Attached files
| file | filename |
|---|---|
| EX-21 - EXHIBIT 21 - Strategic Realty Trust, Inc. | v434308_ex21.htm |
| EX-32.1 - EXHIBIT 32.1 - Strategic Realty Trust, Inc. | v434308_ex32-1.htm |
| EX-32.2 - EXHIBIT 32.2 - Strategic Realty Trust, Inc. | v434308_ex32-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Strategic Realty Trust, Inc. | v434308_ex31-1.htm |
| EX-31.2 - EXHIBIT 31.2 - Strategic Realty Trust, Inc. | v434308_ex31-2.htm |
| EX-10.13 - EXHIBIT 10.13 - Strategic Realty Trust, Inc. | v434308_ex10-13.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-54376
STRATEGIC REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
| Maryland | 90-0413866 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
400 South El Camino Real, Suite 1100 San Mateo, California, 94402 |
94402 |
| (Address of principal executive offices) | (Zip Code) |
(650) 343-9300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
There is no established trading market for the registrant’s common stock. On July 15, 2014, the board of directors of the registrant approved an estimate value per share of the registrant’s common stock of $7.11 per share based on the estimated value of the registrant’s assets less the estimated value of the registrant’s liabilities, or net asset value, divided by the number of shares and operating partnership units outstanding, as of March 31, 2014. For a full description of the methodologies used to value the registrant’s assets and liabilities in connection with the calculation of the estimated value per share as of March 31, 2014, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Market Information” of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2014. On August 25, 2015, the registrant disclosed an estimated value per share of the registrant’s common stock of $6.57 per share as of August 7, 2015. On August 7, 2015, the board of directors of the registrant approved an estimated value per share of the registrant’s common stock of (i) before giving effect to the declaration of a special distribution and the payment of related penalty interest to the Internal Revenue Service, $6.81 per share based on the estimated value of the registrant’s assets less the estimated value of the registrant’s liabilities, or net asset value, divided by the number of shares and operating partnership units outstanding, all as of July 1, 2015, and (ii) after giving effect to the declaration of a special distribution and the payment of related penalty interest to the Internal Revenue Service, $6.57 per share as of August 7, 2015. For a full description of the methodologies used to value the registrant’s assets and liabilities in connection with the calculation of the estimated value per share as of August 7, 2015, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Market Information” of this Annual Report on Form 10-K.
There were approximately 10,342,707 shares of common stock held by non-affiliates at June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter.
As of March 24, 2016, there were 11,037,948 outstanding shares of common stock of Strategic Realty Trust, Inc.
STRATEGIC REALTY TRUST, INC.
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Certain statements included in this annual report on Form 10-K (this “Annual 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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
| · | Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor’s compensation arrangements with us and conflicts in allocating time among us and other programs and business activities. |
| · | Our initial public offering has terminated and we are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected. |
| · | We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders. |
| · | Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders. |
| · | Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this Annual Report. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Annual Report, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Annual Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward looking statements included in this Annual Report, and the risks described in Part I, Item 1A, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Annual Report will be achieved.
i
| ITEM 1. | BUSINESS |
Overview
Strategic Realty Trust, Inc., is a Maryland corporation formed on September 18, 2008 to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. We have elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes, commencing with the taxable year ended December 31, 2009. As used herein, the terms “we” “our” “us” and “Company” refer to Strategic Realty Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership.
On November 4, 2008, we filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 shares of our common stock to the public in our primary offering at $10.00 per share and a maximum of 10,526,316 shares of our common stock to our stockholders at $9.50 per share pursuant to our distribution reinvestment plan (“DRIP”) (collectively, the “Offering”). On August 7, 2009, the SEC declared the registration statement effective and we commenced the Offering. On February 7, 2013, we terminated the Offering and ceased offering shares of common stock in the primary offering and under the DRIP.
As of February 2013 when we terminated the Offering, we had accepted subscriptions for, and issued, 10,688,940 shares of common stock in the Offering for gross offering proceeds of $104,700,000, and 391,182 shares of common stock pursuant to the DRIP for gross offering proceeds of $3,620,000. We have also granted 50,000 shares of restricted stock and we issued 273,729 shares of common stock to pay a portion of a special distribution. See Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for details regarding the special distribution.
Due to short-term liquidity issues and defaults under certain of our loan agreements, we suspended our share redemption program, including with respect to redemptions upon death and disability, effective as of January 15, 2013. On April 1, 2015, our board of directors approved the reinstatement of the share redemption program and adopted the Amended and Restated Share Redemption Program (“the Amended and Restated SRP”). Under the Amended and Restated SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the Amended and Restated SRP) of a stockholder are eligible for repurchase by us. For more information regarding our share redemption program, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Share Redemption Program.” Cumulatively, through December 31, 2015, we have redeemed 365,903 shares of common stock sold in the Offering for $2,995,000.
Since our inception, our business has been managed by an external advisor. All management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed in August 2014 and August 2015. The current term of the Advisory Agreement terminates on August 10, 2016. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Beginning in December 2012 and ending upon execution of the Advisory Agreement, Glenborough performed certain services for the Company pursuant to a consulting agreement (“Consulting Agreement”). We entered the Consulting Agreement to assist us with the process of transitioning to a new external advisor, as well as to provide other services.
Our office is located at 400 South El Camino Real, Suite 1100, San Mateo, California 94402, and our main telephone number is (650) 343-9300.
| 1 |
Investment Objectives
Our investment objectives are to:
| · | preserve, protect and return stockholders’ capital contributions; |
| · | pay predictable and sustainable cash distributions to stockholders; and |
| · | realize capital appreciation upon the ultimate sale of the real estate assets. |
Business Strategy
On February 7, 2013, as a result of the termination of the Offering, we ceased offering shares of our common stock in our primary offering and under our DRIP. Additionally, in March 2013, we filed an application with the SEC to withdraw our registration statement on Form S-11 for a contemplated follow-on public offering of our common stock. Prior to the termination of the Offering, we funded our investments in real properties and other real-estate related assets primarily with the proceeds from the Offering and debt financing. Since the termination of the Offering, we intend to fund our future cash needs, including any future investments, with debt financing, cash from operations, proceeds to us from asset sales, cash flows from investments in joint ventures and the proceeds from any offerings of our securities that we may conduct in the future. As a result of the termination of the Offering and the resulting decrease in our capital resources, we expect our investment activity to be reduced until we are able to engage in an offering of our securities or are able to identify other significant sources of financing.
We intend to continue to focus on investments in income-producing retail properties. Specifically, we are focused on acquiring high quality urban retail properties in major west coast markets and building a joint venture platform with institutional investors to invest in value–add retail properties. Our investments may include urban store front retail buildings, free standing single tenant buildings, neighborhood, community, power and lifestyle shopping centers, and multi-tenant shopping centers. We may also invest in real estate loans or real estate-related assets that we believe meet our investment objectives.
Investment Portfolio
As of December 31, 2015, our portfolio included 9 properties, including 1 property classified as held for sale, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 766,000 square feet of single and multi-tenant commercial retail space located in 7 states, which we purchased for an aggregate purchase price of approximately $96,960,000. See Item 2, “Properties” for additional information on our portfolio. In addition to the properties, in 2015 we invested in two joint ventures with an institutional partner. These ventures acquired two portfolios comprising 19 properties and approximately 1,447,000 square feet.
Borrowing Policies
We use, and may continue to use in the future, secured and unsecured debt as a means of providing additional funds for the acquisition of real property, real estate-related loans, and other real estate-related assets. Our use of leverage increases the risk of default on loan payments and the resulting foreclosure on a particular asset. In addition, lenders may have recourse to assets other than those specifically securing the repayment of our indebtedness. As of December 31, 2015, our aggregate outstanding indebtedness, excluding outstanding indebtedness included in liabilities related to assets held for sale, totaled approximately $34,391,000, or 33.8% of the book value of our total assets.
Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of December 31, 2015 and 2014, our borrowings were approximately 65.3% and 268.4%, respectively, of the value of our net assets.
| 2 |
Our Advisor uses its best efforts to obtain financing on the most favorable terms available to us and will seek to refinance assets during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing loan, when an existing loan matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of any such refinancing may include increased cash flow resulting from reduced debt service requirements, an increase in distributions from proceeds of the refinancing and an increase in diversification and assets owned if all or a portion of the refinancing proceeds are reinvested.
Economic Dependency
In August 2013, we transitioned to a new external advisor. We are dependent on our Advisor and its affiliates for certain services that are essential to us, including the disposition of real estate and real estate-related investments and, to the extent we acquire additional assets, the identification, evaluation, negotiation and purchase of these assets, management of the daily operations of our real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that our Advisor is unable to provide such services to us, we will be required to obtain such services from other sources.
Competitive Market Factors
To the extent that we acquire additional real estate investments in the future, we will be subject to significant competition in seeking real estate investments and tenants. We compete with many third-parties engaged in real estate investment activities, including other REITs, other real estate limited partnerships, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies, and other entities. Some of our competitors may have substantially greater financial and other resources than we have and may have substantially more operating experience than us. The marketplace for real estate equity and financing can be volatile. There is no guarantee that in the future we will be able to obtain financing or additional equity on favorable terms, if at all. Lack of available financing or additional equity could result in a further reduction of suitable investment opportunities and create a competitive advantage for other entities that have greater financial resources than we do.
Tax Status
We elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, beginning with the taxable year ended December 31, 2009. We believe we are organized and operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. As a REIT, we generally are not subject to federal income tax on our taxable income that is currently distributed to our stockholders, provided that distributions to our stockholders equal at least 90% of our taxable income, subject to certain adjustments. If we fail to qualify as a REIT in any taxable year without the benefit of certain relief provisions, we will be subject to federal income taxes on our taxable income at regular corporate income tax rates. We may also be subject to certain state or local income taxes, or franchise taxes.
In June 2011, we acquired a debt obligation (the “Distressed Debt”) for $18 million under our prior advisor, TNP Strategic Retail Advisor, LLC. In October 2011, we received the underlying collateral (the “Collateral”) with respect to the Distressed Debt in full settlement of our debt claim (the “Settlement”). At the time of the Settlement, we received an independent valuation of the Collateral’s fair market value (“FMV”) of $27.6 million. The Settlement resulted in taxable income to us in an amount equal to the FMV of the Collateral less our adjusted basis for tax purposes in the Distressed Debt. Such income was not properly reported on our 2011 federal income tax return, and we did not make a sufficient distribution of taxable income for purposes of the REIT qualification rules (the “2011 Underreporting”). We believe that we were able to rectify the 2011 Underreporting and avoid failing to qualify as a REIT by making a special distribution (the “Special Distribution”) to our stockholders in the form of cash and common shares. On November 4, 2015, we paid $450,000 in cash and issued 273,729 common shares with a value of $1,798,000 pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. Although we believe the Special Distribution allowed us to maintain our qualification as a REIT, there can be no complete assurance in this regard.
Amounts paid as deficiency dividends should generally be treated as taxable income to our stockholders for U.S. federal income tax purposes in the year paid. Taxable stockholders who received the Special Distribution will therefore be required to include the full amount of cash and common shares received pursuant to the Special Distribution as ordinary income to the extent of our current and accumulated earnings and profits for federal income tax purposes, as measured at that point in 2011. As a result, such stockholders may be required to pay income taxes with respect to such cash and common shares received pursuant to the Special Distribution in excess of the cash component of the Special Distribution.
| 3 |
We have elected to treat one of our subsidiaries as a taxable REIT subsidiary, which we refer to as a TRS. In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal Revenue Code. A TRS is subject to federal and state income taxes. Our TRS activities have not been material.
Environmental Matters
All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on a real property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such real property as collateral for future borrowings. Environmental laws also may impose restrictions on the manner in which real property may be used or businesses may be operated. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require us to incur material expenditures or may impose material environmental liability. Additionally, tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our real properties, such as the presence of underground storage tanks, or activities of unrelated third-parties may affect our real properties. There are also various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. In connection with the acquisition and ownership of real properties, we may be exposed to such costs in connection with such regulations. The cost of defending against environmental claims, of any damages or fines we must pay, of compliance with environmental regulatory requirements or of remediating any contaminated real property could materially and adversely affect our business, lower the value of our assets or results of operations and, consequently, lower the amounts available for distribution to our stockholders.
We do not believe that compliance with existing environmental laws will have a material adverse effect on our consolidated financial condition or results of operations. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Employees
We have no paid employees. The employees of our Advisor and its affiliates provide management, acquisition, disposition, advisory and certain administrative services for us.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as a result, file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports, proxy and information statements and other information we file electronically with the SEC. Access to these filings is free of charge on the SEC’s website as well as on our website (www.srtreit.com).
| ITEM 1A. | RISK FACTORS |
The following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.
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Risks Related to an Investment in Us
We raised substantially less than half of the maximum amount we sought to raise in the Offering, which terminated on February 7, 2013. As a result, our portfolio is not as diverse as if we had raised the full $1 billion of shares registered under the Offering, which may cause the value of your investment to vary more widely with the performance of specific assets, and our general and administrative expenses may constitute a greater percentage of our revenue, which could increase the risk that you will lose money on your investment.
The Offering terminated on February 7, 2013. The Offering was made on a “best efforts” basis, whereby the brokers participating in the Offering had no firm commitment to purchase any shares. We raised approximately $108.3 million from the sale of shares in the Offering, including approximately $3.6 million from the sale of shares in the DRIP. These proceeds were lower than our former sponsor and former dealer manager expected. As a result, we have not been able to make the number of investments originally intended, resulting in less diversification in terms of the number of investments owned, the geographic regions in which our investments are located, the industries in which our tenants operate and the length of lease terms with our tenants. In addition, we will be limited in the number of investments we are able to make in the future. Finally, adverse developments with respect to a single property, a geographic region, a small number of tenants, a tenant industry or rental rates when we renew or release a property may have a greater adverse impact than they otherwise would.
The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.
On August 7, 2015, our board of directors approved an estimated value per share of our common stock of (i) before giving effect to the declaration of the Special Distribution together with the payment of the penalty interest due to the Internal Revenue Service related thereto (the “Penalty Interest”), $6.81 per share based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares and operating partnership units outstanding, all as of July 1, 2015, and (b) after giving effect to the declaration of the Special Distribution and the payment of the Penalty Interest, $6.57 per share as of August 7, 2015. We provided this estimated value per share to assist broker-dealers that participated in the Offering in meeting their customer account statement reporting obligations under the rules of the Financial Industry Regulatory Authority (“FINRA”).
FINRA rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, our Advisor’s methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to generally accepted accounting principles (“GAAP”). Accordingly, with respect to the estimated value per share, we can give no assurance that:
| · | a stockholder would be able to resell his or her shares at this estimated value; |
| · | a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the company; |
| · | our shares of common stock would trade at the estimated value per share on a national securities exchange; or |
| · | the methodology used to estimate our value per share would or would not be acceptable to FINRA or for compliance with ERISA reporting requirements. |
The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. As such, the estimated value per share does not take into account developments in our portfolio since August 7, 2015 other than the declaration of the Special Distribution. For a description of the methodologies used to value our assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Market Information”.
| 5 |
Our business could be negatively affected as a result of stockholder activities. Proxy contests threatened or commenced against us could be disruptive and costly and the possibility that stockholders may wage proxy contests or gain representation on or control of our board of directors could cause uncertainty about our strategic direction.
