UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One) 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the quarterly period ended March 31, 2014

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from _________ to __________

 

Commission file number: 333-178651

 

UNITED REALTY TRUST INCORPORATED

 (Exact name of registrant as specified in its charter)

 

Maryland		45-3770595
(State or other jurisdiction  of incorporation or organization)		(I.R.S. Employer Identification No.)
60 Broad Street, 34th Floor, New York, NY		10004
(Address of principal executive offices)		(Zip Code)

 

(212) 388-6800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒ (Do not check if a smaller reporting company)	Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of April 29, 2014 the registrant had 888,489 shares of common stock, $0.01 par value per share, outstanding.

 

 

TABLE OF CONTENTS

 

			Page
Part I. Financial Information			2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013	2
		Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2014 and March 31, 2013	3
		Consolidated Statement of Equity (Unaudited) for the three months ended March 31, 2014	4
		Consolidated Statements of Cash Flow (Unaudited) for the three months ended March 31, 2014 and March 31, 2013	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	23
Part II. Other Information			23
	Item 1.	Legal Proceedings	23
	Item 1A.	Risk Factors	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 3.	Defaults Upon Senior Securities	24
	Item 4.	Mine Safety Disclosures	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	24

 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

UNITED REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS

 

		March 31, 2014 (Unaudited)				December 31, 2013
ASSETS
Real estate investments:
Land		$	4,870,933			$	4,870,933
Building and improvements			16,426,448				16,426,448
			21,297,381				21,297,381
Less: accumulated depreciation			622,403				462,871
			20,674,978				20,834,510
Mortgage note receivable			1,500,000				1,500,000
Real estate investments, net			22,174,978				22,334,510
Cash and cash equivalents			423,501				520,449
Restricted cash			799,698				609,259
Prepaid expenses			128,560				227,042
Deferred offering costs			1,031,810				—
Deposit on real estate			338,683				100,000
Due from affiliates			8,451				15,759
Tenant and other receivables, net			10,761				280,983
Other assets			61,780				65,343
Acquired lease intangible asset, net of accumulated amortization			2,066,097				2,150,515
Deferred charges, net of accumulated amortization			1,574,530				1,638,487
Total assets		$	28,618,849			$	27,942,347
LIABILITIES AND EQUITY
Liabilities
Mortgage notes payable		$	15,792,957			$	15,855,304
Acquired lease intangibles liability, net of accumulated amortization			787,554				787,554
Tenant security deposits			23,108				21,508
Dividends payable			51,324				43,679
Accounts payable			194,183				283,265
Total Liabilities			16,849,127				16,991,310
Commitments and contingencies			—				—
Equity:
Preferred stock, $.01 par value 50,000,000 shares authorized; 500,000 shares issued and outstanding			50,000				50,000
Common stock, $.01 par value 200,000,000 shares authorized; 790,469 and 673,727 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively			7,904				6,737
Additional paid-in-capital			7,224,705				6,110,988
Accumulated deficit			(3,976,126	)			(3,685,931	)
Total United Realty Trust Incorporated stockholders’ equity			3,306,483				2,481,794
Noncontrolling interests:
Noncontrolling interests in consolidated joint venture			8,435,027				8,435,027
Limited partners’ interest in Operating Partnership			28,212				34,216
Total Noncontrolling interests			8,463,239				8,469,243
Total equity			11,769,722				10,951,037
Total liabilities and equity		$	28,618,849			$	27,942,347

 

The accompanying notes to consolidated financial statements are an integral part of these statements

 

 

UNITED REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended
		March 31,				March 31,
		2014				2013
Revenues
Base rents		$	722,704			$	18,702
Recoveries from tenants			79,934				—
Other			700				—
Total revenue			803,339				18,702
Operating expenses
Property operating			141,778				—
Property taxes			92,548				—
General & administrative expenses			84,683				639,583
Depreciation and amortization			270,589				4,318
Acquisition transaction costs			845				1,333,571
Total operating expenses			590,443				1,977,472
Operating income (loss)			212,896				(1,958,770	)
Non-operating income (expenses)
Interest income			—				—
Interest expense and other finance expenses			(221,760	)			(6,775	)
Net loss			(8,864	)			(1,965,545	)
Noncontrolling interests:
Net income attributable to noncontrolling interest			(143,214	)			(4,233	)
Net loss attributable to United Realty Trust Incorporated		$	(152,078	)		$	(1,969,778	)
Net loss per common share:
Basic and diluted		$	(.21	)		$	(6.74	)
Weighted average number of common shares outstanding
Basic and diluted			727,928				292,189
Distributions per share		$	0.19			$	0.19

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements

 

  

UNITED REALTY TRUST INCORPORATED 

CONSOLIDATED STATEMENT OF EQUITY 

(Unaudited)

 

For the Three Months Ended March 31, 2014

 

																						Retained
																		Additional				earnings
		Preferred Stock								Common Stock								capital				(Accumulated				Noncontrolling
		Shares				Amount				Shares				Amount				paid-in				deficit)				interests				Equity
Balance at December 31, 2013			500,000			$	50,000				673,727			$	6,737			$	6,110,988			$	(3,685,931	)		$	8,469,243			$	10,951,037
Proceeds from the sale of common stock			—				—				98,307				983				1,026,329				—				—				1,027,313
Distributions paid to noncontrolling interests			—				—				—				—				—				—				(143,214	)			(143,214	)
Amortization of restricted stock			—				—				—				—				18,000				—				—				18,000
Shares issued under the stock incentive plan			—				—				13,342				133				125,418				—				—				125,551
Registration expenditures			—				—				—				—				(112,899	)			—				—				(112,899	)
Distributions paid			—				—				—				—				—				(138,117	)			—				(138,117	)
Issuance of shares under distribution reinvestment program			—				—				5,092				51				50,865				—				—				50,916
Net loss			—				—				—				—				—				(152,078	)			143,214				(8,864	)
Reallocation adjustment of limited partners interest																			6,004								(6,004	)			—
Balance at March 31, 2014			500,000			$	50,000				790,469			$	7,904			$	7,224,705			$	(3,976,126	)		$	8,463,239			$	11,769,722

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements

 

  

UNITED REALTY TRUST INCORPORATED 

CONSOLIDATED STATEMENTS OF CASH FLOW 

(unaudited)

 

