[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Maryland | 39-6594066 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) |
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer [ X ] | Smaller reporting company [X] | |
Emerging growth company [ ] |
PART I. Financial Information | |||
Part II. Other Information | |||
Pillarstone Capital REIT and Subsidiaries | ||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
(in thousands, except share and per share data) | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
(unaudited) | ||||||||
ASSETS (a) | ||||||||
Real estate assets, at cost | ||||||||
Property | $ | 79,351 | $ | 77,944 | ||||
Accumulated depreciation | (7,325 | ) | (5,281 | ) | ||||
Total real estate assets | 72,026 | 72,663 | ||||||
Cash and cash equivalents | 2,292 | 2,010 | ||||||
Escrows and utility deposits | 1,939 | 1,835 | ||||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 1,848 | 1,360 | ||||||
Receivable due from related party | 73 | 58 | ||||||
Unamortized lease commissions and deferred legal cost, net | 1,046 | 1,164 | ||||||
Prepaid expenses and other assets (1) | 118 | 60 | ||||||
Total assets | $ | 79,342 | $ | 79,150 | ||||
LIABILITIES AND EQUITY (b) | ||||||||
Liabilities: | ||||||||
Notes payable | $ | 46,281 | $ | 47,064 | ||||
Accounts payable and accrued expenses (2) | 2,919 | 2,817 | ||||||
Payable due to related party | 315 | 372 | ||||||
Convertible notes payable - related parties | 198 | 198 | ||||||
Accrued interest payable | 275 | 258 | ||||||
Stock redemption payable - related party | — | 143 | ||||||
Tenants' security deposits | 1,329 | 1,236 | ||||||
Total liabilities | 51,317 | 52,088 | ||||||
Commitments and contingencies: | — | — | ||||||
Shareholders' Equity: | ||||||||
Preferred A Shares - $0.01 par value, 1,518,000 authorized: 256,636 Class A cumulative convertible shares issued and outstanding at September 30, 2019 and December 31, 2018, $10.00 per share liquidation preference | 3 | 3 | ||||||
Preferred C Shares - $0.01 par value, 300,000 authorized: 231,944 Class C cumulative convertible shares issued and outstanding at September 30, 2019 and December 31, 2018, $10.00 per share liquidation preference | 2 | 2 | ||||||
Common Shares - $0.01 par value, 400,000,000 authorized: 443,299 shares issued and 405,169 outstanding at September 30, 2019 and December 31, 2018 | 4 | 4 | ||||||
Additional paid-in capital | 28,175 | 28,147 | ||||||
Accumulated deficit | (26,028 | ) | (26,319 | ) | ||||
Treasury stock, at cost, 38,130 shares | (801 | ) | (801 | ) | ||||
Total Pillarstone Capital REIT shareholders' equity | 1,355 | 1,036 | ||||||
Noncontrolling interest in subsidiary | 26,670 | 26,026 | ||||||
Total equity | 28,025 | 27,062 | ||||||
Total liabilities and equity | $ | 79,342 | $ | 79,150 |
Pillarstone Capital REIT and Subsidiaries | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued | ||||||
(in thousands) | ||||||
September 30, 2019 | December 31, 2018 | |||||
(unaudited) | ||||||
(1) Operating lease right of use assets (net) (related to adoption of Topic 842) | $ | 11 | N/A | |||
(2) Operating lease liabilities (related to adoption of Topic 842) | $ | 11 | N/A |
September 30, 2019 | December 31, 2018 | |||||||
(unaudited) | ||||||||
(a) Assets of condensed consolidated Variable Interest Entity included in the total assets above: | ||||||||
Real estate assets, at cost | ||||||||
Property | $ | 79,348 | $ | 77,941 | ||||
Accumulated depreciation | (7,323 | ) | (5,281 | ) | ||||
Total real estate assets | 72,025 | 72,660 | ||||||
Cash and cash equivalents | 2,218 | 1,872 | ||||||
Escrows and utility deposits | 1,939 | 1,835 | ||||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 1,703 | 1,360 | ||||||
Receivable due from related party | 73 | 58 | ||||||
Unamortized lease commissions and deferred legal cost, net | 1,046 | 1,164 | ||||||
Prepaid expenses and other assets | 106 | 51 | ||||||
Total assets | $ | 79,110 | $ | 79,000 | ||||
(b) Liabilities of condensed consolidated Variable Interest Entity included in the total liabilities above: | ||||||||
Notes payable | $ | 46,281 | $ | 47,064 | ||||
Accounts payable and accrued expenses | 2,835 | 2,617 | ||||||
Payable due to related party | 313 | 373 | ||||||
Accrued interest payable | 199 | 197 | ||||||
Tenants' security deposits | 1,329 | 1,236 | ||||||
Total liabilities | $ | 50,957 | $ | 51,487 |
Pillarstone Capital REIT and Subsidiaries | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(unaudited) | ||||||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
Rental (1) | $ | 3,854 | $ | 4,438 | $ | 11,504 | $ | 12,915 | ||||||||
Transaction and other fees | 9 | 12 | 32 | 76 | ||||||||||||
Total revenues | 3,863 | 4,450 | 11,536 | 12,991 | ||||||||||||
Operating expenses | ||||||||||||||||
Depreciation and amortization | 801 | 860 | 2,360 | 2,612 | ||||||||||||
Operating and maintenance (2) | 873 | 1,023 | 2,595 | 2,875 | ||||||||||||
Real estate taxes | 659 | 874 | 1,954 | 2,135 | ||||||||||||
General and administrative | 137 | 285 | 511 | 578 | ||||||||||||
Management fees | 224 | 249 | 660 | 755 | ||||||||||||
Total operating expenses | 2,694 | 3,291 | 8,080 | 8,955 | ||||||||||||
Other expenses | ||||||||||||||||
Interest expense | 521 | 686 | 1,566 | 2,051 | ||||||||||||
Loss on disposal of assets | 16 | 12 | 24 | 12 | ||||||||||||
Total other expenses | 537 | 698 | 1,590 | 2,063 | ||||||||||||
Income before income taxes | 632 | 461 | 1,866 | 1,973 | ||||||||||||
Provision for income taxes | 133 | (23 | ) | 35 | (67 | ) | ||||||||||
Net income | 765 | 438 | 1,901 | 1,906 | ||||||||||||
Less: Noncontrolling interest in subsidiary | 551 | 529 | 1,610 | 1,842 | ||||||||||||
Net income (loss) attributable to Common Shareholders | $ | 214 | $ | (91 | ) | $ | 291 | $ | 64 | |||||||
Earnings Loss Per Share: | ||||||||||||||||
Basic income (loss) per Common Share: | ||||||||||||||||
Net income (loss) available to Common Shareholders | $ | 0.53 | $ | (0.22 | ) | $ | 0.72 | $ | 0.16 | |||||||
Diluted income (loss) per Common Share: | ||||||||||||||||
Net income (loss) available to Common Shareholders | $ | 0.07 | $ | (0.22 | ) | $ | 0.10 | $ | 0.02 | |||||||
Weighted average number of Common Shares outstanding: | ||||||||||||||||
Basic: | 405,169 | 405,169 | 405,169 | 405,169 | ||||||||||||
Diluted: | 2,868,281 | 405,169 | 2,808,240 | 2,903,219 |
Pillarstone Capital REIT and Subsidiaries | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(unaudited) | ||||||||||||||||
(in thousands) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(1) Rental | ||||||||||||||||
Rental revenues | $ | 3,250 | $ | 3,602 | $ | 9,769 | $ | 10,768 | ||||||||
Recoveries | 609 | 836 | 1,859 | 2,147 | ||||||||||||
Bad debt | (5 | ) | N/A | (124 | ) | N/A | ||||||||||
Total rental | $ | 3,854 | $ | 4,438 | $ | 11,504 | $ | 12,915 | ||||||||
(2) Bad debt included in operating and maintenance expenses prior to adoption of Topic 842 | N/A | $ | 53 | N/A | $ | 153 |
Pillarstone Capital REIT and Subsidiaries | ||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) | ||||||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Class A Preferred Shares | Class C Preferred Shares | Common Shares | Additional Paid-in Capital | Accumulated Deficit | Cost of Shares Held in Treasury | Total Shareholders' Equity (Deficit) | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (26,319 | ) | $ | (801 | ) | $ | 1,036 | $ | 26,026 | $ | 27,062 | ||||||||||||||||
