 2014 and December 31, 2013, there was $123,625,000 and $140,230,000 of indebtedness on our properties, respectively. As of March 31, 2014 and December 31, 2013, approximately 87% and 89% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately 7 years for both periods.
| Property Name | Location | Rentable Feet (1) | Date Acquired | Original Price (2) (3) | Debt (4) | |||||||||||
| Real Estate Investments | ||||||||||||||||
| Moreno Marketplace | Moreno Valley, California | 78,321 | 11/19/2009 | $ | 12,500,000 | $ | 9,219,000 | |||||||||
| Northgate Plaza | Tucson, Arizona | 103,492 | 7/6/2010 | 8,050,000 | 6,287,000 | |||||||||||
| San Jacinto | San Jacinto, California | 53,777 | 8/11/2010 | 7,088,000 | 1,820,000 | |||||||||||
| Pinehurst Square | Bismarck, North Dakota | 114,292 | 5/26/2011 | 15,000,000 | 10,138,000 | |||||||||||
| Cochran Bypass | Chester, South Carolina | 45,817 | 7/14/2011 | 2,585,000 | 1,554,000 | |||||||||||
| Topaz Marketplace | Hesperia, California | 50,699 | 9/23/2011 | 13,500,000 | 7,969,000 | |||||||||||
| Osceola Village | Kissimmee, Florida | 116,645 | 10/11/2011 | 21,800,000 | 17,653,000 | |||||||||||
| Constitution Trail | Normal, Illinois | 200,289 | 10/21/2011 | 18,000,000 | 14,855,000 | |||||||||||
| Summit Point | Fayetteville, Georgia | 111,970 | 12/21/2011 | 18,250,000 | 12,170,000 | |||||||||||
| Morningside Marketplace | Fontana, California | 76,923 | 1/9/2012 | 18,050,000 | 8,871,000 | |||||||||||
| Woodland West Marketplace | Arlington, Texas | 176,414 | 2/3/2012 | 13,950,000 | 9,941,000 | |||||||||||
| Ensenada Square | Arlington, Texas | 62,612 | 2/27/2012 | 5,025,000 | 3,076,000 | |||||||||||
| Shops at Turkey Creek | Knoxville, Tennessee | 16,324 | 3/12/2012 | 4,300,000 | 2,783,000 | |||||||||||
| Aurora Commons | Aurora, Ohio | 89,211 | 3/20/2012 | 7,000,000 | 2,583,000 | |||||||||||
| Florissant Marketplace | Florissant, Missouri | 146,257 | 5/16/2012 | 15,250,000 | 9,107,000 | |||||||||||
| Bloomingdale Hills | Riverside, Florida | 78,442 | 6/18/2012 | 9,300,000 | 5,599,000 | |||||||||||
| 1,521,485 | $ | 189,648,000 | $ | 123,625,000 | ||||||||||||
| (1) | Square feet includes improvements made on ground leases at the property. |
| (2) | The purchase price for Pinehurst Square and Shops at Turkey Creek includes the issuance of common units in our operating partnership to the sellers. |
| (3) | These amounts represent original purchase price and not current holdings due to pad sales at San Jacinto, Osceola Village, and Morningside Marketplace. |
| (4) | Debt represents the outstanding balance as of March 31, 2014. For more information on our financing, see Item 2, “Management Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 6. “Notes Payable” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. |
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Results of Operations
Comparison of the three months ended March 31, 2014 versus the three months ended March 31, 2013
The following table provides summary information about our results of operations for the three months ended March 31, 2014 and 2013:
| Three Months Ended March 31, | Increase | Percentage | ||||||||||||||
| 2014 | 2013 | (Decrease) | Change | |||||||||||||
| Rental and reimbursements | $ | 5,311,000 | $ | 5,642,000 | $ | (331,000 | ) | (5.9 | %) | |||||||
| Operating and maintenance expenses | 1,918,000 | 1,950,000 | (32,000 | ) | (1.6 | %) | ||||||||||
| General and administrative expenses | 1,360,000 | 1,596,000 | (236,000 | ) | (14.8 | %) | ||||||||||
| Depreciation and amortization expenses | 1,990,000 | 2,081,000 | (91,000 | ) | (4.4 | %) | ||||||||||
| Transaction expenses | - | (6,000 | ) | 6,000 | (100.0 | %) | ||||||||||
| Interest expense | 2,219,000 | 2,270,000 | (51,000 | ) | (2.2 | %) | ||||||||||
| Loss from continuing operations | (2,176,000 | ) | (2,249,000 | ) | 73,000 | (3.2 | %) | |||||||||
| Income from discontinued operations | 3,178,000 | 3,432,000 | (254,000 | ) | (7.4 | %) | ||||||||||
| Net income | $ | 1,002,000 | $ | 1,183,000 | $ | (181,000 | ) | (15.3 | %) | |||||||
Our results of operations for the three months ended March 31, 2014, are not necessarily indicative of those expected in future periods.