		For the Three Months Ended
		March 31,				March 31,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(8,864	)		$	(1,965,545	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization			270,589				4,318
Amortization of deferred financing costs			26,576				731
Amortization of above-market rent			14,306				—
Amortization of restricted stock			18,000				—
Change in operating assets and liabilities
Mortgage escrows			(138,623	)			(309,110	)
Prepaid expenses			98,482				—
Security deposits			1,600				—
Tenant and other receivables			270,222				—
Due to/from affiliates			132,859				(242,067	)
Accounts payable			(89,082	)			187,674
Net cash provided by (used in) operating activities			596,065				(2,323,999	)
CASH FLOWS FROM INVESTING ACTIVITIES
Construction escrow			(51,816	)			—
Deposit on real estate			(238,683	)			(14,750,000	)
Net cash flows used in investing activities			(290,499	)			(14,750,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock			1,027,313				2,030,284
Proceeds from mortgage notes payable			—				14,500,000
Deferred financing and other costs			—				(454,657	)
Deferred offering costs			(1,031,810	)			—
Distribution paid to noncontrolling interest			(143,214	)			(4,233	)
Principal repayments on mortgage			(62,347	)			—
Registration expenditures			(112,899	)			(209,634	)
Distributions paid to common stockholders			(79,557	)			(31,771	)
Net cash(used in) provided by financing activities			(402,514	)			15,829,989
Net decrease in cash and cash equivalents			(96,948	)			(1,244,010	)
Cash and cash equivalents at beginning of period			520,449				1,246,264
Cash and cash equivalents at end of period		$	423,501			$	2,254

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements

 

  

UNITED REALTY TRUST INCORPORATED 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

March 31, 2014

 

1.

Organization

 

United Realty Trust Incorporated (the “Company”) was formed on November 8, 2011 as a Maryland corporation and intends to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2013. Substantially all of the Company’s business is conducted through United Realty Capital Operating Partnership, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on November 8, 2011. The Company is the general partner of the Operating Partnership and holds both general and limited partnership interests in the Operating Partnership. As the Company completes the settlement for the purchase orders for shares of the Company’s common stock, par value $0.01 per share (“Common Shares”) in its continuous public offering, it will transfer substantially all of the net proceeds of the offering to the Operating Partnership.

 

At March 31, 2014, the Company owned a 99.98% economic interest in the Operating Partnership. The other limited partners’ interest in the Operating Partnership (.02% at March 31, 2014) is represented by Operating Partnership Units (“OP Units”). The carrying amount of such interest is adjusted at the end of each reporting period to an amount equal to the limited partners’ ownership percentage of the Operating Partnership’s net equity. The 790,469 OP Units and 9,091 OP Units outstanding at March 31, 2014 are economically equivalent to the Company’s Common Stock.

 

The Company was organized to invest in a diversified portfolio of income-producing commercial real estate properties and other real estate-related assets. On November 25, 2011, United Realty Advisor Holdings LLC, a Delaware limited liability Company (the “Sponsor”) purchased 500,000 shares of preferred stock for $50,000.

 

The Company is offering to the public 100,000,000 Common Shares in its primary offering and 20,000,000 Common Shares pursuant to its distribution reinvestment program (“DRIP”). The Company may reallocate the Common Shares offered between the primary offering and the DRIP. The Company expects to sell the Common Shares offered in the primary offering until August 15, 2015.

 

The Company intends to invest primarily in interests in real estate located in the United States, with a primary focus on the eastern United States and in markets that the Company believes are likely to benefit from favorable demographic changes, or that the Company believes are poised for strong economic growth. The Company may invest in interests in a wide variety of commercial property types, including office, industrial, retail and hospitality properties, single-tenant properties, multifamily properties, age-restricted residences, and in other real estate-related assets. The Company may acquire assets directly or through joint ventures, by making an equity investment in a project or by making a mezzanine or bridge loan with a right to acquire equity in the project. The Company also may buy debt secured by an asset with a view toward acquiring the asset through foreclosure. The Company also may originate or invest in mortgages, bridge or mezzanine loans and tenant-in-common interests, or entities that make investments similar to the foregoing. Further, the Company may invest in real estate-related securities, including securities issued by other real estate companies.

 

The Company’s advisor is United Realty Advisors LP (the “Advisor”), a Delaware limited partnership formed on July 1, 2011. The Advisor conducts the Company’s operations and manages the portfolio of real estate investments. As of March 31, 2014, the Company owned a 69.2 % interest in a joint venture that owns a residential property located at 2520 Tilden Avenue in Brooklyn, New York (“Tilden House”) and owned a 14.6% interest in a joint venture that owns a residential property known as 14 Highland Ave. (“14 Highland”), located in Yonkers, New York. In addition, as of March 31, 2014, the Company owned a 76.7% interest in a joint venture that owns a mortgage note secured by a property located at 58th and 70 Parker Avenue, in Poughkeepsie, NY.

 

2. Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements are prepared on an accrual basis in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Results of operations for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013.

 

 

The consolidated financial statements include the accounts of the Company and those of its subsidiaries, which are wholly owned or controlled by the Company. Entities which the Company does not control through its voting interest and entities which are variable interest entities (“VIEs”), but where it is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

 

The Company follows the Financial Accounting Standards Board (“FASB”) guidance for determining whether an entity is a VIE and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Included in real estate investments on the Company's consolidated balance sheets as of March 31, 2014 and December 31, 2013 is approximately $2.0 million related to the Company's consolidated VIE's. Included in Mortgage notes payable on the Company's consolidated balance sheet as of March 31, 2014 and December 31, 2013 is approximately $1.5 million related to the Company's consolidated VIE's.

 

A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the consolidated balance sheet. This guidance modifies the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.

 

The Company assesses the accounting treatment for each joint venture. This assessment includes a review of each joint venture or limited liability company agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, the Company reviews such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance. In situations where the Company or its partner approves, among other things, the annual budget, receives a detailed monthly reporting package from the Company, meets on a quarterly basis to review the results of the joint venture, reviews and approves the joint venture’s tax return before filing, and approves all leases that cover more than a nominal amount of space relative to the total rentable space at each property, the Company does not consolidate the joint venture as it considers these to be substantive participation rights that result in shared power of the activities that most significantly impact the performance of the joint venture. At March 31, 2014, the Company deemed its investment in 14 Highland to be a VIE since it has an economic interest greater than its voting proportion, and the Company participates in the management activities that significantly impact the performance of the joint venture.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods covered by the financial statements. Actual results could differ from these estimates.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued guidance which amends the requirements for reporting discontinued operations. Under the amended guidance, a disposal of an individual property or group of properties (i.e., when a property or properties are sold or meet the criteria to be classified as “held for sale”) is required to be reported in “discontinued operations” only if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results. The amended guidance also requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014. The adoption of the guidance is not expected to have a material impact on the Company's financial condition or results of operations.

 

Fair Value Measurements

 

The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

 

 

Financial Instruments Not Measured at Fair Value

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, prepaid expenses, deferred offering costs, deposit on real estate, tenant and other receivables, due from affiliates, other assets, accounts payable, dividends payable, and tenant security deposits approximate their fair values based on their short-term maturity. The Company has determined that the carrying value of mortgage notes payable approximates their fair value based on prevailing market rates for loans of similar risk and maturities.

 

Real Estate Investments

 

All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred. The Company expenses transaction costs associated with business combinations in the period incurred.