Contributions to operating partnership | — | — | — | — | — | — | — | 40 | 40 | |||||||||||||||||||||||||||
Distributions to operating partnership limited partner | — | — | — | — | — | — | — | (302 | ) | (302 | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | 46 | — | 46 | 568 | 614 | |||||||||||||||||||||||||||
Balance, March 31, 2019 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (26,273 | ) | $ | (801 | ) | $ | 1,082 | $ | 26,332 | $ | 27,414 | ||||||||||||||||
Distributions to operating partnership limited partner | — | — | — | — | — | — | — | (588 | ) | (588 | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | 31 | — | 31 | 491 | 522 | |||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (26,242 | ) | $ | (801 | ) | $ | 1,113 | $ | 26,235 | $ | 27,348 | ||||||||||||||||
Distributions to operating partnership limited partner | — | — | — | — | — | — | — | (116 | ) | (116 | ) | |||||||||||||||||||||||||
Share-based compensation | — | — | — | 28 | — | — | 28 | — | 28 | |||||||||||||||||||||||||||
Net income | — | — | — | — | 214 | — | 214 | 551 | 765 | |||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | 3 | $ | 2 | $ | 4 | $ | 28,175 | $ | (26,028 | ) | $ | (801 | ) | $ | 1,355 | $ | 26,670 | $ | 28,025 |
Class A Preferred Shares | Class C Preferred Shares | Common Shares | Additional Paid-in Capital | Accumulated Deficit | Cost of Shares Held in Treasury | Total Shareholders' Equity (Deficit) | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (27,635 | ) | $ | (801 | ) | $ | (280 | ) | $ | 18,861 | $ | 18,581 | |||||||||||||||
Distributions to operating partnership limited partner | — | — | — | — | — | — | — | (506 | ) | (506 | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | 54 | — | 54 | 700 | 754 | |||||||||||||||||||||||||||
Balance, March 31, 2018 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (27,581 | ) | $ | (801 | ) | $ | (226 | ) | $ | 19,055 | $ | 18,829 | |||||||||||||||
Reallocation of ownership between parent and noncontrolling interest | — | — | — | — | (1 | ) | — | (1 | ) | 1 | — | |||||||||||||||||||||||||
Net income | — | — | — | — | 101 | — | 101 | 613 | 714 | |||||||||||||||||||||||||||
Balance, June 30, 2018 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (27,481 | ) | $ | (801 | ) | $ | (126 | ) | $ | 19,669 | $ | 19,543 | |||||||||||||||
Adjustment to accumulated deficit | — | — | — | — | (2 | ) | — | (2 | ) | — | (2 | ) | ||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (91 | ) | — | (91 | ) | 529 | 438 | |||||||||||||||||||||||||
Balance, September, 30, 2018 | $ | 3 | $ | 2 | $ | 4 | $ | 28,147 | $ | (27,574 | ) | $ | (801 | ) | $ | (219 | ) | $ | 20,198 | $ | 19,979 |
Pillarstone Capital REIT and Subsidiaries | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,901 | $ | 1,906 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,360 | 2,612 | ||||||
Amortization of deferred loan costs | 75 | 75 | ||||||
Loss on disposal of assets | 24 | 12 | ||||||
Bad debt | 124 | 153 | ||||||
Share-based compensation | 28 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accrued rents and accounts receivable | (612) | (824 | ) | |||||
Receivable due from related party | (15) | (17 | ) | |||||
Escrows and utility deposits | (104) | (361 | ) | |||||
Unamortized lease commissions and deferred legal cost | (175) | (404 | ) | |||||
Prepaid expenses and other assets | (83) | 42 | ||||||
Accounts payable and accrued expenses | 119 | (83 | ) | |||||
Payable due to related party | (57) | (708 | ) | |||||
Stock redemption payable - related party | (143) | — | ||||||
Tenants' security deposits | 93 | 219 | ||||||
Net cash provided by operating activities | 3,535 | 2,622 | ||||||
Cash flows from investing activities: | ||||||||
Additions to real estate | (1,389) | (2,143 | ) | |||||
Net cash used in investing activities | (1,389) | (2,143 | ) | |||||
Cash flows from financing activities: | ||||||||
Distributions paid to noncontrolling interest in subsidiary | (1,006) | (505 | ) | |||||
Repayments of notes payable | (858) | (1,977 | ) | |||||
Net cash used in financing activities | (1,864) | (2,482 | ) | |||||
Net change in cash and cash equivalents | 282 | (2,003 | ) | |||||
Cash and cash equivalents at beginning of period | 2,010 | 2,991 | ||||||
Cash and cash equivalents at end of period | $ | 2,292 | $ | 988 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 1,474 | $ | 1,974 | ||||
Cash paid for taxes | $ | 204 | $ | 88 | ||||
Non cash investing activities: | ||||||||
Disposal of fully depreciated real estate | $ | 22 | $ | 7 | ||||
Additions to real estate contributed by related party | $ | 40 | $ | 45 |
• | Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the financial statements as well as leases that commenced after that date. Under this method, prior comparative periods presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented, a cumulative-effect adjustment is recognized at that date. |
• | Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity first applies the leases standard with a cumulative-effect adjustment as of that date. Prior comparative periods would not be adjusted under this method. |
September 30, 2019 | December 31, 2018 | |||||||
Tenant receivables | $ | 469 | $ | 252 | ||||
Accrued rents and other recoveries | 1,626 | 1,161 | ||||||
Allowance for doubtful accounts | (247 | ) | (53 | ) | ||||
Total | $ | 1,848 | $ | 1,360 |
Years Ended December 31, | Minimum Future Rents(1) | |||
2019 (remaining) | $ | 3,027 | ||
2020 | 10,503 | |||
2021 | 7,671 | |||
2022 | 5,127 | |||
2023 | 3,600 | |||
Thereafter | 3,610 | |||
Total | $ | 33,538 |
Years Ended December 31, | September 30, 2019 | |||
2019 (remaining) | $ | 4 | ||
2020 | 7 | |||
Total undiscounted rental payments | 11 | |||
Total lease liabilities (1) | $ | 11 |
September 30, 2019 | December 31, 2018 | |||||||
Leasing commissions | $ | 1,903 | $ | 1,780 | ||||
Deferred legal cost | 34 | 34 | ||||||
Total cost | 1,937 | 1,814 | ||||||
Less: leasing commissions accumulated amortization | (872 | ) | (636 | ) | ||||
Less: deferred legal cost accumulated amortization | (19 | ) | (14 | ) | ||||
Total cost, net of accumulated amortization | $ | 1,046 | $ | 1,164 |
September 30, 2019 | December 31, 2018 | |||||||
(unaudited) | ||||||||
Real estate assets, at cost | ||||||||
Property | $ | 79,348 | $ | 77,941 | ||||
Accumulated depreciation | (7,323 | ) | (5,281 | ) | ||||
Total real estate assets | 72,025 | 72,660 | ||||||
Cash and cash equivalents | 2,218 | 1,872 | ||||||
Escrows and utility deposits | 1,939 | 1,835 | ||||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 1,703 | 1,360 | ||||||
Receivable due from related party (1) | 73 | 58 | ||||||
Unamortized lease commissions and deferred legal cost, net | 1,046 | 1,164 | ||||||
Prepaid expenses and other assets | 106 | 51 | ||||||
Total assets | $ | 79,110 | $ | 79,000 | ||||
Liabilities | ||||||||
Notes payable | $ | 46,281 | $ | 47,064 | ||||
Accounts payable and accrued expenses | 2,835 | 2,617 | ||||||
Payable due to related party | 313 | 373 | ||||||
Accrued interest payable | 199 | 197 | ||||||
Tenants' security deposits | 1,329 | 1,236 | ||||||
Total liabilities | $ | 50,957 | $ | 51,487 |
(1) | Excludes approximately $0.5 million in accounts receivable due from Pillarstone that was eliminated in consolidation as of September 30, 2019 and approximately $0.3 million as of December 31, 2018. |
Description | September 30, 2019 | December 31, 2018 | ||||||
Fixed rate notes | ||||||||