Revenue
Revenues decreased by $331,000 to $5,311,000 during the three months ended March 31, 2014 compared to $5,642,000 for the three months ended March 31, 2013. The decrease was primarily due to timing of the reconciliation of prior year expense recovery billings to tenants. The occupancy rate for our property portfolio included within continuing operations was slightly lower at 87%, as of March 31, 2014, compared to 88%, as of March 31, 2013. Both rates are based on approximately 1,521,000 rentable square feet.
Operating and maintenance expenses
Operating and maintenance expenses decreased slightly by $32,000, or less than 2%, to $1,918,000 during the three months ended March 31, 2014 compared to $1,950,000 for the three months ended March 31, 2013.
General and administrative expenses
General and administrative expenses were $1,360,000 during the three months ended March 31, 2014 compared to $1,596,000 for the three months ended March 31, 2013, a decrease of $236,000. Costs savings were recognized in overhead and asset management, directors’ compensation, insurance, transfer agent and investor costs, audit, tax preparation and traveling totaling $910,000. These reductions were mainly due to the successful completion of the transition to our new Advisor and property manager. Savings in these categories were offset by $577,000 of costs related to the proxy contest and its settlement.
Depreciation and amortization expenses
Depreciation and amortization expense decreased slightly by $91,000, or less than 5%, to $1,990,000 during the three months ended March 31, 2014 compared to $2,081,000 for the three months ended March 31, 2013.
Transaction expenses
Transaction expenses were not incurred during the three months ended March 31, 2014 and were a credit amount for the three months ended March 31, 2013 due to the reversal of previously expensed legal cost in connection with the pursuit of new property acquisitions that did not materialize. We had no acquisitions during the first quarter of 2014 or the first quarter of 2013.
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Interest expense
Interest expense decreased by $51,000 to $2,219,000 during the three months ended March 31, 2014 compared to $2,270,000 for the three months ended March 31, 2013. The decrease is primarily due to amortization of principal on our notes payable balances which consequently reduces the amount of interest expense incurred.
Income from discontinued operations
Income from discontinued operations decreased by $254,000 to $3,178,000 during the three months ended March 31, 2014 compared to $3,432,000 for the three months ended March 31, 2013. The decrease is primarily attributed to a smaller gain on the sale of Visalia Marketplace in the amount of $3,196,000 during the first quarter 2014 compared to a gain on the sale of Waianae Mall in the amount of $4,838,000 during the first quarter 2013. In addition, the decrease resulting from the smaller gain was largely offset by a $1,427,000 reduction in net operating loss associated with properties included in discontinued operations for the respective periods. Discontinued operations for the first quarter 2013 included the operating results related to Waianae Mall, Lahaina Gateway, Craig Promenade, Willow Run, and Visalia Marketplace while discontinued operations for the first quarter 2014 only included Visalia Marketplace.
Liquidity and Capital Resources
As of March 31, 2014, our portfolio included 16 retail properties, with a net carrying value aggregating $160,955,000. 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 and the payment of distributions to our stockholders. On February 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 also expect our investment activity will be significantly reduced until we are able to identify other sources of equity capital or other significant sources of financing. Due to the decrease in our capital resources, we suspended our share redemption program, including redemptions for death and disability, effective as of January 15, 2013. We intend to reevaluate our ability to resume share redemptions pursuant to our share redemption program after addressing our liquidity issues. Our ability to resume share redemptions will be determined by our board of directors based on our liquidity and cash needs, once the KeyBank forbearance is resolved. See “—KeyBank Credit Facility and Forbearance Agreement” below for additional information.
As of March 31, 2014, our cash and cash equivalents were $4,412,000 and our restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs) was $4,518,000. For properties with such lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.