 

Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and improvements), and acquired intangible assets and liabilities (consisting of above-market and below-market leases and acquired in-place leases). Acquired lease intangible assets include above-market leases and acquired in-place leases in the accompanying consolidated balance sheet. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the relative fair values of these assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs. Leasing commissions, legal and other related costs (“lease origination costs”) are classified as deferred charges in the accompanying consolidated balance sheets.

 

The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The value of the above-market and below-market leases associated with the original lease term is amortized to rental income and recorded as either an increase (in the case of below market leases) or decrease (in the case of above market leases), over the terms of the respective leases and option periods. The values of in-place leases are amortized to expense over the remaining non-cancellable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time. The Company may record a bargain purchase gain if it determines that the purchase price for the acquired assets was less than the fair value. The Company will record a liability in situations where any part of the cash consideration is deferred. The amounts payable in the future are discounted to their present value. The liability is subsequently re-measured to fair value with changes in fair value recognized in the consolidated statements of operations. If, up to one year from the acquisition date, information regarding fair value of assets acquired and liabilities assumed is received and estimates are refined, appropriate property adjustments are made to the purchase price allocation on a retrospective basis.

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value. Management does not believe that the value of any of the Company’s real estate investments was impaired at March 31, 2014.

 

Restricted Cash

 

The terms of the Company’s mortgage notes payable require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations.

 

Segment Reporting

 

The Company operates in one industry segment, ownership of real estate properties. The Company does not distinguish in property operations for purposes of measuring performance. The Company reassesses its conclusion that it has one reportable operating segment at least annually.

 

 

Revenue Recognition

 

The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and will include amounts expected to be received in later years in deferred rents. The Company will record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred. The Company will make certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. The Company does not expect the actual results to differ from the estimated reimbursement.

 

The Company makes estimates of the collectability of its tenant receivables related to base rents, expense reimbursements and other revenue or income. The Company will specifically analyze accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. These estimates have a direct impact on its net income because a higher bad debt reserve results in less net income. The provision for doubtful accounts at March 31, 2014 and December 31, 2013 was approximately $608,000.

 

Interest income from loans receivable are recognized based on the contractual terms of the debt instrument utilizing the effective interest method. Under the effective interest method, interest income is recognized at a constant yield based on the increasing or decreasing carrying value of the loans. The total interest income for each period is the carrying value of the loans at the start of the period multiplied by the effective interest rate.

 

Depreciation and Amortization

 

The Company uses the straight-line method for depreciation and amortization. Buildings and building improvements are depreciated over the estimated useful lives which the Company estimates to be 27 to 30 years. Land improvements are depreciated over the estimated useful life of 15 years. Tenant improvements are amortized over the shorter of the life of the related leases or their useful life. Furniture and fixtures are depreciated over the estimated useful lives that range from 5 to 7 years.

 

Deferred Charges

 

Deferred charges consist principally of leasing commissions and acquired lease origination costs (which are amortized ratably over the life of the tenant leases) and financing fees (which are amortized over the term of the related debt obligation and included in interest expense). As of March 31, 2014 and December 31, 2013 deferred charges consisted of the following:

 

		March 31, 2014				December 31, 2013
Leasing commissions-acquired leases		$	1,289,812			$	1,289,812
Legal-acquired lease			6,016				6,016
Deferred financing costs			529,920				529,920
Total		$	1,825,748			$	1,825,748
Less accumulated amortization(1)			251,218				187,261
Deferred charges, net of accumulated amortization		$	1,574,530			$	1,638,487

 

(1)

Includes amortization of deferred financing costs of $26,576 which is included in interest expense and other finance expense in the accompanying Statements of Operations.

 

Organization and Offering Expenses

 

Organization and offering expenses include all costs and expenses to be paid by the Company in connection with the formation of the Company and an offering, including the Company’s legal, accounting, printing, mailing and filing fees, charges of the escrow agent, reimbursements to the dealer manager and participating broker-dealers for due diligence expenses set forth in detailed and itemized invoices, amounts to reimburse the Advisor for its portion of the salaries of the employees of its affiliates who provide services to the Advisor, and other costs in connection with administrative oversight of such offering and the marketing process, such as preparing supplemental sales materials, holding educational conferences and attending retail seminars conducted by the dealer manager or participating broker-dealers.

 

 

The Advisor will advance the Company’s organization and offering expenses to the extent the Company does not have the funds to pay such expenses. The Company will reimburse the Advisor for organization and offering expenses up to 2% of the total offering price paid by investors (including proceeds from sale of Common Shares, plus applicable selling commissions and dealer manager fees paid by purchasers of Common Shares). On December 28, 2012, the Company broke escrow, at which time organization and offering expenses advanced by the Advisor became a liability to the Company, subject to the 2% limitation noted above. Between November 25, 2011 and March 31, 2014, the Company paid $1,280,154 of offering costs of which $248,344 was recorded to additional paid-in capital and $1,031,810 was recorded to deferred offering costs in the accompanying consolidated balance sheet. The Company will reclass amounts from deferred offering costs to additional paid in capital based on 2% of the total offering price paid to investors. Amounts paid by the Company in excess of the 2% limitation at the end of the offering will be reimbursed by the Advisor. As of March 31, 2014, the Advisor had incurred an additional $9.8 million of offering and organization expenses, of which $149,028 was billed and paid to the Advisor at March 31, 2014.

 

Offering costs incurred by the Company, the Advisor and their affiliates on behalf of the Company have been deferred and will be paid from the proceeds of the continuous public offering and will be treated as a reduction of equity.

 

Stock-Based Compensation

 

The Company has adopted a Stock Incentive Plan (the “Plan”) for its independent directors, officers and employees, employees of the Advisor and other affiliates and consultants. Compensation cost for stock options is recognized ratably over the vesting period of the award. Our policy is to grant options with exercise price equal to the offering price of our common stock on the grant date. Awards of stock or restricted stock are expensed as compensation over the benefit period based on the fair value of the stock on the grant date.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents in excess of insured amounts with high quality financial institutions.

 

Basic and Diluted Earnings (Loss) per Common Share

 

Basic earnings (loss) per Common Share is calculated by dividing net income (loss) by the weighted average number of Common Shares outstanding during each period. Diluted earnings (loss) per Common Share includes the effects of potentially issuable Common Shares, but only if dilutive. There are no dilutive Common Shares as of March 31, 2014 and 2013.

 

Cash Flows

 

Supplemental Consolidated Statement of Cash Flow Information:

 

		March 31, 2014				March 31, 2013
Supplemental disclosure of cash activities:
Interest expense		$	195,419			$	—

 

3. Mortgage Notes Payable

 

On March 29, 2013, the Tilden House JV obtained a first mortgage loan (the “Doral Loan”) from Doral Bank in an amount equal to $14.5 million to provide the acquisition funding for Tilden House. The Doral Loan has an initial five-year term ending on April 30, 2018 and provides the JV with the option to extend the maturity date to April 30, 2023. The Doral Loan bears interest at a per annum fixed rate of 5.0% and is secured by a mortgage on Tilden House. During the extended term, the interest rate will be reset based on a rate of 250 basis points spread over the 5 year Federal Home Loan Bank on New York Advanced Rate, with a minimum floor rate to be not less than the initial interest rate.