Campaigns by stockholders to effect changes at public companies are sometimes led by investors seeking to increase stockholder value through actions such as financial restructuring, corporate governance changes, special dividends, stock repurchases or sales of assets or the entire company. In connection with our 2013 annual meeting of stockholders, we were engaged in a contested election with a stockholder group for seats on the board of directors, which ultimately resulted in a settlement. Prior to the annual meeting proxy contest, the same stockholder group solicited stockholder requests to call a special meeting of stockholders, which effort ended when the group did not collect the requisite number of requests to require us to call a special meeting. Future proxy contests, if any, could be costly and time-consuming, disrupt our operations and divert the attention of management and our employees from executing our strategic plan. Additionally, perceived uncertainties as to our future direction as a result of stockholder activities or changes to the composition of the board of directors may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If such perceived uncertainties result in delay, deferral or reduction in transactions with us or transactions with our competitors instead of us because of any such issues, then our revenue, earnings and operating cash flows could be adversely affected.
Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on our operations.
Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of the Company’s internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to ensure that we can conclude on an ongoing basis that we have an effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and to maintain our qualification as a REIT and are important in helping to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, REIT qualification could be jeopardized, and investors could lose confidence in our reported financial information.
There is no trading market for shares of our common stock, and we are not required to effectuate a liquidity event by a certain date. As a result, it will be difficult for you to sell your shares of common stock and, if you are able to sell your shares, you are likely to sell them at a substantial discount.
There is no current public market for the shares of our common stock and we have no obligation to list our shares on any public securities market or provide any other type of liquidity to our stockholders. It will therefore be difficult for you to sell your shares of common stock promptly, or at all. Even if you are able to sell your shares of common stock, the absence of a public market may cause the price received for any shares of our common stock sold to be less than what you paid or less than your proportionate value of the assets we own. We have adopted the Amended and Restated SRP, but only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the Amended and Restated SRP) of a stockholder are eligible for repurchase under the Amended and Restated SRP and the number of shares to be redeemed under the Amended and Restated SRP is limited to the lesser of (i) a total of $2,000,000 for redemptions sought upon a stockholder’s death and a total of $1,000,000 for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted average of the number of shares of our common stock outstanding during the prior calendar year. Additionally, our charter does not require that we consummate a transaction to provide liquidity to stockholders on any date certain or at all. As a result, you should be prepared to hold your shares for an indefinite length of time.
Because we are dependent upon our Advisor
and its affiliates to conduct our operations, any adverse changes in the financial health of our Advisor or its affiliates or our
relationship with them could hinder our operating performance and the return on our stockholders’ investment.
We are dependent on our Advisor to manage our operations and our portfolio of real estate and real estate-related assets. Our Advisor depends on fees and other compensation that it receives from us in connection with the purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of our Advisor or our relationship with them could hinder our Advisor’s ability to successfully manage our operations and our portfolio of investments. If our Advisor is unable to provide services to us we may spend substantial resources in identifying alternative service providers to provide advisory functions.
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Distributions are not guaranteed, may fluctuate, and may constitute a return of capital or taxable gain from the sale or exchange of property.
From August 2009 to December 2012, our board of directors declared monthly cash distributions. Due to short-term liquidity issues and defaults under certain of our loan agreements, effective January 15, 2013, our board of directors determined to pay future distributions on a quarterly basis (as opposed to monthly). However, our board of directors did not declare or pay a distribution for the first three quarters of 2013. On December 9, 2013, our board of directors re-established a quarterly distribution that has continued through 2015. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Distributions” for additional information regarding distributions.
The actual amount and timing of any future distributions will be determined by our board of directors and typically will depend upon, among other things, the amount of funds available for distribution, which will depend on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.
To the extent that we are unable to consistently fund distributions to our stockholders entirely from our funds from operations, the value of your shares upon a listing of our common stock, the sale of our assets or any other liquidity event will likely be reduced. Further, if the aggregate amount of cash distributed in any given year exceeds the amount of our “REIT taxable income” generated during the year, the excess amount will either be (1) a return of capital or (2) gain from the sale or exchange of property to the extent that a stockholder’s basis in our common stock equals or is reduced to zero as the result of our current or prior year distributions. In addition, to the extent we make distributions to stockholders with sources other than funds from operations, the amount of cash that is distributed from such sources will limit the amount of investments that we can make, which will in turn negatively impact our ability to achieve our investment objectives and limit our ability to make future distributions.
If we internalize our management functions, your interest in us could be diluted and we could incur other significant costs associated with being self-managed.
Our board of directors may decide in the future to internalize our management functions. If we do so, we may elect to negotiate to acquire our Advisor’s assets and personnel. At this time, we cannot anticipate the form or amount of consideration or other terms relating to any such acquisition. Such consideration could take many forms, including cash payments, promissory notes and shares of our common stock. The payment of such consideration could result in dilution of your interests as a stockholder and could reduce the earnings per share and funds from operations per share attributable to your investment.
Additionally, while we would no longer bear the costs of the various fees and expenses we pay to our Advisor under the Advisory Agreement, our direct expenses would include general and administrative costs, including legal, accounting and other expenses related to corporate governance, SEC reporting and compliance. We would also be required to employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances as well as incur the compensation and benefits costs of our officers and other employees and consultants that were being paid by our Advisor or its affiliates. We may issue equity awards to officers, employees and consultants, which awards would decrease net income and funds from operations and may further dilute your investment. We cannot reasonably estimate the amount of fees to our Advisor we would save or the costs we would incur if we became self-managed. If the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to our Advisor, our earnings per share and funds from operations per share would be lower as a result of the internalization than it otherwise would have been, potentially decreasing the amount of funds available to distribute to our stockholders and the value of our shares.
Internalization transactions involving the acquisition of advisors or property managers affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims which would reduce the amount of funds available for us to invest in properties or other investments or to pay distributions.
If we internalize our management functions, we could have difficulty integrating these functions as a stand-alone entity. Currently, our Advisor and its affiliates perform asset management and general and administrative functions, including accounting and financial reporting, for multiple entities. These personnel have substantial know-how and experience which provides us with economies of scale. We may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering potential deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our real properties and other real estate-related assets.
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You are limited in your ability to sell your shares of common stock pursuant to the Amended and Restated SRP. You may not be able to sell any of your shares of our common stock back to us, and if you do sell your shares, you may not receive the price you paid upon subscription.
The Amended and Restated SRP may provide you with an opportunity to have your shares of common stock redeemed by us. However, our share redemption program contains certain restrictions and limitations. Only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the Amended and Restated SRP) of a stockholder are eligible for repurchase under the Amended and Restated SRP. Further, we limit the number of shares to be redeemed under the Amended and Restated SRP to the lesser of (i) a total of $2,000,000 for redemptions sought upon a stockholder’s death and a total of $1,000,000 for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted average of the number of shares of our common stock outstanding during the prior calendar year. In addition, our board of directors reserves the right to reject any redemption request for any reason or to amend or terminate the Amended and Restated SRP at any time. Therefore, you may not have the opportunity to make a redemption request prior to a potential termination of the Amended and Restated SRP and you may not be able to sell any of your shares of common stock back to us pursuant to the Amended and Restated SRP. Moreover, if you do sell your shares of common stock back to us pursuant to the Amended and Restated SRP, you may not receive the price you paid for any shares of our common stock being redeemed.