On April 1, 2013, we entered into a forbearance agreement relating to our credit facility with KeyBank (the “Forbearance Agreement”), and on July 31, 2013, we entered into an amendment to the Forbearance Agreement with KeyBank which extended the forbearance period to January 31, 2014. On December 11, 2013, we entered into a second amendment to the Forbearance Agreement which further extended the term of the forbearance period to July 31, 2014. On or before the expiration of the forbearance period, we intend to refinance the credit facility with KeyBank or with another lender. See “—KeyBank Credit Facility and Forbearance Agreement” below for additional information.
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. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. 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 of March 31, 2014 and December 31, 2013, our borrowings did not exceed 300% of the value of our net assets.
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Cash Flows from Operating Activities
During the three months ended March 31, 2014, net cash used in operating activities from continuing operations was $472,000 compared to net cash used in operating activities of $2,183,000 during the three months ended March 31, 2013, a reduction in net cash flows used in operating activities of $1,711,000. The reduction in cash used in operating activities during the three months ended March 31, 2014 was primarily due to changes in operating asset and liability balances involving tenant receivables, accounts payable and accrued expenses, and other liabilities.
Cash Flows from Investing Activities
During the three months ended March 31, 2014, net cash provided by investing activities was $19,745,000 compared to net cash provided by investing activities of $7,301,000 during the three months ended March 31, 2013, an increase in net cash flows provided by investing activities of $12,444,000. The increase was primarily due to net proceeds from the sale of Visalia Marketplace during the three months ended March 31, 2014 compared to much lower net proceeds from the sale of Waianae Mall during the three months ended March 31, 2013.
Cash Flows from Financing Activities
During the three months ended March 31, 2014, net cash used in financing activities was $17,207,000, compared to $5,699,000 used during the three months ended March 31, 2013, an increase in uses of $11,508,000. The components of net cash used in financing activities for the three months ended March 31, 2014 were repayments of notes payable in the amount of $16,605,000, attributable primarily to the Visalia Marketplace sale, and the payment of distributions to stockholders in the amount of $602,000. The primary components of net cash used in financing activities for the three months ended March 31, 2013 were the repayment of notes payable in the amount of $5,254,000 resulting from the Waianae Mall sale and the payment of distributions to stockholders in the amount of $415,000.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment of principal and interest on our outstanding indebtedness. 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. On March 24, 2014, we were able to declare a second consecutive quarterly distribution to stockholders totaling $570,000, and we will continue to evaluate our ability to make future quarterly distributions based on our operational cash needs.
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 (currently suspended) 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. Until the termination of our initial public offering on February 7, 2013, our cash needs for acquisitions were satisfied from the net proceeds of the public offering and from debt financings. 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. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” and Note 8. “Notes Payable” to our consolidated financial statements included in our 2013 Annual Report on Form 10-K for additional information on the maturity dates and terms of our outstanding indebtedness.
KeyBank Credit Facility and Forbearance Agreement
On December 17, 2010, we, through our subsidiary, SRT Secured Holdings, LLC (“Secured Holdings”), formerly TNP SRT Secured Holdings, LLC, entered into the credit facility with KeyBank and certain other lenders, which we collectively refer to as the “lenders,” to establish a revolving credit facility with an initial maximum aggregate commitment of $35,000,000. The KeyBank credit facility initially consisted of an A tranche, or “Tranche A,” with an initial aggregate commitment of $25 million, and a B tranche, or “Tranche B,” with an initial aggregate commitment of $10 million. Tranche B under the KeyBank credit facility terminated as of June 30, 2011. The aggregate commitment under Tranche A was subsequently increased on multiple occasions to a maximum of $45 million.
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Under the KeyBank credit facility, we are required to comply with certain restrictive and financial covenants. In January 2013, we became aware of a number of events of default under the KeyBank credit facility relating to, among other things, our failure to use the net proceeds from our sale of our shares in our public offering and the sale of our assets to repay our borrowings under the KeyBank credit facility and our failure to satisfy certain financial covenants under the KeyBank credit facility, which we collectively refer to as the “existing events of default.” We also failed to comply with certain financial covenants as of March 31, 2013. Due to the existing events of default, KeyBank and the other lenders became entitled to exercise all of their rights and remedies under the KeyBank credit facility and applicable law.