 

On August 2, 2013, the 14 Highland JV obtained a first mortgage loan (the “Carver Loan”) from Carver Bank in an amount equal to $1.5 million to provide the acquisition funding for 14 Highland. The Carver Loan has an initial five-year term ending on September 5, 2018 and provides the 14 Highland JV with the option to extend the maturity date to September 5, 2023. The Carver Loan bears interest at a per annum fixed rate of 4.25% and is secured by a mortgage on 14 Highland. During the extended term, the interest rate will be a fixed rate equal to the greater of: (i) 4.50% per annum; or (ii) the Wall Street Journal's Prime Rate in effect within three (3) business days prior to September 5, 2018, plus 2.00% per annum.

 

 

The principal maturity of mortgage notes payable during the next five years and thereafter is as follows:

 

			Principal				Scheduled
			Repayments				Amortization				Total
2014			$	—			$	191,688			$	191,688
2015				—				267,147				267,147
2016				—				280,447				280,447
2017				—				294,774				294,774
2018				14,670,350				88,551				14,758,901
			$	14,670,350			$	1,122,607			$	15,792,957

 

 

4. Capitalization

 

Under the Company’s charter, the Company has the authority to issue 200,000,000 Common Shares and 50,000,000 shares of preferred stock. All shares of such stock have a par value of $0.01 per share. On November 17, 2011, the Sponsor purchased 18,182 Common Shares for total cash consideration of $200,000 to provide the Company’s initial capitalization. On November 25, 2011, for $50,000, the Sponsor purchased 500,000 shares of preferred stock, subsequently exchanged for 500,000 sponsor preferred shares (“Sponsor Preferred Shares”), which are convertible into Common Shares upon the terms and subject to the conditions set forth in the Company’s charter, and which have a preference upon the Company’s liquidation, dissolution or winding up as described below. Upon the Company’s liquidation, dissolution or winding up, the Sponsor will receive a preference in the amount of 15% of any excess of the net sales proceeds from the sale of all the assets in connection with such liquidation, dissolution or winding up over the amount of Invested Capital, as defined in the Company’s charter, plus a cumulative non-compounded pre-tax annual return to holders of Common Shares of 7% on Invested Capital. The Company’s board of directors is authorized to amend its charter from time to time, without the approval of the stockholders, to increase or decrease the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.

 

5. Stock Incentive Plan

 

The Plan, as outlined in the prospectus, provides for the grant of equity incentive awards to the Company’s independent directors, officers and employees, employees of the Advisor and other affiliates and consultants. The aggregate number of Common Shares that may be issued or used for reference purposes or with respect to which awards may be granted under the Plan shall not exceed the lesser of five percent (5%) of Common Shares outstanding on a fully diluted basis at any time and 5,000,000 Common Shares, which may be either authorized and unissued Common Shares or Common Shares held in or acquired for the treasury of the Company or both. The vesting period of stock-based awards will be determined by the Company’s compensation committee. During the three months ended March 31, 2014 the Company granted 13,342 Common Shares under the Plan all of which were fully vested as of March 31, 2014. The 13,342 shares were granted to employees of an affiliate of the Company and to an independent consultant for services provided to the Company. These shares were recorded as a reduction to a receivable from an affiliated entity. No shares were granted during the three months ended March 31, 2013. During the three months ended March 31, 2014 and 2013, the Company expensed $18,000 and $0 respectively. As of March 31, 2014, there remained a total of $18,000 of unrecognized restricted stock compensation related to outstanding non-vested restricted stock grants awarded in 2013.

 

6. Related Party Arrangements

 

The Company has executed an advisory agreement with the Advisor and a property management agreement with URA Property Management LLC (the “Property Manager”), an affiliate of the Sponsor. Effective September 20, 2013 the Company executed a dealer manager agreement with Cabot Lodge Securities, LLC (the “Dealer Manager”), a Delaware limited liability company and member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) that does business as United Realty Securities and that is indirectly owned by the Sponsor. Prior to September 20, 2013 the Company had a dealer manager agreement with an unaffiliated party which had a soliciting dealer agreement with Cabot Lodge Securities. These agreements entitle the Advisor, the Dealer Manager, and the Property Manager to specified fees upon the provision of certain services with regard to the offering and the investment of funds in real estate properties and real estate-related investments, among other services, as well as reimbursement of organization and offering expenses incurred by the Advisor and the Dealer Manager on behalf of the Company (as discussed in Note 2) and certain costs incurred by the Advisor in providing services to the Company. The Company has engaged and may engage from time to time, United Realty Partners LLC (“URP”), an entity controlled and indirectly owned by the Company’s chief executive officer and secretary, to provide brokerage services, services in connection with the origination or refinancing of debt, or advice in connection with joint venture opportunities and equity financing opportunities for the Company’s properties.

 

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2014 and 2013 and any related amounts payable as of March 31, 2014 and December 31, 2013.

 

		Incurred Three Months Ended								Payable as of
		March 31,				March 31,				March 31,				December 31,
		2014				2013				2014				2013
Expensed
Reimbursable general and administrative expenses		$	—			$	814,583			$	—			$	—
Reimbursable property operating expenses and acquisition fee			—				—				—				—
Supplemental transaction-based advisory fees			—				229,175				—				—
Acquisition fees			—				229,175				—				—
Property Management fees			33,498				—				—				—
Oversight Fees			716				—				—				—
Asset Management fees			47,625				—				—				—
Additional Paid-in Capital
Reimbursable other offering costs			—				19,575				—				—
Capitalized
Financing coordination fee			—				145,000				—				—

 

 

7. Distributions

 

The Operating Partnership’s limited partnership agreement generally provides that the Operating Partnership will distribute cash available for distribution to the partners of the Operating Partnership in proportion to each such partner’s holding of GP Units and/or OP Units, as such terms are defined in the Operating Partnership’s limited partnership agreement at the times and in the amounts as determined by the Company, as the general partner.

 

8. Economic Dependency

 

The Company will be dependent on the Advisor or its affiliates for certain services that are essential to the Company, including the sale of the Common Shares, asset acquisition, management and disposition decisions and other general and administrative responsibilities. If the Advisor and its affiliates are unable to provide such services, the Company would be required to find alternative service providers.

 

9. Subsequent Events

 

In determining subsequent events, the Company reviewed all activity from April 1, 2014 to the date the financial statements are issued and discloses the following items:

 

On April 24, 2014, the Company received a favorable ruling from the Internal Revenue Service (“IRS’) relating to its request for relief to not be treated as having made its REIT election with the filing of its tax return for the tax year ending December 31, 2011.