Provisions of the Maryland General Corporation Law may limit the ability of a third party to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
Our board of directors has elected for us to be subject to certain provisions of the Maryland General Corporation Law (the “MGCL”) relating to corporate governance that may have the effect of delaying, deferring or preventing a transaction or a change of control of us that might involve a premium to the market price of our common stock or otherwise be in our stockholders' best interests. Pursuant to Subtitle 8 of Title 3 of the MGCL, our board of directors has implemented (i) a classified board of directors having staggered three year terms and (ii) a requirement that a vacancy on the board be filled only by the remaining directors. Such provisions may have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if the acquisition would be in our stockholders’ best interests, and may therefore prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
Risks Related To Our Business
Changing laws and regulations have resulted in increased compliance costs for us, which could affect our operating results.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and newly enacted SEC regulations, have created, and may create in the future, additional compliance requirements for companies such as ours. For instance, our Advisor may be required to register as an investment advisor under federal or state regulations which will subject it to additional compliance procedures and reporting obligations as well as potential penalties for noncompliance. As a result of such additional regulation, we intend to invest appropriate resources to comply with evolving standards, and this investment has resulted and will likely continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
We are uncertain of our sources for funding our future capital needs and our cash and cash equivalents on hand is limited. If we cannot obtain debt or equity financing on acceptable terms, our ability to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected.
The net proceeds from the Offering, which was terminated on February 7, 2013, have been used primarily to fund our investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of various fees and expenses such as acquisition fees and management fees and for payment of distributions to our stockholders. Proceeds from the Offering are no longer available as a source of funding for our capital needs and our cash and cash equivalents on hand are currently limited. In addition, in the event that we develop a need for additional capital in the future for investments, the improvement of our real properties or for any other reason, sources of funding may not be available to us. If we cannot establish reserves out of cash flow generated by our investments or out of net sale proceeds in non-liquidating sale transactions, or obtain debt or equity financing on acceptable terms, our ability to acquire real properties and other real estate-related assets, to expand our operations and make distributions to our stockholders will be adversely affected. Furthermore, if our liquidity were to become severely limited it could jeopardize our ability to continue as a going concern or to make the annual distributions required to continue to qualify as a REIT, which would adversely affect the value of our stockholders’ investment in us.
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Risks Relating to Our Organizational Structure
The limit on the percentage of shares of our common stock that any person may own may discourage a takeover or business combination that may benefit our stockholders.
Our charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of the value of our then outstanding capital stock (which includes common stock and any preferred stock we may issue) and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding common stock unless exempted by our board of directors. This restriction may discourage a change of control of us and may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to stockholders or which may cause a change in our management. In addition to deterring potential transactions that may be favorable to our stockholders, these provisions may also decrease your ability to sell your shares of our common stock.
We may issue preferred stock or other classes of common stock, which issuance could adversely affect the holders of our common stock issued pursuant to the Offering.
Our stockholders do not have preemptive rights to any shares issued by us in the future. We may issue, without stockholder approval, preferred stock or other classes of common stock with rights that could dilute the value of your shares of common stock. However, the issuance of preferred stock must also be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. In some instances, the issuance of preferred stock or other classes of common stock would increase the number of stockholders entitled to distributions without simultaneously increasing the size of our asset base.
Our charter authorizes us to issue 449,600,000 shares of capital stock, of which 400,000,000 shares of capital stock are designated as common stock and 50,000,000 shares of capital stock are designated as preferred stock. Our board of directors may amend our charter to increase the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. If we ever create and issue preferred stock with a distribution preference over common stock, payment of any distribution preferences of outstanding preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of preferred stock are normally entitled to receive a preference payment in the event we liquidate, dissolve or wind up before any payment is made to our common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of preferred stock or a separate class or series of common stock may render more difficult or tend to discourage:
| · | a merger, tender offer or proxy contest; |
| · | the assumption of control by a holder of a large block of our securities; and |
| · | the removal of incumbent management. |
Actions of joint venture partners could negatively impact our performance.
We have entered into and may enter into joint ventures with third-parties, including with entities that are affiliated with our Advisor. We may also purchase and develop properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with the sellers of the properties, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with a direct investment in real estate, including, for example:
| · | the possibility that our venture partner or co-tenant in an investment might become bankrupt; |
| · | that the venture partner or co-tenant may at any time have economic or business interests or goals which are, or which become, inconsistent with our business interests or goals; |
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| · | that such venture partner or co-tenant may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; |
| · | the possibility that we may incur liabilities as a result of an action taken by such venture partner; |
| · | that disputes between us and a venture partner may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business; |
| · | the possibility that if we have a right of first refusal or buy/sell right to buy out a co-venturer, co-owner or partner, we may be unable to finance such a buy-out if it becomes exercisable or we may be required to purchase such interest at a time when it would not otherwise be in our best interest to do so; or |
| · | the possibility that we may not be able to sell our interest in the joint venture if we desire to exit the joint venture. |
Under certain joint venture arrangements, one or all of the venture partners may have limited powers to control the venture and an impasse could be reached, which might have a negative influence on the joint venture and decrease potential returns to you. In addition, to the extent that our venture partner or co-tenant is an affiliate of our Advisor, certain conflicts of interest will exist.
Risks Related To Conflicts of Interest
We may compete with other affiliates of our Advisor for opportunities to acquire or sell investments, which may have an adverse impact on our operations.
We may compete with other affiliates of our Advisor for opportunities to acquire or sell real properties and other real estate-related assets. We may also buy or sell real properties and other real estate-related assets at the same time as other affiliates are considering buying or selling similar assets. In this regard, there is a risk that our Advisor will select for us investments that provide lower returns to us than investments purchased by another affiliate. Certain of our Advisor’s affiliates may own or manage real properties in geographical areas in which we may expect to own real properties. As a result of our potential competition with other affiliates of our Advisor, certain investment opportunities that would otherwise be available to us may not in fact be available. This competition may also result in conflicts of interest that are not resolved in our favor.
The time and resources that our Advisor and some of its affiliates, including our officers and directors, devote to us may be diverted, and we may face additional competition due to the fact that affiliates of our Advisor are not prohibited from raising money for, or managing, another entity that makes the same types of investments that we target.
Our Advisor and some of its affiliates, including our officers and directors, are not prohibited from raising money for, or managing, another investment entity that makes the same types of investments as those we target. For example, our Advisor’s management currently manages several privately offered real estate programs sponsored by affiliates of our Advisor. As a result, the time and resources they could devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities. We may also co-invest with any such investment entity. Even though all such co-investments will be subject to approval by our independent directors, they could be on terms not as favorable to us as those we could achieve co-investing with a third-party.
Our Advisor and its affiliates, including certain of our officers and directors, face conflicts of interest caused by compensation arrangements with us and other affiliates, which could result in actions that are not in the best interests of our stockholders.
Our Advisor and its affiliates receive substantial fees from us in return for their services and these fees could influence the advice provided to us. Among other matters, the compensation arrangements could affect their judgment with respect to:
| · | acquisitions of property and other investments and originations of loans, which entitle our Advisor to acquisition or origination fees and management fees; and, in the case of acquisitions of investments from other programs sponsored by Glenborough, may entitle affiliates of our Advisor to disposition or other fees from the seller; |
| · | real property sales, since the asset management fees payable to our Advisor will decrease; |
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| · | incurring or refinancing debt and originating loans, which would increase the acquisition, financing, origination and management fees payable to our Advisor; and |
| · | whether and when we seek to sell the company or its assets or to list our common stock on a national securities exchange, which would entitle the Advisor and/or its affiliates to incentive fees. |
Further, our Advisor may recommend that we invest in a particular asset or pay a higher purchase price for the asset than it would otherwise recommend if it did not receive an acquisition fee. Certain acquisition fees and asset management fees payable to our Advisor and property management fees payable to the property manager are payable irrespective of the quality of the underlying real estate or property management services during the term of the related agreement. These fees may influence our Advisor to recommend transactions with respect to the sale of a property or properties that may not be in our best interest at the time. Investments with higher net operating income growth potential are generally riskier or more speculative. In addition, the premature sale of an asset may add concentration risk to the portfolio or may be at a price lower than if we held on to the asset. Moreover, our Advisor has considerable discretion with respect to the terms and timing of acquisition, disposition, refinancing and leasing transactions. In evaluating investments and other management strategies, the opportunity to earn these fees may lead our Advisor to place undue emphasis on criteria relating to its compensation at the expense of other criteria, such as the preservation of capital, to achieve higher short-term compensation. Considerations relating to our affiliates’ compensation from us and other affiliates of our Advisor could result in decisions that are not in the best interests of our stockholders, which could hurt our ability to pay you distributions or result in a decline in the value of your investment.