On April 1, 2013, our OP, certain subsidiaries of our OP which are borrowers under the KeyBank credit facility (each a “Borrower” and collectively the “Borrowers”) and KeyBank, as lender and agent for the other lenders, entered into the Forbearance Agreement which amended the terms of the KeyBank credit facility and provided for certain additional agreements with respect to the existing events of default. On July 31, 2013 and again on December 11, 2013, our OP, the Borrowers and KeyBank entered into amendments to the Forbearance Agreement which extended the forbearance period under the Forbearance Agreement. Pursuant to the terms of the Forbearance Agreement, as amended, KeyBank and the other lenders agreed to forbear the exercise of their rights and remedies with respect to the existing events of default until the earliest to occur of (1) July 31, 2014, (2) our default under or breach of any of the representations or covenants under the Forbearance Agreement or (3) the date any additional events of defaults (other than the existing events of default) under the KeyBank credit facility occur or become known to KeyBank or any other lender, which we refer to as the “forbearance expiration date.” Upon the forbearance expiration date, all forbearances, deferrals and indulgences granted by the lenders pursuant to the Forbearance Agreement, as amended, will automatically terminate and the lenders will be entitled to enforce, without further notice of any kind, any and all rights and remedies available to them as creditors at law, in equity, or pursuant to the KeyBank credit facility or any other agreement as a result of the existing events of default or any additional events of default which occur or come to light following the date of the Forbearance Agreement, as amended.
The Forbearance Agreement, as amended, converted the entire outstanding principal balance under the credit facility, and all interest and other amounts payable under the credit facility, which we refer to as the “outstanding loan,” into a term loan that is due and payable in full on July 31, 2014. Pursuant to the Forbearance Agreement, as amended, we, our OP and every other Borrower under the credit facility must apply a portion of the net proceeds from, among other things, (1) the sale of our shares in our completed public offering or any other sale of securities by us, our OP or any other Borrower, (2) the sale or refinancing of any of our properties or other assets, and (3) the collection of insurance or condemnation proceeds due to any damage or destruction of our properties or any condemnation for public use of any of our properties, to the repayment of the outstanding loan. The Forbearance Agreement, as amended, provides that all commitments under the credit facility will terminate of July 31, 2014 and that, effective as of the date of the Forbearance Agreement, as amended, the lenders have no further obligation whatsoever to advance any additional loans or amounts under the KeyBank credit facility. The Forbearance Agreement, as amended, also provides that neither we, our OP nor any other Borrower may, without KeyBank’s prior written consent, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any indebtedness other than the existing indebtedness specified in the Forbearance Agreement, as amended, and any refinancing of such existing indebtedness which does not materially modify the terms of such existing indebtedness in a manner adverse to us or the lenders.
Pursuant to the Forbearance Agreement we, our OP and all of the Borrowers under the KeyBank credit facility have jointly and severally agreed to pay to KeyBank (1) any and all out-of-pocket costs or expenses (including legal fees and disbursements) incurred or sustained by the lenders in connection with the preparation of the Forbearance Agreement and all related matters, and (2) from time to time after the occurrence of any default under the Forbearance Agreement any out-of-pocket costs or expenses (including legal fees and consulting and other similar professional fees and expenses) incurred by the lenders in connection with the preservation of or enforcement of any rights of the lenders under the Forbearance Agreement and the KeyBank credit facility. In connection with the execution and amendment of the Forbearance Agreement, we agreed to pay a market rate loan extension fee to KeyBank.
Under the KeyBank credit facility, while defaults existed we are not permitted to make, without the lender’s consent, certain restricted payments (as defined in the KeyBank credit facility) which include the payment of distributions that are not required to maintain our REIT status. On December 11, 2013, the Company, our OP, the Borrowers and KeyBank entered into the second amendment to Forbearance Agreement. The second forbearance amendment amended the Forbearance Agreement and the credit facility as follows: (i) the lenders’ obligation to provide forbearance will terminate on the first to occur of (1) July 31, 2014, (2) a default under or breach of any of the representations, warranties or covenants of the Forbearance Agreement, or (3) an event of default (other than the existing events of default) under the loan documents related to the credit facility occurring or becoming known to any lender (such date the “Forbearance Expiration Date”); (ii) the entire outstanding principal balance, and all interest thereon, of the outstanding Tranche A loans under the credit facility will become due and payable in full on July 31, 2014, instead of January 31, 2014; (iii) the Company, the OP and the Borrowers are required to apply 80%, as opposed to 100%, of the net proceeds received from specified capital events, including a sale or refinancing of the Company’s properties, to Tranche A loans, unless an event of default, other than the existing events of default, occurs, in which case they must apply 100% of the net proceeds to Tranche A loans; and (iv) the Company, the OP and the Borrowers are permitted to pay distributions, provided that the aggregate amount of such distributions does not exceed 100% of the Company’s Adjusted Funds from Operations (on a trailing 12-month basis commencing on April 1, 2013), as defined in the credit facility agreement. As of March 31, 2014, the outstanding principal balance of the credit facility was $4,403,000, down from $36,455,000 in April 2013, as a result of the application of the sales proceeds from the Willow Run, Craig Promenade and Visalia Marketplace property sales. With the lender’s approval, we declared quarterly distributions in December 2013 and March 2014 in the amount of $0.05 per share on our outstanding common shares.