 

On April 28, 2014, the Company through its Operating Partnership, became contractually bound, subject to certain conditions customary to closing, to close on a purchase and sale agreement (the “PSA”) entered into on November 22, 2013, pursuant to which the Company will acquire the fee simple interest in a commercial property located at 945 82^nd Parkway in Myrtle Beach, South Carolina (the “Property”). The seller of the property is 82ND-17, LLC. The seller does not have a material relationship with the Company and the acquisition is not an affiliated transaction.  The Company deposited a total of $285,000 into an interest-bearing account with a title company in accordance with the PSA. The deposit was funded with cash.

 

On April 28, 2014, Mr. LoParrino announced that effective May 1, 2014, he will resign from his positions with the Company and the Company’s advisor in order to pursue other opportunities. Mr. LoParrino has confirmed to the board of directors that his resignation is not due to a disagreement with us or the advisor on any matter relating to the operations, policies or practices of us or our advisor. Mr. LoParrino will assist in the transition of responsibilities to his successor. The Company and the Company’s advisor have initiated a search for a new Chief Accounting Officer or Chief Financial Officer for the Company and the Company’s advisor.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in key components of our financial statements from period to period. MD&A also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our MD&A should be read in conjunction with our accompanying financial statements and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to United Realty Trust Incorporated, a Maryland corporation, and, as required by context, United Realty Capital Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”).

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events of our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

 

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

•

the fact that we have limited operating history and, as of March 31, 2014, our assets totaled approximately $28.6 million;

 

•

the fact that we may not qualify as a REIT exactly in the year of our choosing;

 

•

our ability to raise capital in our continuous initial public offering (“IPO”);

 

•

our ability to deploy effectively the proceeds we raise in our offering of shares of common stock, par value $0.01 per share (“Common Shares”);

 

•

changes in economic conditions generally and the real estate market specifically;

 

•

legislative or regulatory changes (including changes to the laws governing the taxation of real estate investment trusts (“REITs”));

 

•

the availability of credit;

 

•

interest rates; and

 

•

changes to generally accepted accounting principles in the United States (“GAAP”).

 

 

Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed on any forward-looking statements included herein. All forward-looking statements are made as of the date this Quarterly Report is filed with the Securities and Exchange Commission (the “SEC”), and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made herein, whether as a result of new information, future events, changed circumstances or any other reason.

 

All forward-looking statements included herein should be read in light of the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated in this Quarterly Report.

 

Overview

 

We were formed in November 2011 for the purpose of investing primarily in a diversified portfolio of income-producing real estate properties and other real estate-related assets. We intend to elect and qualify as a REIT beginning with the taxable year ended December 31, 2013. We conduct substantially all of our investment activities and own all of our assets through the OP, of which we are the sole general partner and a limited partner. United Realty Advisors LP, a Delaware limited partnership (our “Advisor”) manages our day-to-day operations and our portfolio of properties and real estate-related assets.

 

On August 15, 2012, our Registration Statement was declared effective by the SEC. The Registration Statement covers our initial public offering of up to 120,000,000 Common Shares, consisting of up to 100,000,000 Common Shares in our primary offering on a “best efforts” basis and up to 20,000,000 Common Shares pursuant to our distribution reinvestment program (our “DRIP”).

 

On December 28, 2012, we received and accepted aggregate subscriptions in excess of the minimum of 200,000 Common Shares, broke escrow and issued Common Shares to our initial investors, who were admitted as stockholders. As of March 31, 2014 we had sold 790,469 Common Shares for gross offering proceeds of approximately $6.7 million and net offering proceeds of $6.1 million.

 

As of March 31, 2014, we owned a 69.2 % interest in a joint venture that owns a residential property located at 2520 Tilden Avenue in Brooklyn, New York (“Tilden House”) and we owned a 14.6% interest in a joint venture that owns a residential property known as 14 Highland Ave. (“14 Highland”), located in Yonkers, New York. In addition, as of March 31, 2014, we owned a 76.7% interest in a joint venture that owns a mortgage note secured by a property located at 58th and 70 Parker Avenue, in Poughkeepsie, NY.

 

Funds From Operations and Modified Funds From Operations

 

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has promulgated a measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.

 

We define FFO, a non-GAAP measure, consistently with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

 

 

The historical accounting convention used for real estate assets requires depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book, value exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. If the carrying, or book, value exceeds the total estimated undiscounted future cash flows, an impairment charge is recognized to reduce the carrying value to fair value. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

 

Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations (“MFFO”), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities also may experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. As disclosed elsewhere in this Quarterly Report on Form 10-Q, we will use the proceeds raised in our IPO to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our Common Shares on a national exchange, a merger or sale of the company or another similar transaction) within six to nine years of the completion of our IPO. Thus, we will not continuously purchase assets and will have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association (“IPA”), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our IPO has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our IPO and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our IPO has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

 

 

We define MFFO, a non-GAAP measure, consistently with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, issued by the IPA in November 2010 (the “Practice Guideline”). The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses from the extinguishment or sale of hedges, foreign exchange, derivatives or securities holdings included in net income, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude gains and losses from their extinguishment or sale in calculating MFFO, as such gains and losses are not reflective of ongoing operations.

 

Our MFFO calculation complies with the Practice Guideline. In calculating MFFO, we exclude acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance and calculating MFFO. As disclosed elsewhere in this Quarterly Report on Form 10-Q, the purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. There may be inadequate proceeds from the sale of Common Shares in our IPO to pay or reimburse, as applicable, our Advisor for acquisition fees and expenses, and therefore such fees and expenses may need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

 

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from the proceeds of our IPO and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

 

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a Common Share in the primary offering is a stated value and there is, with respect to the primary offering, no net asset value determination. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

 

 

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

 

The table below provides a reconciliation of net loss applicable to stockholders in accordance with GAAP to FFO and MFFO for the three months ended March 31, 2014. We determined the reporting of FFO and MFFO for the three months ended March 31, 2014 will not be useful since did not own any real estate assets during most of the first quarter of 2013.

 

		For the Three Months Ended March 31, 2014
Net loss for period		$	(152,078	)
Plus: Real property depreciation			148,109
Amortization of tenant improvements and allowances			14,987
Amortization of deferred leasing costs			107,492
FFO		$	118,510
Add: Acquisition transaction costs (1)			845
Add: Amortization of below-market rent (2)			14,306
MFFO		$	133,662
Net cash provided by (used in):
Operating activities		$	596,065
Investing activities		$	(290,499	)
Financing activities		$	(402,514	)

 

(1)	The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. There may be inadequate proceeds from the sale of Common Shares in our IPO to pay or reimburse, as applicable, our Advisor for acquisition fees and expenses, and therefore such fees may need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.
(2)	Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

 

 

Results of Operations

 

As of March 31, 2014, we owned interests in two properties and one real estate-related asset. At March 31, 2013, we owned one property which we acquired on March 29, 2013 resulting in only three days of operating results in 2013.  Accordingly, our results of operations for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 reflect significant increases in most categories relating to property operations.