We may purchase real property and other real estate-related assets from third-parties who have existing or previous business relationships with affiliates of our Advisor, and, as a result, in any such transaction, we may not have the benefit of arm’s-length negotiations of the type normally conducted between unrelated parties.
We may purchase real property and other real estate-related assets from third-parties that have existing or previous business relationships with affiliates of our Advisor. The officers, directors or employees of our Advisor and its affiliates and the principals of our Advisor who also perform services for other affiliates of our Advisor may have a conflict in representing our interests in these transactions on the one hand and preserving or furthering their respective relationships on the other hand. In any such transaction, we will not have the benefit of arm’s-length negotiations of the type normally conducted between unrelated parties, and the purchase price or fees paid by us may be in excess of amounts that we would otherwise pay to third-parties.
Uninsured losses or premiums for insurance coverage relating to real property may adversely affect your returns.
We attempt to adequately insure all of our real properties against casualty losses. There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Additionally, mortgage lenders sometimes require commercial property owners to purchase specific coverage against terrorism as a condition for providing mortgage loans. These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our real properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. Changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our real properties incurs a casualty loss which is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, we cannot assure you that funding will be available to us for repair or reconstruction of damaged real property in the future.
Risks Associated with Retail Property
Our retail properties are subject to property taxes that may increase in the future, which could adversely affect our cash flow.
Our real properties are subject to real and personal property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. Certain of our leases provide that the property taxes, or increases therein, are charged to the lessees as an expense related to the real properties that they occupy, while other leases provide that we are responsible for such taxes. In any case, as the owner of the properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If real property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes even if otherwise stated under the terms of the lease. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale. In addition, we will generally be responsible for real property taxes related to any vacant space.
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An economic downturn in the United States may have an adverse impact on the retail industry generally. Slow or negative growth in the retail industry may result in defaults by retail tenants which could have an adverse impact on our financial operations.
An economic downturn in the United States may have an adverse impact on the retail industry generally. As a result, the retail industry may face reductions in sales revenues and increased bankruptcies. Adverse economic conditions may result in an increase in distressed or bankrupt retail companies, which in turn could result in an increase in defaults by tenants at our commercial properties. Additionally, slow economic growth may likely to hinder new entrants into the retail market which may make it difficult for us to fully lease our properties. Tenant defaults and decreased demand for retail space would have an adverse impact on the value of our retail properties and our results of operations.
Our properties consist of retail properties. Our performance, therefore, is linked to the market for retail space generally.
As of December 31, 2015, we owned 9 properties, and 1 property held for sale, each of which is a retail center and the majority of which have multiple tenants. The joint ventures in which we are invested also own retail centers. The market for retail space has been and in the future could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to such stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center. Such a reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.
Our retail tenants face competition
from numerous retail channels, which may reduce our profitability and ability to
pay distributions.
Retailers at our current retail properties and at any retail property we may acquire in the future face continued competition from discount or value retailers, factory outlet centers, wholesale clubs, mail order catalogues and operators, television shopping networks and shopping via the Internet. Such competition could adversely affect our tenants and, consequently, our revenues and funds available for distribution.
Retail conditions may adversely affect our base rent and subsequently, our income.
Some of our leases may provide for base rent plus contractual base rent increases. A number of our retail leases may also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue that we may derive from percentage rent leases could decline upon a general economic downturn.
Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space and adversely affect the returns on your investment.
In the retail sector, a tenant occupying all or a large portion of the gross leasable area of a retail center, commonly referred to as an “anchor tenant,” may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events at one of our properties or any retail property we may acquire in the future would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant at one of our properties or any retail property we may acquire in the future could result in lease terminations or reductions in rent by other tenants whose leases may permit cancellation or rent reduction if another tenant’s lease is terminated. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer of a lease to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases. In the event that we are unable to re-lease vacated space at one of our properties or any retail property we may acquire in the future to a new anchor tenant, we may incur additional expenses in order to re-model the space to be able to re-lease the space to more than one tenant. As of December 31, 2015, excluding a property classified as held for sale, Ralph’s Grocery, accounted for 10% of our annual minimum rent.
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Two of our tenants account for a meaningful portion of the gross leasable area of our portfolio and/or our annual minimum rent, and the inability of either of these tenants to make their contractual rent payments to us could expose us to potential losses in rental revenue, expense recoveries, and percentage rent.
A concentration of credit risk may arise in our business when a nationally or regionally-based tenant is responsible for a substantial amount of rent in multiple properties owned by us. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to us, exposing us to potential losses in rental revenue, expense recoveries, and percentage rent. Further, the impact may be magnified if the tenant is renting space in multiple locations. Generally, we do not obtain security from nationally-based or regionally-based tenants in support of their lease obligations to us. As of December 31, 2015, excluding a property classified as held for sale, Ralph’s Grocery, accounted for 10% of our annual minimum rent.
The bankruptcy or insolvency of a major tenant may adversely impact our operations and our ability to pay distributions.
The bankruptcy or insolvency of a significant tenant or a number of smaller tenants at one of our properties or any retail property we may acquire in the future may have an adverse impact on our income and our ability to pay distributions. Generally, under bankruptcy law, a debtor tenant has 120 days to exercise the option of assuming or rejecting the obligations under any unexpired lease for nonresidential real property, which period may be extended once by the bankruptcy court. If the tenant assumes its lease, the tenant must cure all defaults under the lease and may be required to provide adequate assurance of its future performance under the lease. If the tenant rejects the lease, we will have a claim against the tenant’s bankruptcy estate. Although rent owing for the period between filing for bankruptcy and rejection of the lease may be afforded administrative expense priority and paid in full, pre-bankruptcy arrears and amounts owing under the remaining term of the lease will be afforded general unsecured claim status (absent collateral securing the claim). Moreover, amounts owing under the remaining term of the lease will be capped. Other than equity and subordinated claims, general unsecured claims are the last claims paid in a bankruptcy and therefore funds may not be available to pay such claims in full.
The costs of complying with governmental laws and regulations related to environmental protection and human health and safety may be high.
All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such real property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such real property as collateral for future borrowings. Environmental laws also may impose restrictions on the manner in which real property may be used or businesses may be operated. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our real properties, such as the presence of underground storage tanks, or activities of unrelated third-parties may affect our real properties. There are also various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. In connection with the acquisition and ownership of our real properties, we may be exposed to such costs in connection with such regulations. The cost of defending against environmental claims, of any damages or fines we must pay, of compliance with environmental regulatory requirements or of remediating any contaminated real property could materially and adversely affect our business, lower the value of our assets or results of operations and, consequently, lower the amounts available for distribution to you.
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The costs associated with complying with the Americans with Disabilities Act may reduce the amount of cash available for distribution to our stockholders.