$37.0 million 3.76% Note, due December 1, 2020 | $ | 25,203 | $ | 25,863 | ||||
$16.5 million 4.97% Note, due September 26, 2023 | 15,607 | 15,805 | ||||||
Floating rate notes | ||||||||
Related party Note, LIBOR plus 1.40% to 1.90%, due December 31, 2019 | 5,661 | 5,661 | ||||||
Total notes payable principal | 46,471 | 47,329 | ||||||
Less deferred financing costs, net of accumulated amortization | (190 | ) | (265 | ) | ||||
Total notes payable | $ | 46,281 | $ | 47,064 |
Year | Amount Due (in thousands) | |||
2019 | $ | 5,999 | ||
2020 | 25,272 | |||
2021 | 308 | |||
2022 | 323 | |||
2023 | 14,569 | |||
Total | $ | 46,471 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except share and per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to common shareholders | $ | 214 | $ | (91 | ) | $ | 291 | $ | 64 | |||||||
Dilutive effect of interest from convertible notes payable | — | — | — | — | ||||||||||||
Net income (loss) available to common shareholders with assumed conversion | $ | 214 | $ | (91 | ) | $ | 291 | $ | 64 | |||||||
Denominator: | ||||||||||||||||
Weighted average number of common shares - basic | 405,169 | 405,169 | 405,169 | 405,169 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Dilutive effect of restricted common stock | 90,062 | — | 30,021 | — | ||||||||||||
Assumed conversion of Preferred A Shares | 53,610 | — | 53,610 | 53,610 | ||||||||||||
Assumed conversion of Preferred C Shares | 2,319,440 | — | 2,319,440 | 2,444,440 | ||||||||||||
Assumed conversion of convertible notes payable | — | — | — | — | ||||||||||||
Weighted average number of common shares - dilutive | 2,868,281 | 405,169 | 2,808,240 | 2,903,219 | ||||||||||||
Earnings (Loss) Per Share: | ||||||||||||||||
Basic income (loss) per common share: | ||||||||||||||||
Net income (loss) available to common shareholders | $ | 0.53 | $ | (0.22 | ) | $ | 0.72 | $ | 0.16 | |||||||
Diluted income (loss) per common share: | ||||||||||||||||
Net income (loss) available to common shareholders | $ | 0.07 | $ | (0.22 | ) | $ | 0.10 | $ | 0.02 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
Location of Revenue (Expense) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||
Rent | Rental | $ | 211 | $ | 201 | $ | 524 | $ | 606 | |||||||||
Property management fees | Management fees | (168 | ) | (183 | ) | (510 | ) | (557 | ) | |||||||||
Asset management fees | Management fees | (56 | ) | (66 | ) | (150 | ) | (198 | ) | |||||||||
Interest expense | Interest expense | (52 | ) | (149 | ) | (161 | ) | (435 | ) |
Location of Receivable / Payable | September 30, 2019 | December 31, 2018 | |||||||
Tenant receivables and other receivables | Accrued rents and accounts receivable | $ | 73 | $ | 58 | ||||
Accrued interest due to related party | Accrued interest payable | 129 | 112 | ||||||
Other payables due to related party | Payable due to related party | 315 | 372 |
Description | Shares | Weighted-Average Grant Date Fair Value (1) | |||||
Non-vested at January 1, 2019 | — | $ | — | ||||
Granted | 90,062 | 2.18 | |||||
Non-vested at September 30, 2019 | 90,062 | $ | 2.18 | ||||
Available for grant at September 30, 2019 | 2,248,507 |
• | uncertainties related to the national economy, the real estate industry in general and in our specific markets; |
• | legislative or regulatory changes; |
• | adverse economic conditions in Texas; |
• | adverse changes in governmental rules and fiscal policies; |
• | increases in interest rates and operating costs; |
• | availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures; |
• | decreases in rental rates or increases in vacancy rates; |
• | litigation risks; |
• | lease-up risks; |
• | our inability to renew tenants or obtain new tenants upon the expiration of existing leases; and |
• | our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws. |
• | our cash resources are limited; |
• | we have a history of losses; |
• | we have not raised funds through a public equity offering; |
• | our trustees control a significant percentage of our voting shares; |
• | shareholders could experience possible future dilution through the issuance of additional shares; |
• | we are dependent on a small number of key senior professionals who are part-time employees; and |
• | we currently do not plan to distribute dividends to the holders of our shares. |
• | Explanation of changes in the results of operations in the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2019 compared to the three and nine month periods ended September 30, 2018. |
• | Our critical accounting policies and estimates that require our subjective judgment and are important to the presentation of our financial condition and results of operations. |
• | Our primary sources and uses of cash for the nine month periods ended September 30, 2019 and 2018, and how we intend to generate cash for long-term capital needs. |
• | Our current income tax status. |
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Number of properties | 11 | 14 | ||||||
Aggregate GLA (sq. ft.) | 1,307,930 | 1,529,861 | ||||||
Ending occupancy rate | 77 | % | 80 | % | ||||
Total revenues | $ | 11,536 | $ | 12,991 | ||||
Total operating expenses | 8,080 | 8,955 | ||||||
Total other expenses | 1,590 | 2,063 | ||||||
Provision for income taxes | (35 | ) | 67 | |||||
Net income | 1,901 | 1,906 | ||||||
Less: Non-controlling interest in subsidiary | 1,610 | 1,842 | ||||||
Net income available to Common Shareholders | $ | 291 | $ | 64 |
Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | Change | % Change | ||||||||||||
Operating and maintenance, excluding bad debt | $ | 2,595 | $ | 2,722 | $ | (127 | ) | (5 | )% | ||||||
Real estate taxes | 1,954 | 2,135 | (181 | ) | (8 | )% | |||||||||
General and administrative | 511 | 578 | (67 | ) | (12 | )% | |||||||||
Depreciation and amortization | 2,360 | 2,612 | (252 | ) | (10 | )% | |||||||||
Management fees | 660 | 755 | (95 | ) | (13 | )% | |||||||||
Bad debt | — | 153 | (153 | ) | (100 | )% | |||||||||
Total property expenses | $ | 8,080 | $ | 8,955 | $ | (875 | ) | (10 | )% |
Three Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Number of properties | 11 | 14 | ||||||
Aggregate GLA (sq. ft.) | 1,307,930 | 1,529,861 | ||||||
Ending occupancy rate | 77 | % | 80 | % | ||||
Total revenues | $ | 3,863 | $ | 4,450 | ||||
Total operating expenses | 2,694 | 3,291 | ||||||
Total other expenses | 537 | 698 | ||||||
Provision for income taxes | (133 | ) | 23 | |||||
Net income | 765 | 438 | ||||||
Less: Non-controlling interest in subsidiary | 551 | 529 | ||||||
Net income (loss) available to Common Shareholders | $ | 214 | $ | (91 | ) |
Three Months Ended September 30, | |||||||||||||||
2019 | 2018 | Change | % Change | ||||||||||||
Operating and maintenance, excluding bad debt | $ | 873 | $ | 970 | $ | (97 | ) | (10 | )% | ||||||
Real estate taxes | 659 | 874 | (215 | ) | (25 | )% | |||||||||
General and administrative | 137 | 285 | (148 | ) | (52 | )% | |||||||||
Depreciation and amortization | 801 | 860 | (59 | ) | (7 | )% | |||||||||
Management fees | 224 | 249 | (25 | ) | (10 | )% | |||||||||
Bad debt | — | 53 | (53 | ) | (100 | )% | |||||||||
Total property expenses | $ | 2,694 | $ | 3,291 | $ | (597 | ) | (18 | )% |
• | borrowings from new loans; |
• | additional equity issuances of our common and preferred shares; and |
• | proceeds from the sales of our Real Estate Assets. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Federal | $ | (154 | ) | $ | — | $ | (141 | ) | $ | — | ||||||