 

Rental Income

 

Rental income was approximately $803,000 for the three months ended March 31, 2014.  Rental income was driven by our acquisitions during the year ended December 31, 2013 of approximately $24.3 million of properties and real estate-related assets.  We owned an interest in only one property for three days and therefore, had minimal rental income for the three months ended March 31, 2013.

  

Property Operating Expenses and Property Taxes

 

Property operating expenses and property taxes for the three months ended March 31, 2014, were approximately $142,000 and $93,000, respectively.  Property operating expenses primarily consist of asset management fees paid to our advisor, property insurance and utilities.  There were no similar expenses during the three months ended March 31, 2013, since we owned an interest in only one property for three days during this period.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended March 31, 2014 amounted to approximately $85,000 as compared to approximately $640,000 during the three months ended March 31, 2013. The significant decrease in general and administrative expenses was the result of a change in policy effective April 1, 2013 in which salaries of certain advisor employees were no longer allocated to us.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense of approximately $271,000 for the three months ended March 31, 2014, related to the purchase of two properties acquired in 2013 for an aggregate purchase price of $24.3 million.  The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives.  There were only de minimus depreciation and amortization expenses during the three months ended March 31, 2013, since we owned an interest in only one property for three days during this period.

 

Acquisition Transaction Costs

 

Acquisition transaction costs for the three months ended March 31, 2013 amounted to approximately $1.3 million resulting from the acquisition of a property on March 29, 2013. There were only de minimus acquisition transaction costs during the three months ended March 31, 2014.

 

Interest Expense

 

Interest expense of approximately $222,000 for the three months ended March 31, 2014, related to mortgage notes payable used to finance a portion of the purchase price of properties acquired in 2013.  We owned an interest in only one property for three days and therefore, had minimal interest expense for the three months ended March 31, 2013.

 

Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the level of proceeds raised in our offering, the cost of borrowings, and the opportunity to acquire real estate assets which meet our investment objectives.

 

Our Advisor will advance our organization and offering expenses to the extent we do not have the funds to pay such expenses. Organization and offering expenses advanced by our Advisor became liabilities to us when our primary offering broke escrow on December 28, 2012. We will reimburse our Advisor up to 2% of the total offering price paid by investors (which includes proceeds to us from the sale of Common Shares, plus applicable selling commissions and dealer manager fee) for organization and offering expenses. Between November 25, 2011 and March 31, 2014, we paid $1,280,154 of offering costs of which $248,344 was recorded to additional paid-in capital and $1,031,810 was recorded to deferred offering costs in the consolidated balance sheet. We will reclass amounts from deferred offering costs to additional paid in capital based on 2% of the total offering price paid to investors. Amounts that we paid in excess of the 2% limitation at the end of the offering will be reimbursed by the Advisor. As of March 31, 2014, our Advisor had incurred approximately $9.8 million of organization and offering expenses of which $149,028 has been billed to and paid by us.

 

If we qualify as a REIT for U.S. federal income tax purposes, we generally will not be subject to U.S. federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year after the taxable year in which we initially elect to be taxed as a REIT, we will be subject to U.S. federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year in which qualification is denied. Failing to qualify as a REIT could materially and adversely affect our net income.

 

Liquidity and Capital Resources

 

We are dependent upon the net proceeds from our IPO to conduct our proposed operations. We will obtain the capital required to purchase properties and other investments and conduct our operations from the proceeds of our IPO and any future offerings we may conduct, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations.

 

If we are unable to raise substantially more funds in our IPO than the minimum offering amount, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we are able to raise substantial funds in our IPO. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions. We do not expect to establish a permanent reserve from our offering proceeds for maintenance and repairs of real properties, as we expect the majority of leases for the properties we acquire will provide for tenant reimbursement of operating expenses. However, to the extent that we have insufficient funds for such purposes, we may establish reserves from offering proceeds, out of cash flow from operations or net cash proceeds from the sale of properties. In addition, the terms of our mortgage loans payable require us to deposit certain replacement and other reserves with the lender.

 

 

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor and our dealer manager. During our organization and offering stage, these payments will include payments to the dealer manager for selling commissions and dealer manager fee. During this stage, we also will make payments to our Advisor for reimbursement of certain other organization and offering expenses. However, we will not reimburse our Advisor (except in limited circumstances) for other organization and offering expenses to the extent that our total payments for other organization and offering expenses would exceed 2% of the total offering price paid by investors in our IPO. During our acquisition and development stage, we expect to make payments to our Advisor in connection with the selection and origination or purchase of investments and the management of our assets and to reimburse certain costs incurred by our Advisor in providing services to us. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our Advisor and our independent directors.

 

To maintain our qualification as a REIT after attaining it, we generally are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. We expect that our board of directors will authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We expect to continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions or other factors make it imprudent to do so. The timing and amount of distributions will be determined by our board and will be influenced in part by its intention to comply with REIT requirements of the Internal Revenue Code of 1986, as amended (the “Code”). We have not established a minimum distribution level.

 

Net Cash Flows from:

 

Operating Activities

 

Net cash flows provided by operating activities amounted to approximately $596,000 during the three months ended March 31, 2014 mostly due to a positive operating cash flow from real estate investments of approximately $569,000.

 

Investing Activities

 

Net cash flows used by investing activities amounted to approximately $290,000 during the three months ended March 31, 2014, resulting primarily from the deposit on a real estate asset.

 

Financing Activities

 

Net cash flows used by financing activities amounted to approximately $403,000 for the three months ended March 31, 2014. During the three months ended March 31, 2014, we received approximately $1.0 million from the sale of our Common Shares. We incurred approximately $1.0 in deferred offering costs. We incurred approximately $80,000 and $143,000 related to distributions to common stockholders and non-controlling interest, respectively. In addition, we paid approximately $62,000 in principal repayments on our outstanding mortgages.

 

Acquisitions

 

Our Advisor expects to continue to evaluate potential acquisitions of real estate and real estate-related assets and to engage in negotiations with sellers and borrowers on our behalf. Investors should be aware that after a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and negotiation of final binding agreements. During this period, we may decide to temporarily invest any unused proceeds from offerings of Common Shares in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.

 

Distributions

 

On December 28, 2012, our board of directors declared daily distributions on our Common Shares at a daily rate of $0.00210958904 per Common Share. The distributions began to accrue as of daily record dates beginning on January 1, 2013, and are aggregated and paid monthly, on payment dates determined by us, to stockholders who hold Common Shares as of such daily record dates. We expect to continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions or other factors make it imprudent to do so. The timing and amount of distributions will be determined by our board and will be influenced in part by its intention to comply with REIT requirements of the Code.