Investment in real properties may also be subject to the Americans with Disabilities Act of 1990, as amended, or “ADA”. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. We are committed to complying with the act to the extent to which it applies. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. With respect to the properties we acquire, the ADA’s requirements could require us to remove access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third-party, such as a tenant, to ensure compliance with the ADA. We cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. Any monies we use to comply with the ADA will reduce the amount of cash available for distribution to our stockholders.
Real properties are illiquid investments, and we may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so.
Real properties are illiquid investments. We may be unable to adjust our portfolio in response to changes in economic or other conditions. In addition, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and supply and demand that are beyond our control. We cannot predict whether we will be able to sell any real property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a real property. Also, we may acquire real properties that are subject to contractual “lock-out” provisions that could restrict our ability to dispose of the real property for a period of time. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements.
In acquiring a real property, we may agree to restrictions that prohibit the sale of that real property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that real property. Our real properties may also be subject to resale restrictions. All these provisions would restrict our ability to sell a property, which could reduce the amount of cash available for distribution to our stockholders.
Risks Associated With Debt Financing
Restrictions imposed by our loan agreements may limit our ability to execute our business strategy and could limit our ability to make distributions to our stockholders.
We are a party to loan agreements that contain a variety of restrictive covenants. These covenants include requirements to maintain certain financial ratios and requirements to maintain compliance with applicable laws. A lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. In general, we expect our loan agreements to restrict our ability to encumber or otherwise transfer our interest in the respective property without the prior consent of the lender. Loan documents we enter may contain other customary negative covenants that may limit our ability to further mortgage the property, discontinue insurance coverage, replace our Advisor or impose other limitations. Any such restriction or limitation may have an adverse effect on our operations and our ability to make distributions to you.
We will incur mortgage indebtedness and other borrowings, which may increase our business risks, could hinder our ability to make distributions and could decrease the value of your investment.
We have, and may in the future, obtain lines of credit and long-term financing that may be secured by our real properties and other assets. Under our charter, we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities. Generally speaking, the preceding calculation is expected to approximate 75% of the aggregate cost of our investments before non-cash reserves and depreciation. Our charter allows us to borrow in excess of these amounts if such excess is approved by a majority of the independent directors and is disclosed to stockholders in our next quarterly report, along with justification for such excess. As of December 31, 2015 and 2014, our aggregate borrowings did not exceed 300% of the value of our net assets. Also, we may incur mortgage debt and pledge some or all of our investments as security for that debt to obtain funds to acquire additional investments or for working capital. We may also borrow funds as necessary or advisable to ensure we maintain our REIT tax qualification, including the requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the distribution paid deduction and excluding net capital gains). Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes.
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High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure on any of our properties will be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we will recognize taxable income on foreclosure, but we would not receive any cash proceeds. If any mortgage contains cross collateralization or cross default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected.
Instability in the debt markets may make it more difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make to our stockholders.
If mortgage debt is unavailable on reasonable terms as a result of increased interest rates or other factors, we may not be able to finance the purchase of additional properties. In addition, if we place mortgage debt on properties, we run the risk of being unable to refinance such debt when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance debt, our income could be reduced. We may be unable to refinance debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us, or could result in the foreclosure of such properties. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise more capital by issuing securities or by borrowing more money.
Increases in interest rates could increase the amount of our debt payments and negatively impact our operating results.
Interest we pay on our debt obligations will reduce cash available for distributions. If we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flows and our ability to make distributions to you. If we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times which may not permit realization of the maximum return on such investments.
Derivative financial instruments that we may use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment.
We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging strategy can protect us completely. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income test.
Federal Income Tax Risks
Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.
We made an election to be taxed as a REIT for federal income tax purposes commencing with the taxable year ended December 31, 2009. Our qualification as a REIT depends on our satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex provisions of the Internal Revenue Code, for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within our control. The complexity of these provisions and of the applicable income tax regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that holds its assets through a partnership, as we do. Moreover, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal income tax consequences of that qualification.
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Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Internal Revenue Code. If we fail to qualify as a REIT for any taxable year, we would be subject to 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 in which we lose our REIT status. Losing our REIT status 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 be deductible in computing our taxable income and we would no longer be required to make distributions. To the extent that distributions had been made in anticipation of our qualifying as a REIT, we might be required to borrow funds or liquidate some investments to pay the applicable corporate income tax. In addition, although we intend to operate in a manner intended to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our board of directors to recommend that we revoke our REIT election.
We believe that our operating partnership will be treated for federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation. To minimize the risk that our operating partnership will be considered a “publicly traded partnership” as defined in the Internal Revenue Code, we have placed certain transfer restrictions on the transfer or redemption of the partnership units in our operating partnership. If the Internal Revenue Service were successfully to determine that our operating partnership should properly be treated as a corporation, our operating partnership would be required to pay federal income tax at corporate rates on its net income, its partners would be treated as stockholders of our operating partnership and distributions to partners would constitute distributions that would not be deductible in computing our operating partnership’s taxable income. In addition, we could fail to qualify as a REIT, with the resulting consequences described above.
To qualify as a REIT we must meet annual distribution requirements, which may result in us distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our real estate investment income, determined without regard to the dividends paid deduction and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds or sell assets to fund these distributions. If we fund distributions through borrowings, then we will have to repay debt using money we could have otherwise used to acquire properties resulting in our ownership of fewer real estate assets. If we sell assets or use offering proceeds to pay distributions, we also will have fewer investments. Fewer investments may impact our ability to generate future cash flows from operations and, therefore, reduce your overall return.
We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed taxable income. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid corporate income taxation on the earnings that we distribute, it is possible that we might not always be able to do so.
In June 2011, we acquired a debt obligation, the Distressed Debt, for $18 million under our prior advisor, TNP Strategic Retail Advisor, LLC. In October 2011, we received the underlying Collateral with respect to the Distressed Debt in full Settlement of our debt claim. At the time of the Settlement, we received an independent valuation of the Collateral’s FMV of $27.6 million. The Settlement resulted in taxable income to us in an amount equal to the FMV of the Collateral less our adjusted basis for tax purposes in the Distressed Debt. Such income was not properly reported on our 2011 federal income tax return, and we did not make a sufficient distribution of taxable income for purposes of the REIT qualification rules. We believe that we were able to rectify the 2011 Underreporting and avoid failing to qualify as a REIT by making a Special Distribution in 2015 to our stockholders as described below. The Special Distribution was then included in the Company’s deduction for dividends paid for 2011.
On August 7, 2015, our board of directors authorized a Special Distribution of $2,248,000 on our common stock to holders of record as of the close of business on August 10, 2015 (the “Record Date”). Subject to the limitations described below, the Special Distribution was payable in cash, common shares or a combination of cash and common shares to, and at the election of, the stockholders of record as of the Record Date.
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As of the Record Date, we had approximately 10,891,798 million common shares outstanding. Based on such amount, the Special Distribution was valued at approximately $0.20 per common share. Stockholders had the right to elect to be paid their pro rata portion of the Special Distribution all in cash, all in common shares or a combination of cash and common shares; provided, however, that the total amount of cash payable to all stockholders in the Special Distribution was limited to no more than $449,600, with the balance of the Special Distribution, or $1,798,400, payable in the form of common shares. Stockholders who failed to properly and timely complete an election form received their pro rata portion of the Special Distribution entirely in common shares.
We paid the Special Distribution on November 4, 2015 (the “Payment Date”). The total amount of cash paid to stockholders was $449,600 and the balance of $1,798,400 was paid in the form of 273,729 common shares issued pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. The issuance of the common shares pursuant to the Special Distribution will impact weighted average shares outstanding from the date of issuance and, thus, will impact the earnings per share calculation prospectively from the Payment Date. Although we believe the Special Distribution allowed us to maintain our qualification as a REIT, there can be no complete assurance in this regard.