Texas franchise tax | 21 | 23 | 106 | 67 | ||||||||||||
$ | (133 | ) | $ | 23 | $ | (35 | ) | $ | 67 |
Exhibit Number | Exhibit Description | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
PILLARSTONE CAPITAL REIT | |||
By: | /s/ James C. Mastandrea | ||
Date: | November 13, 2019 | James C. Mastandrea Chief Executive Officer (Principal executive officer) |
PILLARSTONE CAPITAL REIT | |||
By: | /s/ John J. Dee | ||
Date: | November 13, 2019 | John J. Dee Chief Financial Officer (Principal financial and accounting officer) |
1. | I have reviewed this quarterly report on Form 10-Q of Pillarstone Capital REIT (the “Registrant”); |
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 subsidiary, 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 that has materially affected, or is reasonably likely to materially effect, 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 trustees (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. |
1. | I have reviewed this quarterly report on Form 10-Q of Pillarstone Capital REIT (the “Registrant”); |
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 subsidiary, 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 that has materially affected, or is reasonably likely to materially effect, 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 trustees (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. |
(1) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
PILLARSTONE CAPITAL REIT | |||||
By: | /s/ James C. Mastandrea | ||||
Date: | November 13, 2019 | James C. Mastandrea Chairman, Chief Executive Officer and President |
PILLARSTONE CAPITAL REIT | |||||
By: | /s/ John J. Dee | ||||
Date: | November 13, 2019 | John J. Dee Chief Financial Officer and Senior Vice President |
Subsequent Events (Details) - Subsequent Event [Member] $ in Millions |
Oct. 08, 2019
USD ($)
property
|
---|---|
Subsequent Event [Line Items] | |
Number of real estate properties sold | property | 3 |
Gain on sale of properties | $ 39.7 |
Loan carrying amount | 5.7 |
Mortgage loan | 15.5 |
Whitestone [Member] | |
Subsequent Event [Line Items] | |
Cash distribution paid | $ 5.4 |
Summary of Significant Accounting Policies |
9 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | |||||||||
Accounting Policies [Abstract] | |||||||||
Summary of Significant Accounting Policies | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting. Pillarstone Capital REIT's (the “Company”, “Pillarstone”, “we”, “our”, or “us”) financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. Use of estimates. In order to conform with U.S. generally accepted accounting principles (“U.S. GAAP”), management, in preparation of our consolidated financial statements, is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of September 30, 2019 and December 31, 2018, and the reported amounts of revenues and expenses for the three and nine months ended September 30, 2019 and 2018. Actual results could differ from those estimates. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, and deferred taxes and the related valuation allowance for deferred taxes. Actual results could differ from those estimates. Reclassifications. We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity. Change in accounting estimate. The calculation of the Company's tax provision is performed using management's best judgment with the assistance of tax advisers and re-evaluated as changes in facts and circumstances occur that may impact the application of tax laws. The Company seeks to reduce its overall tax burden and to minimize or delay cash outflows for taxes by implementing tax-efficient business structures, entering into tax-advantaged transactions, and seeking tax-optimal transactions. During the three months ended September 30, 2019, a change in facts and circumstances occurred involving the timing and amount of gains on sales of properties in relation to the timing of the Company's potential election of REIT status. This new information resulted in the change in tax strategy that is described in more detail below under Income taxes. Based on the change in tax strategy, we reversed an estimated $141,000 federal income tax liability recorded as of December 31, 2018 and a $9,000 federal income tax liability recorded as of June 30, 2019. The impact of these changes resulted in a decrease in tax expense for the three and nine months ended September 30, 2019 of $154,000 and $141,000, respectively, which increased our reported net income by $154,000 and $141,000 or $0.05 per diluted share for the three and nine months ended September 30, 2019, respectively. Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents as of September 30, 2019 and December 31, 2018 consisted of demand deposits at commercial banks and brokerage accounts. We maintain our cash in bank accounts that are federally insured. Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values at the time of purchase. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt. Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter. Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of September 30, 2019. Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. With the adoption of Accounting Standards Codification (“ASC”) No. 842, "Leases" (“Topic 842”) effective January 1, 2019, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As of September 30, 2019 and December 31, 2018, we had an allowance for uncollectible accounts of approximately $247,000 and $53,000, respectively. For the three and nine months ended September 30, 2019, we recorded an adjustment to rental revenue in the amount of approximately $5,000 and $124,000, respectively. For the three and nine months ended September 30, 2018, we recorded bad debt expense in the amount of approximately $53,000 and $153,000, respectively. Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized using the straight-line method over the terms of the related lease agreements. Loan costs are amortized on the straight-line method over the terms of the loans, which approximates the effective interest method. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases. Prepaids and Other assets. Prepaids and other assets include escrows established pursuant to certain mortgage financing arrangements for real estate taxes and insurance. Noncontrolling Interests. Noncontrolling interests are the portion of equity in a subsidiary not attributable to a parent. Accordingly, we have reported noncontrolling interest in equity on the consolidated balance sheets but separate from Pillarstone’s equity. On the consolidated statements of operations, subsidiaries are reported at the consolidated amount, including both the amount attributable to Pillarstone and noncontrolling interest. Revenue recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and non lease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the consolidated statements of operations. We recognize lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured. Additionally, if we have tenants who pay real estate taxes directly to the taxing authority, we exclude these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property operating expense. Stock-based compensation. The Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Board's (“FASB”) ASC 718, "Compensation - Stock Compensation," which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 generally requires that these transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. Income taxes. Because we have not elected to be taxed as a REIT for federal income tax purposes, we account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company evaluates potential uncertain tax positions on an annual basis in conjunction with the board of trustees and its tax accountants. Authoritative literature provides a two-step approach to recognize and measure tax benefits when realization of the benefits is uncertain. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition, and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Embedded in the effective tax rate for the three and nine months ended September 30, 2019 are the tax effects of the Company's operating activities. For the three and nine months ended September 30, 2019, the Company's effective tax rate applied to its income before income taxes decreased in relation to the statutory tax rate as a result of a change in the treatment of the gain on certain property sales described below. Please reference the Company's 2018 10-K for additional details on the differences between the Federal statutory rate and our effective rate. On December 9, 2016, Whitestone REIT Operating Partnership LP ("WROP") contributed 14 real estate assets (the "Real Estate Assets") to Pillarstone Capital REIT Operating Partnership ("Pillarstone OP" or "Operating Partnership") in exchange for operating partnership units of Pillarstone OP. The contribution of these assets in exchange for Pillarstone OP units resulted in a “built in tax gain” in the Pillarstone OP units owned by WROP. The amount of the “built in tax gain” represented the difference between the contribution amount and WROP’s tax basis in the properties. On December 27, 2018, Pillarstone OP sold three of the fourteen contributed Real Estate Assets. As a result of new information and facts obtained, and changes in circumstances that occurred in the three months ended September 30, 2019, including but not limited to, new contracts entered into for property sales and the expected timing of the Company’s potential REIT status election, the Company changed its tax strategy regarding the recognition of the “built in tax gain” by the Company. Under Internal Revenue Code Section 704(c), the Company adopted a method in which it allocates all tax gains from the sale of the contributed properties to WROP until the full amount of the "built in tax gain" has been depleted. The original tax position which determined the Company’s accounting estimates recorded in prior periods was taken before the Company had knowledge of additional information and facts, and changes in circumstances that occurred in the three months ended September 30, 2019. The impact of these changes resulted in a decrease in tax expense for the three and nine months ended September 30, 2019 of $154,000 and $141,000, respectively, which increased our reported net income by $154,000 and $141,000 or $0.05 per diluted share for the three and nine months ended September 30, 2019, respectively. Concentration of Risk. Substantially all of our revenues are obtained from office and warehouse locations in the Dallas and Houston metropolitan areas. We maintain cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts sometimes exceed the federally insured limits, although no losses have been incurred in connection with these deposits. Recent Accounting Pronouncements. In May 2014, the FASB issued guidance, as amended in subsequent updates, establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. The standard also requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We have adopted this guidance on a modified retrospective basis beginning January 1, 2018 and it did not have a material impact on our consolidated financial statements. In February 2016, the FASB issued an accounting standard update (“ASU”) that provided the principles for the recognition, measurement, presentation and disclosure of leases. Additional guidance and targeted improvements to the February 2016 ASU were made through the issuance of supplementary ASUs in July 2018, December 2018 and March 2019. Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor, we will use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $21,000, which represents the present value of the remaining lease payments of approximately $22,000 discounted using our incremental borrowing rate of 4.5%, and (b) a right-of-use asset of approximately $21,000. Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach. Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:
We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We will continue to amortize unamortized legal costs as of December 31, 2018 over the life of the respective leases. We did not have a cumulative-effect adjustment as of the adoption date. Additionally, the optional transition method does allow us not to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with prior generally accepted accounting principles. Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-term leases entered into or modified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases. We will continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new lease standards. We elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a single line item, Rental, within the consolidated statements of operations. For the three and nine months ended September 30, 2019, we had rental revenues of approximately $3,250,000 and $9,769,000 respectively, and rental reimbursements of approximately $609,000 and $1,859,000 respectively, compared to rental revenues of approximately $3,602,000 and $10,768,000 and rental reimbursements of approximately $836,000 and $2,147,000 for the three and nine months ended September 30, 2018, respectively. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. With the adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | |||||||
---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 |
Sep. 30, 2018 |
Sep. 30, 2019 |
Sep. 30, 2018 |
||||||
Revenues | |||||||||
Rental | [1] | $ 3,854 | $ 11,504 | ||||||
Rental | [1] | $ 4,438 | $ 12,915 | ||||||
Transaction and other fees | 9 | 12 | 32 | 76 | |||||
Total revenues | 3,863 | 4,450 | 11,536 | 12,991 | |||||
Operating expenses | |||||||||
Depreciation and amortization | 801 | 860 | 2,360 | 2,612 | |||||
Operating and maintenance (2) | 873 | 1,023 | 2,595 | 2,875 | |||||
Real estate taxes | 659 | 874 | 1,954 | 2,135 | |||||
General and administrative | [2] | 137 | 285 | 511 | 578 | ||||
Management fees | 224 | 249 | 660 | 755 | |||||
Total operating expenses | 2,694 | 3,291 | 8,080 | 8,955 | |||||
Other expenses | |||||||||
Interest expense | 521 | 686 | 1,566 | 2,051 | |||||
Loss on disposal of assets | 16 | 12 | 24 | 12 | |||||
Total other expenses | 537 | 698 | 1,590 | 2,063 | |||||
Income before income taxes | 632 | 461 | 1,866 | 1,973 | |||||
Provision for income taxes | 133 | (23) | 35 | (67) | |||||
Net income | 765 | 438 | 1,901 | 1,906 | |||||
Less: Noncontrolling interest in subsidiary | 551 | 529 | 1,610 | 1,842 | |||||
Net income (loss) attributable to Common Shareholders | $ 214 | $ (91) | $ 291 | $ 64 | |||||
Basic income (loss) per Common Share: | |||||||||
Net income (loss) available to Common Shareholders (usd per share) | $ 0.53 | $ (0.22) | $ 0.72 | $ 0.16 | |||||
Diluted income (loss) per Common Share: | |||||||||
Net income (loss) available to Common Shareholders (usd per share) | $ 0.07 | $ (0.22) | $ 0.10 | $ 0.02 | |||||