 

 

We expect to have little, if any, funds from operations available for distribution until we make substantial investments. Further, because we may receive income from interest or rents at various times during our fiscal year and because we may need funds from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our development and from time to time during our operational stage, our board will authorize and we will declare distributions in anticipation of funds that we expect to receive during a later period and we will pay these distributions in advance of our actual receipt of these funds. In these instances, we expect to look to proceeds from our IPO or from the issuance of securities in the future, or to third-party borrowings, to fund our distributions. We also may fund such distributions from advances from our Sponsor or from any waiver of fees by our Advisor.

 

Our board has the authority under our organizational documents, to the extent permitted by Maryland law, to authorize the payment of distributions from any source without limits, including proceeds from our IPO or the proceeds from the issuance of securities in the future, and we expect that, at least in the early stages of our existence, we will use the proceeds of our IPO to pay distributions.

 

To maintain our qualification as a REIT, we generally are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we meet the REIT qualification requirements, we generally will not be subject to U.S. federal income tax on that portion of our taxable income or capital gain which is distributed to our stockholders.

 

We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.

 

The following table shows the sources for the payment of distributions to common stockholders for the periods presented:

 

		Three months ended
		March 31, 2013								June 30, 2013								September 30, 2013
Distributions:						Percentage of Distributions								Percentage of Distributions								Percentage of Distributions
Distributions paid in cash		$	16,832				53.6	%		$	52,100				60.2	%		$	62,096				58.6	%
Distributions reinvested			14,577				46.4	%			34,435				39.8	%			43,811				41.4	%
Total distributions		$	31,409				100.0	%		$	86,535				100.0	%		$	105,907				100.0	%
Source of distribution coverage:
Cash flows provided by operations		$	—				0.0	%		$	—				0.0	%		$	62,096				58.6	%
Common Shares issued under the DRIP			14,577				46.4	%			34,435				39.8	%			43,811				41.4	%
Proceeds from issuance of Common Shares			16,832				53.6	%			52,100				60.2	%			—				0	%
Total sources of distributions		$	31,409				100.0	%		$	86,535				100.0	%		$	105,907				100.0	%
Cash flows (used in) provided by operations (GAAP basis)		$	(2,328,232	)						$	(943,008	)						$	231,416
Net loss attributable to stockholders (in accordance with GAAP)		$	(l,969,778)							$	(133,989	)						$	(185,281	)

 

		Three months ended December 31, 2013								Year Ended December 31, 2013
Distributions:						Percentage of Distributions								Percentage of Distributions
Distributions paid in cash		$	65,744				60.0	%		$	196,749				59.0	%
Distributions reinvested			43,740				40.0	%			136,586				41.0	%
Total distributions		$	109,484				100.0	%		$	333,335				100.0	%
Source of distribution coverage:
Cash flows provided by operations		$	—				0.0	%		$	62,096				18.6	%
Common Shares issued under the DRIP			43,740				40.0	%			136,586				41.4	%
Proceeds from issuance of Common Shares			65,744				60.0	%			134,653				40.0	%
Total sources of distributions		$	109,484				100.0	%		$	333,335				l00.0	%
Cash flows (used in) provided by operations (GAAP basis)		$	(170,523	)						$	(3,210,348	)
Net loss attributable to stockholders (in accordance with GAAP)		$	(402,888	)						$	(2,691,937	)

 

Leverage Policies

 

We may use borrowing proceeds to finance acquisitions of new properties or other real estate-related loans and securities; to originate new loans; to pay for capital improvements, repairs or tenant build-outs to properties; to pay distributions; or to provide working capital. Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. Our investment strategy is to utilize primarily secured and possibly unsecured debt to finance our investment portfolio; however, given the current debt market environment, we may elect to forego the use of debt on some of or all our future real estate acquisitions. We may elect to secure financing subsequent to the acquisition date on future real estate properties and initially acquire investments without debt financing. To the extent that we do not finance our properties and other investments, our ability to acquire additional properties and real estate-related investments will be restricted.

 

We currently have approximately $16.0 million of mortgage notes payable outstanding. Once we have fully invested the proceeds of our IPO, assuming we sell the maximum amount, we expect that our portfolio-wide loan-to-value ratio (calculated after the close of our IPO) will be approximately 65%. For purposes of calculating our 65% target leverage, we will determine the loan-to-value ratio on our portfolio based on the greater of the aggregate cost and the fair market value of our investments and other assets. There is no limitation on the amount we may borrow for the purchase of any single asset. Our charter allows us to incur leverage up to 300% of our total “net assets” (as defined by our charter and the Statement of Policy Regarding Real Estate Investment Trusts, as revised and adopted by the membership of the North American Securities Administrators Association on May 7, 2007) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. We may only exceed this 300% limit with the approval of a majority of our independent directors. During the early stages of our IPO, our independent directors may be more likely to approve debt in excess of this limit. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.

 

 

The form of our indebtedness may be long-term or short-term, secured or unsecured, fixed or floating rate or in the form of a revolving credit facility or repurchase agreements or warehouse lines of credit. Our Advisor will seek to obtain financing on our behalf on the most favorable terms available.

 

Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our debt policy in the future without a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, any investment opportunities, the ability of our properties and other investments to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to book value in connection with any change of our borrowing policies.

 

We will not borrow from our Advisor or its affiliates to purchase properties or make other investments unless a majority of our directors, including a majority of the independent directors not otherwise interested in the transaction, approves the transaction after determining that it is fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties. In order to arrive at such a determination, our directors will examine data regarding comparable loans between unaffiliated parties in consultation with counsel and independent financial advisors, investment bankers or mortgage brokers.

 

In 2013, we obtained a first mortgage loan (the “Doral Loan”) from Doral Bank in an amount equal to $14.5 million to provide the acquisition funding for Tilden House. The Doral Loan has an initial five-year term ending on April 30, 2018 and provides us with the option to extend the maturity date to April 30, 2023. The Doral Loan bears interest at a per annum fixed rate of 5.0%. During the extended term, the interest rate will be reset based on a rate of 250 basis points spread over the 5 year Federal Home Loan Bank on New York Advanced Rate, with a minimum floor rate to be not less than the initial interest rate and is secured by a mortgage on Tilden House.

 

In 2013, we obtained a first mortgage loan (the “Carver Loan”) from Carver Bank in an amount equal to $1.5 million to provide the acquisition funding for 14 Highland. The Carver Loan has an initial five-year term ending on September 5, 2018 and provides us with the option to extend the maturity date to September 5, 2023. The Carver Loan bears interest at a per annum fixed rate of 4.25%. During the extended term, the interest rate will be a fixed rate equal to the greater of: (i) 4.50% per annum; or (ii) the Wall Street Journal's Prime Rate in effect within three (3) business days prior to September 5, 2018, plus 2.00% per annum and is secured by a mortgage on 14 Highland.