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Contingencies
As of March 31, 2014, there have been no material changes in our enforceable and legally binding obligations, contractual obligations, and commitments from those disclosed in our 2013 Annual Report on Form 10-K.
Interim Financial Information
The financial information as of and for the period ended March 31, 2014, included in this Quarterly Report on Form 10-Q is unaudited, but includes all adjustments consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three months ended March 31, 2014. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete consolidated financial statements. Interim results of operations are not necessarily indicative of the results to be expected for the full year; and such results may be less favorable. Our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2013 Annual Report on Form 10-K.
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 nonrecurring factors. For the twelve months ended March 31, 2014, our total operating expenses did not exceed the 2%/25% Guidelines.
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 distribute at least 90% of our REIT taxable income to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We will monitor the business and transactions that may potentially impact our REIT status. 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 the Internal Revenue Service 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. As of March 31, 2014, we believe we are in compliance with the REIT qualification requirements.
Distributions
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. 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.
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For so long as the Company remained in default under the terms of the credit facility, KeyBank prohibited the payment of distributions to investors in the Company. Effective January 15, 2013, the Company announced that it would no longer be making monthly distributions. On December 9, 2013, the Company announced that it had successfully modified the credit facility such that the Company may re-establish distributions so long as the total amount paid does not exceed 100% of the Adjusted Funds from Operations (on a trailing 12-month basis commencing on April 1, 2013), as defined in the credit facility agreement. As a result, on December 9, 2013, the Company declared a quarterly distribution in the amount of $0.05 per share on the outstanding common shares of the Company, payable to stockholders of record as of December 31, 2013, which was paid on January 31, 2014. For the three months ended March 31, 2014, the Company declared a quarterly distribution in the amount of $0.05 per share on our outstanding common shares, payable to stockholders of record as of March 31, 2014. This distribution was paid on April 30, 2014. The Company’s board of directors will continue to evaluate the Company’s ability to make future quarterly distributions based on the Company’s other operational cash needs.
The following table sets forth the distributions declared to the Company’s common stockholders and non-controlling Common Unit holders for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively:
| Distribution Record Date | Distribution Payable Date | Distribution Per Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2014 | 3/31/2014 | 4/30/2014 | $ | 0.05000 | $ | 548,000 | $ | 22,000 | $ | 570,000 | ||||||||||
| $ | 548,000 | $ | 22,000 | $ | 570,000 | |||||||||||||||
| Distribution Record Date | Distribution Payable Date | Distribution Per Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2013 | 1/18/2013 | 1/18/2013 | $ | 0.05833 | $ | 636,000 | $ | 25,000 | $ | 661,000 | ||||||||||
| Second Quarter 2013 | N/A | N/A | - | - | - | - | ||||||||||||||
| Third Quarter 2013 | N/A | N/A | - | - | - | - | ||||||||||||||
| Fourth Quarter 2013 | 12/31/2013 | 1/31/2014 | 0.05000 | 548,000 | 22,000 | 570,000 | ||||||||||||||
| $ | 1,184,000 | $ | 47,000 | $ | 1,231,000 | |||||||||||||||
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or “NAREIT”, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT. FFO is not equivalent to our net income or loss as determined under GAAP.
We calculate FFO consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative.
As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete measure of our performance to investors and to management. However, our method of calculating FFO may not be comparable to other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the definition differently.
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Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses. Items such as acquisition fees and expenses, which had previously been capitalized, are currently expensed and accounted for as operating expenses. Due to this factor and certain unique features of publicly registered, non-listed REITs, the Investment Program Association, or “IPA”, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs.