Weighted average number of Common Shares outstanding: | |||||||||
Basic (shares) | 405,169 | 405,169 | 405,169 | 405,169 | |||||
Diluted (shares) | 2,868,281 | 405,169 | 2,808,240 | 2,903,219 | |||||
Operating Leases, Lease Income [Abstract] | |||||||||
Rental revenues | $ 3,250 | $ 9,769 | |||||||
Recoveries | 609 | 1,859 | |||||||
Bad debt | (5) | (124) | |||||||
Total rental | [1] | $ 3,854 | $ 11,504 | ||||||
Operating Leases, Income Statement, Lease Revenue [Abstract] | |||||||||
Rental revenues | $ 3,602 | $ 10,768 | |||||||
Recoveries | 836 | 2,147 | |||||||
Total rental | [1] | 4,438 | 12,915 | ||||||
Bad debt (prior to adoption of Topic 842) | $ 53 | $ 153 | |||||||
|
Variable Interest Entity (Tables) |
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Equity Method Investments and Joint Ventures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Variable Interest Entities | The carrying amounts and classification of certain assets and liabilities for Pillarstone OP in our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 consists of the following (in thousands):
|
Incentive Equity Plan (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Share-Based Incentive Plan Activity | As of September 30, 2019, the maximum number of Common Shares or OP Units available to be granted is 2,248,507. During the three months ended September 30, 2019, the following shares were granted:
(1) The fair value of the shares granted were determined based on the weighted average OTC share price for the nine months ended September 30, 2019. |
Variable Interest Entity |
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Equity Method Investments and Joint Ventures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Variable Interest Entity | VARIABLE INTEREST ENTITY On December 8, 2016, Pillarstone and Pillarstone OP, entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT (“Whitestone”), both of which are related parties to Pillarstone and Pillarstone OP. Pursuant to the terms of the Contribution Agreement, Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries (the “Subsidiaries”): Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company; Whitestone Industrial-Office, LLC, a Texas limited liability company; Whitestone Offices, LLC, a Texas limited liability company; and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”) that owned 14 real estate assets (the “Real Estate Assets” and, together with the Subsidiaries, the “Property”) for aggregate consideration of approximately $84 million, consisting of (i) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP (“OP Units”), issued at a price of $1.331 per OP Unit; and (ii) the assumption of approximately $65.9 million of liabilities by Pillarstone OP. Pursuant to the Contribution Agreement, Pillarstone became the general partner of Pillarstone OP with an equity ownership interest in Pillarstone OP totaling approximately an 18.6% interest valued at $4.1 million as of the date of the Contribution Agreement. In connection with the Contribution Agreement, on December 8, 2016, the Company, as the general partner of Pillarstone OP, entered into an Amended and Restated Agreement of Limited Partnership of Pillarstone OP (as amended and restated, the “Amended and Restated Agreement of Limited Partnership”). Pursuant to the Amended and Restated Agreement of Limited Partnership, subject to certain protective rights of the limited partners described below, the general partner has full, exclusive and complete responsibility and discretion in the management and control of Pillarstone OP, including the ability to cause Pillarstone OP to enter into certain major transactions including a merger of Pillarstone OP or a sale of substantially all of the assets of Pillarstone OP. The limited partners have no power to remove the general partner without the general partner's consent. In addition, pursuant to the Amended and Restated Agreement of Limited Partnership, the general partner may not conduct any business without the consent of a majority of the limited partners other than in connection with certain actions described therein. The Company is deemed to exercise significant influence over Pillarstone OP as it has the power to direct the activities that most significantly impact Pillarstone OP's economic performance and the Company's right to receive benefits based on its ownership percentage in Pillarstone OP. Accordingly, the Company accounts for Pillarstone OP as a Variable Interest Entity. The Amended and Restated Agreement of Limited Partnership designates two classes of units of limited partnership interest in Pillarstone OP: the OP Units and LTIP units. In general, LTIP units are similar to the OP Units and will receive the same quarterly per-unit profit distributions as the OP Units. The rights, privileges, and obligations related to each series of LTIP units will be established at the time the LTIP units are issued. As profits interests, LTIP units initially will not have full parity, on a per-unit basis, with OP Units with respect to liquidating distributions. Upon the occurrence of specified events, LTIP units can over time achieve full parity with the OP Units and therefore accrete to an economic value for the holder equivalent to OP Units. If such parity is achieved, vested LTIP units may be converted on a one-for-one basis into OP Units, which in turn are redeemable by the holder for cash or, at the Company’s election, exchangeable for Common Shares on a one-for-one basis. The carrying amounts and classification of certain assets and liabilities for Pillarstone OP in our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 consists of the following (in thousands):
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Earnings (Loss) Per Share |
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Earnings (Loss) Per Share | EARNINGS (LOSS) PER SHARE The Company applies the guidance of ASC 260, "Earnings Per Share," for all periods presented herein. Net earnings (loss) per weighted average Common Share outstanding, basic and diluted, is computed based on the weighted average number of Common Shares outstanding for the period. The following table shows the weighted average number of Common Shares outstanding and reconciles the numerator and denominator of earnings per Common Share calculations for the three and nine month periods ended September 30, 2019 and 2018. For the three and nine month periods ended September 30, 2019 and the nine month period ended September 30, 2018, Class A Cumulative Preferred Shares ("Preferred A Shares") and Class C Convertible Preferred Shares ("Preferred C Shares") were included in net income per weighted average number of Common Shares - dilutive. For the three month period ended September 30, 2018, 2,498,050 common share equivalents represented by Preferred Class A and C shares were not included in the computation of diluted loss per share because the effect of conversion would be anti-dilutive. During the three and nine month periods ended September 30, 2019 and 2018, the Company had $197,780 of convertible notes payable as discussed in Note 8. The convertible notes payable weighted average shares of 206,038 and 202,306 were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2019 because the effect of the conversion would be anti-dilutive. The convertible notes payable were not included in the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2018 because the effect of the conversion would be anti-dilutive.