Amounts paid as deficiency dividends should generally be treated as taxable income to our stockholders for U.S. federal income tax purposes in the year paid. Taxable stockholders who received the Special Distribution will therefore be required to include the full amount of cash and common shares received pursuant to the Special Distribution as ordinary income to the extent of our current and accumulated earnings and profits for federal income tax purposes, as measured at that point in 2011. As a result, such stockholders may be required to pay income taxes with respect to such cash and common shares received pursuant to the Special Distribution in excess of the cash component of the Special Distribution.
Sales of our properties at gains are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.
Our ability to dispose of property during the first few years following acquisition is restricted to a substantial extent as a result of our REIT status. Under applicable provisions of the Internal Revenue Code regarding prohibited transactions by REITs, we may be subject to a 100% tax on any gain realized on the sale or other disposition of any property (other than foreclosure property) we own, directly or through any subsidiary entity, including our operating partnership, but excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary, (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited transaction, or (3) structuring certain dispositions of our properties to comply with certain safe harbors available under the Internal Revenue Code for properties held at least two years. However, no assurance can be given that any particular property will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. In the event the Internal Revenue Service challenges our treatment of any sale or disposition of property as not being a prohibited transaction and prevails, the 100% prohibited transaction tax could be assessed against the gain from such transaction which may be significant.
In certain circumstances, we may be subject to federal and state taxes as a REIT, which would reduce our cash available for distribution to you.
Even if we maintain our status as a REIT, we may be subject to federal and state taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our real estate assets and pay income tax directly on such income. We may also be subject to state and local taxes on our income or property, either directly or at the level of the companies through which we indirectly own our assets. In addition, our taxable REIT subsidiaries will be subject to federal income tax and applicable state and local taxes on their net income. Any federal or state taxes we pay will reduce our cash available for distribution to stockholders or for other purposes.
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Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
| · | part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as unrelated business taxable income if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; |
| · | part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute unrelated business taxable income if the investor incurs debt to acquire the common stock; and |
| · | part or all of the income or gain recognized with respect to our common stock held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Internal Revenue Code may be treated as unrelated business taxable income. |
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Complying with the REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including investments in joint ventures owning qualified real estate assets, shares of stock in other REITs, certain mortgage loans and mortgage backed securities. The remainder of our investment in securities (other than governmental securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. The assets of our joint venture investments are included in our qualifying asset tests. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.
Liquidation of assets may jeopardize our REIT status.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.
Legislative or regulatory action could adversely affect investors.
In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to REITs. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in shares of our common stock. We urge you to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our common stock.
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Non-U.S. investors may be subject to U.S. federal income taxes on the sale of shares of our common stock if we are unable to qualify as a “domestically controlled” REIT.
A non-U.S. person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to U.S. federal income tax on the gain recognized on such disposition. A non-U.S. stockholder generally would not be subject to U.S. federal income tax however, on gain from the disposition of stock in a REIT if the REIT is a “domestically controlled REIT.” A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by non-U.S. holders. We cannot assure you that we will qualify as a domestically controlled REIT. If we were to fail to so qualify, gain realized by a non-U.S. investor on a sale of our common stock would be subject to U.S. federal income tax unless our common stock was traded on an established securities market and the non-U.S. investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of our outstanding common stock.
If we were to pay a “preferential dividend” to certain of our stockholders for our taxable years beginning before 2015, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our annual REIT taxable income (excluding net capital gain), determined without regard to the deduction for dividends paid. In order for distributions to be counted as satisfying the annual distribution requirements for publicly offered REITs for taxable years prior to 2015, and to provide us with a REIT-level tax deduction for such years, the distributions must not have been “preferential dividends”. A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. If the IRS were to take the position that we paid a preferential dividend for our taxable years prior to 2015, we may be deemed to have failed the 90% distribution test, and our status as a REIT could be terminated if we were unable to cure such failure.
Retirement Plan Risks
If you fail to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, you could be subject to criminal and civil penalties.
There are special considerations that apply to employee benefit plans subject to ERISA (such as pension, profit-sharing or 401(k) plans), and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA or Keogh plan) whose assets are being invested in our common stock. If you are investing the assets of such a plan (including assets of an insurance company general account or entity whose assets are considered plan assets under ERISA) or account in our common stock, you should satisfy yourself that:
| · | your investment is consistent with your fiduciary obligations under ERISA and the Internal Revenue Code; |
| · | your investment is made in accordance with the documents and instruments governing your plan or IRA, including your plan or account’s investment policy; |
| · | your investment satisfies the prudence and diversification requirements of Section 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and/or the Internal Revenue Code; |
| · | your investment will not impair the liquidity of the plan or IRA; |
| · | your investment will not produce unrelated business taxable income, referred to as UBTI for the plan or IRA; |
| · | you will be able to value the assets of the plan annually in accordance with ERISA requirements and applicable provisions of the plan or IRA; and |
| · | your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code. |
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to equitable remedies. In addition, if an investment in our common stock constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary that authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested.
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| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
Property Portfolio
As of December 31, 2015, our portfolio included 9 retail properties, including 1 property classified as held for sale, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 766,000 square feet of single- and multi-tenant, commercial retail space located in 7 states. We purchased our properties for an aggregate purchase price of $96,960,000. As of December 31, 2015 and 2014, there was $39,786,000 and $122,148,000 of indebtedness on our properties, respectively, including indebtedness on our held for sale properties. As of December 31, 2015 and 2014, approximately 90% and 88% of our portfolio was leased (based on rentable square footage), respectively, with weighted-average remaining lease terms of approximately 5 and 7 years, respectively.