Our MFFO calculation is consistent with the IPA’s Practice Guidelines issued in 2010 which defines MFFO as FFO excluding the following items: acquisition fees and expenses; amounts relating to straight-line rents and amortization of above and below market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; non-recurring impairments of real estate-related investments; mark-to-market adjustments included in net income; non-recurring gains or losses from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
Presentations of FFO and MFFO are intended to provide useful information to investors as they compare the operating performance to that of other public, non-listed REITs, although it should be noted that not all public, non-listed REITs calculate FFO and MFFO the same way, so comparisons with other public, non-listed REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders.
We also calculate MFFO adjusted for the non-cash amortization of deferred financing costs and non-recurring non-cash allocations of organizational costs, or Adjusted MFFO. We opted to use substantial short-term and medium-term borrowings to acquire properties in advance of raising equity proceeds under our initial public offering in order to more quickly build a larger and more diversified portfolio. Non-cash interest expense represents amortization of financing costs paid to secure short-term and medium-term borrowings. GAAP requires these items to be recognized over the remaining term of the respective debt instrument, which may not correlate with the ongoing operations of our real estate portfolio. Management believes that the measure resulting from an adjustment to MFFO for non-cash interest expense, provides supplemental information that allows for better comparability of reporting periods. We also believe that Adjusted MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisition stages are completed with the sustainability of the operating performance of other real estate companies that are not as involved in significant acquisition and short-term borrowing activities. Like FFO and MFFO, Adjusted MFFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. Further, Adjusted MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO, MFFO or Adjusted MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and, in response to such standardization, we may have to adjust our calculation and characterization of FFO, MFFO or Adjusted MFFO accordingly.
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Our calculation of FFO, MFFO and Adjusted MFFO and the reconciliation to net income (loss) is presented in the following table for the three months ended March 31, 2014 and 2013:
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| FFO, MFFO and Adjusted MFFO | 2014 | 2013 | ||||||
| Net income attributable to common shares | $ | 602,000 | $ | 1,138,000 | ||||
| Adjustments (1): | ||||||||
| Gain on disposal of assets (2) | (2,688,000 | ) | (4,838,000 | ) | ||||
| Depreciation of real estate | 1,383,000 | 1,941,000 | ||||||
| Amortization of in place leases and other intangibles | 607,000 | 1,241,000 | ||||||
| FFO | (96,000 | ) | (518,000 | ) | ||||
| FFO per share - basic | $ | (0.01 | ) | $ | (0.05 | ) | ||
| Adjustments: | ||||||||
| Straight-line rent (3) | (130,000 | ) | (363,000 | ) | ||||
| Transaction expenses (4) | - | 51,000 | ||||||
| Amortization of above market leases (5) | 158,000 | 393,000 | ||||||
| Amortization of below market leases (5) | (133,000 | ) | (255,000 | ) | ||||
| Amortization of debt discount | - | 179,000 | ||||||
| Realized losses from the early extinguishment of debt (6) | - | 98,000 | ||||||
| MFFO | (201,000 | ) | (415,000 | ) | ||||
| MFFO per share - basic | $ | (0.02 | ) | $ | (0.04 | ) | ||
| Adjustments: | ||||||||
| Amortization of deferred financing costs (7) | 203,000 | 288,000 | ||||||
| Non-recurring default interest, penalties and fees (8) | 101,000 | 341,000 | ||||||
| Adjusted MFFO | $ | 103,000 | $ | 214,000 | ||||
| Adjusted MFFO per share - basic | $ | 0.01 | $ | 0.02 | ||||
| Net income per share attributable to common shares - basic | $ | 0.06 | $ | 0.10 | ||||
| Weighted average common shares outstanding - basic | 10,969,714 | 10,935,089 | ||||||
_____________________________________________________
| (1) | Our calculation of MFFO does not adjust for certain other non-recurring charges that do not fall within the IPA’s Practice Guideline definition of MFFO. |
| (2) | Gain attributable to common shares only. |
| (3) | Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance. |
| (4) | In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition and certain disposition costs related to abandoned real estate sales, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor or third parties. Acquisition and disposition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition and disposition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. |
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| (5) | Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate. |
| (6) | Relates to the write-off of unamortized deferred financing costs as a result of refinancing and incremental interest due to early extinguishment of debt. |
| (7) | We made an additional adjustment for the non-cash amortization of deferred financing costs as we believe it will provide useful information about our operations excluding non-cash expenses. |
| (8) | Adjustment for the non-recurring late payment charges and default interest paid to cure the events of default under the Lahaina loan and adjustment for forbearance fees paid. |
Related Party Transactions and Agreements
We had agreements with our Prior Advisor and its affiliates whereby we agreed to pay certain fees to, or reimburse certain expenses of, our Prior Advisor or its affiliates for acquisition fees and expenses, organization and offering costs, asset and property management fees and reimbursement of operating costs. Refer to Note 11. “Related Party Transactions” to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.