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Summary of Significant Accounting Policies (Policies) |
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Accounting Policies [Abstract] | |||||||||
Basis of Accounting | Basis of Accounting. Pillarstone Capital REIT's (the “Company”, “Pillarstone”, “we”, “our”, or “us”) financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. |
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Use of estimates | Use of estimates. In order to conform with U.S. generally accepted accounting principles (“U.S. GAAP”), management, in preparation of our consolidated financial statements, is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of September 30, 2019 and December 31, 2018, and the reported amounts of revenues and expenses for the three and nine months ended September 30, 2019 and 2018. Actual results could differ from those estimates. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, and deferred taxes and the related valuation allowance for deferred taxes. Actual results could differ from those estimates. |
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Reclassifications | Reclassifications. We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity. |
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Cash and cash equivalents | Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents as of September 30, 2019 and December 31, 2018 consisted of demand deposits at commercial banks and brokerage accounts. We maintain our cash in bank accounts that are federally insured. |
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Acquired Properties and Acquired Lease Intangibles | Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values at the time of purchase. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt. |
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Depreciation | Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter. |
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Impairment | Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. |
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Accrued Rents and Accounts Receivable | Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. With the adoption of Accounting Standards Codification (“ASC”) No. 842, "Leases" (“Topic 842”) effective January 1, 2019, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. |
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Unamortized Lease Commissions | Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized using the straight-line method over the terms of the related lease agreements. Loan costs are amortized on the straight-line method over the terms of the loans, which approximates the effective interest method. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases. |
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Prepaids and Other assets | Prepaids and Other assets. Prepaids and other assets include escrows established pursuant to certain mortgage financing arrangements for real estate taxes and insurance. |
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Noncontrolling Interests | Noncontrolling Interests. Noncontrolling interests are the portion of equity in a subsidiary not attributable to a parent. Accordingly, we have reported noncontrolling interest in equity on the consolidated balance sheets but separate from Pillarstone’s equity. On the consolidated statements of operations, subsidiaries are reported at the consolidated amount, including both the amount attributable to Pillarstone and noncontrolling interest. |
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Revenue recognition | Revenue recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and non lease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the consolidated statements of operations. |
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Stock-based compensation | Stock-based compensation. The Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Board's (“FASB”) ASC 718, "Compensation - Stock Compensation," which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 generally requires that these transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. |
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Income taxes | Income taxes. Because we have not elected to be taxed as a REIT for federal income tax purposes, we account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company evaluates potential uncertain tax positions on an annual basis in conjunction with the board of trustees and its tax accountants. Authoritative literature provides a two-step approach to recognize and measure tax benefits when realization of the benefits is uncertain. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition, and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Embedded in the effective tax rate for the three and nine months ended September 30, 2019 are the tax effects of the Company's operating activities. For the three and nine months ended September 30, 2019, the Company's effective tax rate applied to its income before income taxes decreased in relation to the statutory tax rate as a result of a change in the treatment of the gain on certain property sales described below. Please reference the Company's 2018 10-K for additional details on the differences between the Federal statutory rate and our effective rate. On December 9, 2016, Whitestone REIT Operating Partnership LP ("WROP") contributed 14 real estate assets (the "Real Estate Assets") to Pillarstone Capital REIT Operating Partnership ("Pillarstone OP" or "Operating Partnership") in exchange for operating partnership units of Pillarstone OP. The contribution of these assets in exchange for Pillarstone OP units resulted in a “built in tax gain” in the Pillarstone OP units owned by WROP. The amount of the “built in tax gain” represented the difference between the contribution amount and WROP’s tax basis in the properties. On December 27, 2018, Pillarstone OP sold three of the fourteen contributed Real Estate Assets. As a result of new information and facts obtained, and changes in circumstances that occurred in the three months ended September 30, 2019, including but not limited to, new contracts entered into for property sales and the expected timing of the Company’s potential REIT status election, the Company changed its tax strategy regarding the recognition of the “built in tax gain” by the Company. Under Internal Revenue Code Section 704(c), the Company adopted a method in which it allocates all tax gains from the sale of the contributed properties to WROP until the full amount of the "built in tax gain" has been depleted. The original tax position which determined the Company’s accounting estimates recorded in prior periods was taken before the Company had knowledge of additional information and facts, and changes in circumstances that occurred in the three months ended September 30, 2019. |
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Concentration of Risk | Concentration of Risk. Substantially all of our revenues are obtained from office and warehouse locations in the Dallas and Houston metropolitan areas. We maintain cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts sometimes exceed the federally insured limits, although no losses have been incurred in connection with these deposits. |
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Recent accounting pronouncements | Recent Accounting Pronouncements. In May 2014, the FASB issued guidance, as amended in subsequent updates, establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. The standard also requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We have adopted this guidance on a modified retrospective basis beginning January 1, 2018 and it did not have a material impact on our consolidated financial statements. In February 2016, the FASB issued an accounting standard update (“ASU”) that provided the principles for the recognition, measurement, presentation and disclosure of leases. Additional guidance and targeted improvements to the February 2016 ASU were made through the issuance of supplementary ASUs in July 2018, December 2018 and March 2019. Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor, we will use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $21,000, which represents the present value of the remaining lease payments of approximately $22,000 discounted using our incremental borrowing rate of 4.5%, and (b) a right-of-use asset of approximately $21,000. Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach. Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:
We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We will continue to amortize unamortized legal costs as of December 31, 2018 over the life of the respective leases. We did not have a cumulative-effect adjustment as of the adoption date. Additionally, the optional transition method does allow us not to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with prior generally accepted accounting principles. Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-term leases entered into or modified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases. We will continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new lease standards. We elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a single line item, Rental, within the consolidated statements of operations. For the three and nine months ended September 30, 2019, we had rental revenues of approximately $3,250,000 and $9,769,000 respectively, and rental reimbursements of approximately $609,000 and $1,859,000 respectively, compared to rental revenues of approximately $3,602,000 and $10,768,000 and rental reimbursements of approximately $836,000 and $2,147,000 for the three and nine months ended September 30, 2018, respectively. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. With the adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. |
Real Estate (Details) $ in Thousands, ft² in Millions |
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Real Estate [Line Items] | ||||||||
Property revenue | [1] | $ 3,854 | $ 11,504 | |||||
Property revenue | [1] | $ 4,438 | $ 12,915 | |||||
Pillarstone OP [Member] | ||||||||
Real Estate [Line Items] | ||||||||
Number of real estate properties | property | 11 | 11 | 14 | |||||
Gross leasable area (sqft.) | ft² | 1.3 | 1.3 | ||||||
Property revenue | $ 3,900 | $ 11,500 | ||||||
Property revenue | $ 4,500 | $ 13,000 | ||||||