 

Other Obligations

 

In an effort to provide our stockholders with a limited amount of liquidity in respect of their investment in Common Shares, we have adopted a share repurchase program whereby on a daily basis, stockholders who have held their Common Shares for at least one year may request that we repurchase all or any portion (but generally at least 25%) of their Common Shares. Prior to the NAV pricing start date, as defined in the Registration Statement, stockholders who have held their Common Shares for at least one year may have their Common Shares repurchased (a) in the case of hardship, as defined below, at the total offering price paid or (b) in the discretion of the Advisor, at a price of 92% of the total offering price paid, but in neither event at a price greater than the offering price per Common Share under the DRIP. Following the NAV pricing start date, the repurchase price per Common Share on any business day will be 95% of our NAV per Common Share for that day, calculated after the close of business on the repurchase request day, without giving effect to any share purchases or repurchases to be effected on such day; provided, however, that while the primary offering is ongoing, in no event will the repurchase price following the NAV pricing start date exceed the then-current offering price under the primary offering. We define ‘‘hardship’’ to mean: (a) the death of a stockholder; (b) the bankruptcy of a stockholder; (c) a mandatory distribution under a stockholder’s IRA; or (d) another involuntary exigent circumstance, as approved by our board. Prior to the NAV pricing start date, we will limit the Common Shares repurchased during any calendar quarter to 1.25% of the weighted average number of Common Shares outstanding during the previous calendar quarter, or approximately 5% of the weighted average number of Common Shares outstanding in any 12-month period. Following the NAV pricing start date, we will limit Common Shares repurchased during any calendar quarter to 5% of NAV as of the last day of the previous calendar quarter or as of the NAV pricing start date if it occurred during the then-current quarter, or approximately 20% of NAV in any 12-month period. Our board of directors has the right to modify, suspend or terminate the share repurchase program for any reason.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of March 31, 2014.

 

 

Contractual Obligations

 

The following table presents the principal and interest amounts of our long-term debt maturing each year, including amortization of principal based on debt outstanding at March 31, 2014:

 

		2014				2015				2016				2017				2018				Total
Contractual obligations:
Mortgage Notes Payables		$	191,688			$	267,147			$	280,447			$	294,774			$	14,758,901			$	15,792,957
Mortgage Interest Expense			581,612				763,919				750,619				736,292				261,815				3,094,257
Total		$	773,299			$	1,031,066			$	1,031,066			$	1,031,066			$	15,020,717			$	18,887,124

 

Inflation

 

We may be adversely impacted by inflation on our residential leases at 14 Highland, which currently do not contain indexed escalation provisions. However, the lease for Tilden House contains base rent escalations based on CPI. We anticipate that in the future, if we enter into triple net leases, the tenant will be obligated pay all property-level operating expenses, which may include maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.

 

Critical Accounting Policies

 

Our accounting policies have been established to conform with GAAP and in conjunction with the rules and regulations of the SEC. We consider these policies critical because they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC. In addition, refer to Note 2 of our consolidated financial statements for a discussion of additional accounting policies.

 

Recent Accounting Pronouncements

 

See Note 2 to the accompanying consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.

 

As of March 31, 2014, our debt consisted of fixed-rate secured mortgage loans payable, with a carrying value of $15.8 million, which approximated the fair value at March 31, 2014. Changes in market interest rates on our fixed-rate debt impact the fair value of the loans, but have no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed-rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their March 31, 2014 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $588,342. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $567,133. These amounts were determined by considering the impact of hypothetical interest rates changes on our borrowing costs, and assuming no other changes in our capital structure.

 

As the information presented above includes only those exposures that existed as of March 31, 2014, it does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.

 

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our disclosure controls and procedures include our controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.

 

Our chief executive officer and chief accounting officer, together with other members of our management, after conducting an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act), concluded that our disclosure controls and procedures were effective as of March 31, 2014 at a reasonable level of assurance, as required by paragraph (b) of Rule 13a-15 and Rule 15d-15 under the Exchange Act.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not a party to any material pending legal proceedings.

 

Item 1A. Risk Factors.

 

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013, except for the items described below.

 

The risk factor captioned “We may not qualify as a REIT exactly in the year of our choosing” is deleted in its entirety. Additionally, the risk factors substantially similar to the following are restated in their entirety as follows:

 

We will make some of or all our distributions from sources other than our cash flow from operations; this will reduce our funds available for the acquisition of properties, and your overall return may be reduced.

 

Our organizational documents permit us to make distributions from any source, including from the proceeds of our IPO or other offerings, cash advances to us by the Advisor, cash resulting from a waiver of asset management fees, and borrowings, including borrowings secured by our assets. We will make some of or all our distributions from financings or the net proceeds from our IPO; this will reduce the funds available for acquiring properties and other investments, and your overall return may be reduced. Further, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our Common Shares will be reduced. Our organizational documents do not limit the amount of distributions we can fund from sources other than operating cash flow.

 

Our cash flows provided by operations was $596,065 for the three months ended March 31, 2014 covered our distributions paid of $138,117 (inclusive of $54,485 of Common Shares issued under our DRIP) during such period. Our cash flows used in operations of ($3,210,347) for the 12 months ended December 31, 2013 was a shortfall of $3,543,683 to our distributions paid of $333,336 (inclusive of $199,093 of Common Shares issued under our DRIP) during such period. Such shortfall was paid from proceeds from the issuance of Common Shares, including under our DRIP.

 

Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our Common Shares.

 

We intend to elect and qualify to be taxed as a REIT commencing with our taxable year ending December 31, 2013 and intend to operate in a manner that would allow us to continue to qualify as a REIT. Subsequent to making our REIT election, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all the requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.

 

 

If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.

 

The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.

 

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. We intend to elect and qualify to be taxed as a REIT commencing with our taxable year ended December 31, 2013. We also may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the value of our Common Shares.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the period covered by this Quarterly Report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, and we did not repurchase any of our securities.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K listed on the Exhibit Index (following the signatures section of this Quarterly Report) are included herewith.

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	United Realty Trust Incorporated
Date: April 30, 2014	By:	/s/ Jacob Frydman
		Jacob Frydman
		Chief Executive Officer, Secretary and
		Chairman of the Board of Directors
		(Principal Executive Officer)
Date: April 30, 2014	By:	/s/ Joseph LoParrino
		Chief Accounting Officer
		(Principal Financial Officer and
		Principal Accounting Officer)

  

 

EXHIBIT INDEX

 

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit No.		Description
31.1*		Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*		Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		XBRL (eXtensible Business Reporting Language). The following materials from the United Realty Trust Incorporated Quarterly Report on Form 10-Q for the three months ended March 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Equity, (iv) the Consolidated Statements of Cash Flow and (v) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934

 

* Filed herewith

 

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