Off-Balance Sheet Arrangements
As of March 31, 2014 and December 31, 2013, except as disclosed in Note 12. “Commitments and Contingencies” to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our condensed consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. 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 the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2013 Annual Report on Form 10-K. There have been no significant changes to our accounting policies during the three months ended March 31, 2014.
Subsequent Events
Special Units Purchase
On April 30, 2014, Glenborough Property Partners, LLC, as affiliate of our Advisor, purchased 100 units of a separate class of special units of the OP for $1,000. This purchase was in connection with the execution of the Advisory Agreement in August 2013.
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Distributions
On April 30, 2014, the Company paid a first quarter distribution in the amount of $0.05 per share to stockholders of record as of March 31, 2014, totaling $570,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 or the Exchange Act). Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. In connection with the preparation of this report, our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of March 31, 2014 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).
Based on its assessment, our management concluded that, as of March 31, 2014, our internal control over financial reporting was effective. There have been no other changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC applicable to smaller reporting companies.
| 41 |
We continue to be a party to the material legal proceedings previously disclosed in Part I, Item 3 of our 2013 Annual Report on Form 10-K. The following disclosure includes material developments that occurred during the three months ended March 31, 2014.
Litigation Concerning Termination of Property Management Agreements
On or about September 9, 2013, TNP Property Manager, LLC (“TNP Property Manager”), the Company’s former property manager, commenced a civil action in the Superior Court of the State of California for Orange County against Glenborough and the Company. The Company was not served until October 15, 2013. The complaint relates to the termination by the Company of the property management agreements between TNP Property Manager and the subsidiaries of the Company that own the various real estate projects in the Company’s portfolio and the selection of Glenborough to act as the Company’s new property manager. TNP Property Manager alleges that there was no valid basis for the Company to terminate the prior property management agreements and that the Company is now in breach of the agreements. In addition, the TNP Property Manager accuses Glenborough of “intentional interference with economic relationship.” From the Company, TNP Property Manager seeks an award of compensatory damages in the amount of at least $5 million. From Glenborough, TNP Property Manager seeks an award of compensatory damages in the amount of at least $5 million, an award of punitive damages in an unspecified amount, and equitable relief. Glenborough has submitted a request for indemnification to the Company, and the Company has agreed to advance Glenborough’s litigation expenses based on the Company’s obligation under the Consulting Agreement. On November 8, 2013, the Company filed a demurrer, seeking dismissal of the complaint on the grounds that the Company is not a proper defendant because it not a party to the agreements in question and that, in any event, the agreements contain mandatory arbitration provisions. On January 28, 2014, TNP Property Manager filed a notice stating that it did not oppose the demurrer but requesting leave to amend its complaint. On March 17, 2014, the Court granted the demurrer and granted TNP Property Manager leave to amend its complaint. On April 9, 2014, rather than amend its complaint, TNP Property Manager dismissed the action as against the Company. The action continues as against Glenborough. The Company believes that it validly terminated the property management agreements and intends to defend vigorously any claims that TNP Property Manager may assert against it in the future. Through March 31, 2014, the Company has incurred $21,000 in indemnification litigation expenses related to this matter.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors previously disclosed in Part I, Item 1A of our 2013 Annual Report on Form 10-K.
There were no material changes from these risk factors during the three months ended March 31, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this Quarterly Report on Form 10-Q, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended, or the Securities Act.
We have adopted a share redemption program that may provide limited liquidity to our stockholders. Our share redemption program was suspended effective January 15, 2013. During the three months ended March 31, 2014, there were no shares redeemed pursuant to our share redemption program.
| 42 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
As of the three months ended March 31, 2014, all items required to be disclosed under Form 8-K were reported under Form 8-K.