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Leases - Maturities of Operating Lease Liabilities (Details) $ in Thousands |
Sep. 30, 2019
USD ($)
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Leases [Abstract] | |
2019 (remaining) | $ 4 |
2020 | 7 |
Total undiscounted rental payments | 11 |
Total lease liabilities | $ 11 |
Incentive Equity Plan |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Incentive Equity Plan | INCENTIVE EQUITY PLAN At the 2016 Annual Meeting of Shareholders, our shareholders approved the 2016 Equity Plan (“2016 Plan”). The 2016 Plan provides that awards may be made in Common Shares of the Company or units in the Company’s operating partnership, which may be converted into Common Shares. Subject to adjustment as provided by the terms of the 2016 Plan, the maximum aggregate number of Common Shares with respect to which awards may be granted under the 2016 Plan will be increased based on future issuances of Common Shares and units of the operating partnership, including issuances pursuant to the 2016 Plan, so that at any time the maximum number of shares that may be issued under the 2016 Plan shall equal 12.5% of the aggregate number of Common Shares and units of the operating partnership issued and outstanding (other than treasury shares and/or units issued to or held by the Company). The Management, Organization and Compensation Committee (the “Committee”) administers the 2016 Plan, except with respect to awards to non-employee trustees, for which the 2016 Plan is administered by the board of trustees. Subject to the terms of the 2016 Plan, the Committee is authorized to select participants, determine the type and number of awards to be granted, determine and later amend (subject to certain limitations) the terms and conditions of any award, interpret and specify the rules and regulations relating to the 2016 Plan, and make all other determinations which may be necessary or desirable for the administration of the 2016 Plan. The 2016 Plan includes the types of awards for grants and the types of financial performance measures. On July 1, 2019, the Committee approved the grant of 45,031 Restricted Common Share Units (the "Units") subject to the restrictions, terms and conditions set forth in the Restricted Unit Award Agreement (the "Award"). These Units are time-based shares that vest each year over the next three years and will be fully vested on July 1, 2022. On July 1, 2019, the Committee approved the grant of 45,031 Units subject to the restrictions and terms and conditions set forth in the Award. These Units are performance-based shares linked to five specific goals set forth in the Award. If the Company does not attain the performance goals before July 1, 2022, the Units still subject to restriction will be forfeited to the Company. As of September 30, 2019, the maximum number of Common Shares or OP Units available to be granted is 2,248,507. During the three months ended September 30, 2019, the following shares were granted:
(1) The fair value of the shares granted were determined based on the weighted average OTC share price for the nine months ended September 30, 2019. As of September 30, 2019, per the Award, the Company has determined that the time-based shares and the majority of the performance-based shares will vest by July 1, 2022. Time-based shares granted during the three months ended September 30, 2019 are amortized over their respective amortization periods. Performance-based shares granted during the three months ended September, 2019, with the exception of one of the performance based awards, that will be amortized over one year, will be amortized for three years. Performance-based shares that have not been achieved as of July 1, 2022 will be forfeited to the Company. The total value of the time-based and performance-based shares granted on July 1, 2019 is approximately $196,000. As of September 30, 2019, amortization expense for the time-based and performance-based shares is approximately $15,000 and $13,000, respectively. |
Unamortized Lease Commissions and Deferred Legal Cost, Net |
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Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unamortized Lease Commissions and Deferred Legal Cost, Net | UNAMORTIZED LEASE COMMISSIONS AND DEFERRED LEGAL COST, NET Costs which have been deferred consist of the following (in thousands):
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Convertible Notes Payable - Related Parties |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Notes Payable - Related Parties | DEBT Mortgages and other notes payable consist of the following (in thousands):
Our mortgage debt was collateralized by seven operating properties as of September 30, 2019 with a combined net book value of $55.4 million. Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and the assignment of certain rents and leases associated with those properties. Certain of our other loans are subject to customary covenants. As of September 30, 2019, we were in compliance with all loan covenants. Scheduled maturities of notes payable as of September 30, 2019 were as follows:
CONVERTIBLE NOTES PAYABLE - RELATED PARTIES On November 20, 2015, five trustees on our board of trustees at that time loaned $197,780 to the Company in exchange for convertible notes payable. The convertible notes payable accrue interest at 10% per annum and originally matured on November 20, 2018. In 2019, the Pillarstone board of trustees approved an extension of the maturity date to November 20, 2021. The convertible notes payable can be converted by the noteholders into Common Shares at the rate of $1.331 per Common Share at any time and the Company can convert the notes payable into Common Shares. At maturity or when the Company chooses to convert the convertible notes payable into Common Shares, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable into Common Shares. |
Unamortized Lease Commissions and Deferred Legal Cost, Net (Details) - USD ($) $ in Thousands |
Sep. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||
Leasing commissions | $ 1,903 | $ 1,780 |
Deferred legal cost | 34 | 34 |
Total cost | 1,937 | 1,814 |
Less: deferred legal cost accumulated amortization | (872) | (636) |
Less: deferred legal cost accumulated amortization | (19) | (14) |
Total cost, net of accumulated amortization | $ 1,046 | $ 1,164 |
Unamortized Lease Commissions and Deferred Legal Cost, Net (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tablular Disclosure of Unamortized Lease Commissions | Costs which have been deferred consist of the following (in thousands):
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Related Party Transactions (Tables) |
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Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Related Party Transactions | The following table presents the revenue and expenses with Whitestone included in our consolidated statement of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
Receivables due from and payables due to related parties consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
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Debt - Maturity Schedule (Details) - Notes Payable - USD ($) $ in Thousands |
Sep. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Debt Instrument [Line Items] | ||
2019 | $ 5,999 | |
2020 | 25,272 | |
2021 | 308 | |
2022 | 323 | |
2023 | 14,569 | |
Total | $ 46,471 | $ 47,329 |
Variable Interest Entity (Schedules) (Details) - USD ($) $ in Thousands |
Sep. 30, 2019 |
Dec. 31, 2018 |
|||||
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Schedule of Equity Method Investments [Line Items] | |||||||
Property | $ 79,351 | $ 77,944 | |||||
Accumulated depreciation | (7,325) | (5,281) | |||||
Total real estate assets | 72,026 | 72,663 | |||||
Cash and cash equivalents | 2,292 | 2,010 | |||||
Escrows and utility deposits | 1,939 | 1,835 | |||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 1,848 | 1,360 | |||||
Receivable due from related party | 73 | 58 | |||||
Unamortized lease commissions and deferred legal cost, net | 1,046 | 1,164 | |||||
Prepaid expenses and other assets | 118 | 60 | [1] | ||||
Total assets | 79,342 | 79,150 | |||||
Notes payable | 46,281 | 47,064 | |||||
Accounts payable and accrued expenses | 2,919 | 2,817 | [2] | ||||
Payable due to related party | 315 | 372 | |||||
Accrued interest payable | 275 | 258 | |||||
Tenants' security deposits | 1,329 | 1,236 | |||||
Total liabilities | 51,317 | 52,088 | |||||
Variable Interest Entity | |||||||
Schedule of Equity Method Investments [Line Items] | |||||||
Property | 79,348 | 77,941 | |||||
Accumulated depreciation | (7,323) | (5,281) | |||||
Total real estate assets | 72,025 | 72,660 | |||||
Cash and cash equivalents | 2,218 | 1,872 | |||||
Escrows and utility deposits | 1,939 | 1,835 | |||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 1,703 | 1,360 | |||||
Receivable due from related party | 73 | 58 | |||||
Unamortized lease commissions and deferred legal cost, net | 1,046 | 1,164 | |||||
Prepaid expenses and other assets | 106 | 51 | |||||
Total assets | 79,110 | 79,000 | |||||
Notes payable | 46,281 | 47,064 | |||||
Accounts payable and accrued expenses | 2,835 | 2,617 | |||||
Payable due to related party | 313 | 373 | |||||
Accrued interest payable | 199 | 197 | |||||
Tenants' security deposits | 1,329 | 1,236 | |||||
Total liabilities | 50,957 | 51,487 | |||||
Accounts receivable related party | $ 500 | $ 300 | |||||
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Leases - Narrative (Details) |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2019
USD ($)
|
Sep. 30, 2019
USD ($)
|
|
Leases [Abstract] | ||
Remaining lease term | 12 months | |
Operating lease cost | $ 3,705 | $ 10,899 |
Operating lease, weighted average discount rate, percent | 4.50% | 4.50% |
Real Estate |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Real Estate [Abstract] | |
Real Estate | REAL ESTATE As of September 30, 2019, Pillarstone OP owned 11 Real Estate Assets in the Dallas and Houston areas comprised of approximately 1.3 million square feet of gross leasable area. Pillarstone OP results of operations. Property revenue attributable to the Real Estate Assets was $3.9 million and $11.5 million for the three and nine months ended September 30, 2019, respectively, and $4.5 million and $13.0 million for the three and nine months ended September 30, 2018, respectively. |
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