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
| 43 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 12, 2014.
| Strategic Realty Trust, Inc. | ||
| By: |
/s/ Andrew Batinovich | |
| Andrew Batinovich | ||
|
Chief Executive Officer (Principal Executive Officer) | ||
| By: |
/s/ Terri Garnick | |
| Terri Garnick | ||
|
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
| 44 |
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the three months ended March 31, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).
| Exhibit No. | Description |
| 3.1.1 | Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc. (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-154975)) |
| 3.1.2 | Articles of Amendment, dated August 22, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 26, 2013) |
| 3.1.3 | Articles Supplementary, dated November 1, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 4, 2013) |
| 3.1.4 | Articles Supplementary, dated January 22, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 28, 2014) |
| 3.2 | Third Amended and Restated Bylaws of Strategic Realty Trust, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 28, 2014) |
| 10.1 | Settlement Agreement by and among Strategic Realty Trust, Inc., Glenborough Property Partners, LLC and the SRT Shareholders Coalition, dated January 22, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 28, 2014) |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
EXHIBIT 31.1
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Andrew Batinovich, certify that:
| 1. |
I have reviewed this Quarterly Report on Form 10-Q of Strategic Realty Trust, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 12, 2014
| /s/ Andrew Batinovich | ||
| Andrew Batinovich | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
EXHIBIT 31.2
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Terri Garnick, certify that:
| 1. |
I have reviewed this Quarterly Report on Form 10-Q of Strategic Realty Trust, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 12, 2014
| /s/ Terri Garnick | ||
| Terri Garnick | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Strategic Realty Trust, Inc. (the “Company”) for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer of the Company, certifies, to his knowledge, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 12, 2014
| /s/ Andrew Batinovich | ||
| Andrew Batinovich | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Strategic Realty Trust, Inc. (the “Company”) for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Financial Officer of the Company, certifies, to her knowledge, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 12, 2014
| /s/ Terri Garnick | ||
| Terri Garnick | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
|
ACQUIRED LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES (Details) (USD $)
|
Mar. 31, 2014
|
Dec. 31, 2013
|
|---|---|---|
| Indefinite-lived Intangible Assets [Line Items] | ||
| Intangibles, Net | $ 15,830,000 | $ 16,341,000 |
|
Lease Intangibles [Member]
|
||
| Indefinite-lived Intangible Assets [Line Items] | ||
| Cost | 22,987,000 | 23,243,000 |
| Accumulated amortization | (7,157,000) | (6,902,000) |
| Intangibles, Net | 15,830,000 | 16,341,000 |
|
Below Market Lease Liabilities [Member]
|
||
| Indefinite-lived Intangible Assets [Line Items] | ||
| Cost | (7,108,000) | (7,133,000) |
| Accumulated amortization | 1,176,000 | 1,068,000 |
| Intangibles, Net | $ (5,932,000) | $ (6,065,000) |
|
SUBSEQUENT EVENTS (Details Textual) (USD $)
|
3 Months Ended | 12 Months Ended | 1 Months Ended | 3 Months Ended | 1 Months Ended | ||||
|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2014
|
Dec. 31, 2013
|
Sep. 30, 2013
|
Jun. 30, 2013
|
Mar. 31, 2013
|
Dec. 31, 2013
|
Apr. 30, 2014
Subsequent Event [Member]
|
Mar. 31, 2014
Subsequent Event [Member]
|
Apr. 30, 2014
Subsequent Event [Member]
Glenborough Llc [Member]
Special Units [Member]
|
|
| Subsequent Event [Line Items] | |||||||||
| Stock Issued During Period, Shares, New Issues | 100 | ||||||||
| Stock Issued During Period, Value, New Issues | $ 1,000 | ||||||||
| Common Stock, Dividends, Per Share, Declared | $ 0.05000 | $ 0.05000 | $ 0 | $ 0 | $ 0.05833 | $ 0.05 | |||
| Dividends, Common Stock | $ 548,000 | $ 548,000 | $ 0 | $ 0 | $ 636,000 | $ 1,184,000 | $ 570,000 | ||
|
INCENTIVE AWARD PLAN (Details) (USD $)
|
3 Months Ended |
|---|---|
|
Mar. 31, 2014
|
|
| Granted and vested restricted stock | |
| Restricted Stock, Opening balance | 3,333 |
| Restricted Stock, Granted | 0 |
| Restricted Stock, Vested | 0 |
| Restricted Stock, Closing balance | 3,333 |
| Weighted Average Grant Date Fair Value, Opening balance | $ 9.00 |
| Weighted Average Grant Date Fair Value, Granted | $ 0 |
| Weighted Average Grant Date Fair Value, Vested | $ 0 |
| Weighted Average Grant Date Fair Value, Closing balance | $ 9.00 |