| Rentable Square | Percent | Effective Rent (3) | Anchor | Date | Original Purchase | |||||||||||||||||||||
| Property Name | Location | Feet (1) | Leased (2) | (Sq. Foot) | Tenant | Acquired | Price (4) | Debt (5) | ||||||||||||||||||
| Real Estate Investments | ||||||||||||||||||||||||||
| Pinehurst Square | Bismarck, ND | 114,102 | 95 | % | $ | 14.35 | TJ Maxx | 5/26/11 | $ | 15,000,000 | $ | - | ||||||||||||||
| Cochran Bypass | Chester, SC | 45,817 | 100 | % | $ | 5.24 | Bi-Lo | 7/14/11 | 2,585,000 | 1,513,000 | ||||||||||||||||
| Topaz Marketplace | Hesperia, CA | 50,699 | 59 | % | $ | 24.49 | n/a | 9/23/11 | 13,500,000 | - | ||||||||||||||||
| Morningside Marketplace | Fontana, CA | 76,923 | 94 | % | $ | 15.32 | Ralphs | 1/9/12 | 18,050,000 | 8,629,000 | ||||||||||||||||
| Woodland West Marketplace | Arlington, TX | 175,078 | 77 | % | $ | 16.03 | Randall's | 2/3/12 | 13,950,000 | 9,690,000 | ||||||||||||||||
| Ensenada Square | Arlington, TX | 62,628 | 100 | % | $ | 7.28 | Kroger | 2/27/12 | 5,025,000 | 2,992,000 | ||||||||||||||||
| Shops at Turkey Creek | Knoxville, TN | 16,324 | 100 | % | $ | 27.20 | n/a | 3/12/12 | 4,300,000 | 2,708,000 | ||||||||||||||||
| Florissant Marketplace | Florissant, MO | 146,257 | 100 | % | $ | 9.76 | Gold's Gym | 5/16/12 | 15,250,000 | 8,859,000 | ||||||||||||||||
| 687,828 | 87,660,000 | 34,391,000 | ||||||||||||||||||||||||
| Property Held for Sale | ||||||||||||||||||||||||||
| Bloomingdale Hills | Riverside, FL | 78,442 | 94 | % | $ | 8.50 | Walmart | 6/18/12 | $ | 9,300,000 | $ | 5,395,000 | ||||||||||||||
| 766,270 | $ | 96,960,000 | $ | 39,786,000 | ||||||||||||||||||||||
| (1) | Square feet includes improvements made on ground leases at the property. |
| (2) | Percentage is based on leased rentable square feet of each property at December 31, 2015. |
| (3) | Effective rent per square foot is calculated by dividing the annualized December 2015 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries. |
| (4) | The purchase price for Pinehurst Square and Shops at Turkey Creek includes the issuance of common units in our operating partnership to the sellers. |
| (5) | Debt represents the outstanding balance as of December 31, 2015. For more information on our financing, see Part II, Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 8. “Notes Payable” to our consolidated financial statements included in this Annual Report. |
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Lease Expirations
The following table reflects the timing of tenant lease expirations at our properties, excluding property held for sale, as of December 31, 2015:
| Number | Percent of Portfolio | |||||||||||||||
| of Leases | Annualized | Annualized Base | Square Feet | |||||||||||||
| Year of Expiration (1) | Expiring | Base Rent (2) | Rent Expiring | Expiring | ||||||||||||
| 2016 | 13 | $ | 716,000 | 10 | % | 47,000 | ||||||||||
| 2017 | 17 | 1,148,000 | 16 | % | 83,000 | |||||||||||
| 2018 | 13 | 948,000 | 13 | % | 78,000 | |||||||||||
| 2019 | 12 | 910,000 | 13 | % | 84,000 | |||||||||||
| 2020 | 12 | 398,000 | 6 | % | 26,000 | |||||||||||
| 2021 | 10 | 1,178,000 | 17 | % | 149,000 | |||||||||||
| 2022 | 4 | 1,140,000 | 16 | % | 103,000 | |||||||||||
| 2023 | 1 | 247,000 | 4 | % | 11,000 | |||||||||||
| 2024 | 3 | 131,000 | 2 | % | 13,000 | |||||||||||
| 2025 | 3 | 211,000 | 3 | % | 12,000 | |||||||||||
| Thereafter | 1 | 97,000 | 1 | % | 10,000 | |||||||||||
| Total | 89 | $ | 7,124,000 | 100 | % | 616,000 | ||||||||||
| (1) | Represents the expiration date of the lease as of December 31, 2015, and does not take into account any tenant renewal options. |
| (2) | Annualized base rent represents annualized contractual base rent as of December 31, 2015. These amounts do not include other items such as tenant concession (e.g., free rent), percentage rent, and expense recoveries. |
Tenant lease expirations in 2016 and 2017 represent 10% and 16%, respectively, of our annualized base rent as of December 31, 2015. Based on our forecasts, the estimated market rents in 2016 and 2017 are expected to be approximately 8.8% and 4.3% lower than the expiring rents in 2016 and 2017, respectively.
Concentration of Credit Risk
A concentration of credit risk arises in our business when a nationally or regionally-based tenant occupies a substantial amount of space in multiple properties owned by us. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to us, exposing us to potential losses in rental revenue, expense recoveries, and percentage rent. Further, the impact may be magnified if the tenant is renting space in multiple locations. Generally, we do not obtain security from nationally-based or regionally-based tenants in support of their lease obligations to us. We regularly monitor our tenant base to assess potential concentrations of our credit risk. As of December 31, 2015, excluding the property classified as held for sale, Ralph’s Grocery accounted for 10% of our annual minimum rent. Ralph’s Grocery is a major supermarket chain in Southern California. No other tenant accounted for 10% or more of our annual minimum rent.
2015 Property Acquisitions
We did not acquire any properties in 2015.
2015 Investments in Unconsolidated Joint Ventures
On March 11, 2015, we, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC (the “SGO Joint Venture”) with an institutional investor. The SGO Joint Venture was our first venture intended to focus on investing in value–add strategies for retail real estate assets. The SGO Joint Venture acquired three grocery anchor shopping centers with over 400,000 square feet for a total price of $53.6 million.
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On September 30, 2015, we, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC (the “SGO MN Joint Venture”) with an institutional investor. The SGO MN Joint Venture was our second venture intended to focus on investing in value–add strategies for retail real estate assets. The SGO MN Joint Venture acquired 16 retail properties consisting of five grocery anchor shopping centers, six retail strip centers, one mall, one mixed use retail/office property and three single tenant retail properties with over 1,045,000 square feet for a total price of $80.6 million.
On December 21, 2015, we, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture”) with an institutional investor.
2015 Property Dispositions
| • | In March 2015, we completed the sales of Osceola Village (including an additional pad), Constitution Trail and Aurora Commons for a gross sales price of $22,000,000, $23,100,000 and $8,500,000, respectively. The sales were completed in connection with the formation of the SGO Joint Venture as described above. |
| • | In October 2015, we completed the sales of Northgate Plaza, Moreno Marketplace and Summit Point for a gross sales price of $12,800,000, $19,400,000 and $19,600,000, respectively. |
The following disclosure summarizes material pending legal proceedings to which we are a party, as well as material legal proceedings that terminated during the three months ended December 31, 2015.
Securities Litigation
On or about September 23, 2013, a civil action captioned Stephen Drews v. TNP Strategic Retail Trust, Inc., et al., SA-CV-13-1488-PA-DFMx, was commenced in the United States District Court for the Central District of California. The named defendants were the Company, various of its present or former officers and directors, including Anthony W. Thompson, and several entities controlled by Mr. Thompson. The plaintiff alleged that he invested in connection with the Offering and purported to represent a class consisting of all persons who invested in connection with the Offering between September 23, 2010 and February 7, 2013. The plaintiff alleged that the Company and all of the individual defendants violated Section 11 of the Securities Act of 1933, as amended (the “Securities Act”) because the offering materials used in connection with the Offering allegedly failed to disclose financial difficulties that Mr. Thompson and the entities controlled by him were experiencing. Additional claims under the Securities Act were asserted against Mr. Thompson, the entities controlled by Mr. Thompson and the other individual defendants who were employees of Mr. Thompson. The complaint sought a class-wide award of damages in an unspecified amount. On October 22, 2013, the plaintiff filed a notice of voluntary dismissal without prejudice. On October 23, 2013, a virtually identical complaint was filed in the United States District Court for the Northern District of California, asserting the same claims against the same defendants. The only material difference was that an additional plaintiff was added. Like the original plaintiff, the additional plaintiff alleged that he invested in connection with the Offering. The new action was captioned Lewis Booth, et al. v. Strategic Realty Trust, Inc., et al., CV-13-4921-JST. On January 27, 2014, the Court entered an order appointing lead plaintiffs and lead plaintiffs’ counsel. On March 13, 2014, the plaintiffs filed an amended complaint. The amended complaint contained the same claims as the original complaint and added additional common law claims, including claims that the Company’s directors breached their fiduciary duties, and that the Company and its directors had been unjustly enriched. On April 28, 2014, the Company and the individual defendants other than Mr. Thompson or employees of Mr. Thompson moved to dismiss the amended complaint. On July 29, 2014, the Court granted the motion in part and denied the motion in part. Specifically, the Court dismissed the claim for breach of fiduciary duty with leave to amend and dismissed the claim for unjust enrichment with prejudice. On July 31, 2014, the plaintiffs advised the Court that they did not intend to amend their pleading to re-assert the claim for breach of fiduciary duty. On January 16, 2015, the parties reached an agreement to settle the case on a class-wide basis, subject to approval by the Court, with the settlement to be funded entirely by the Company’s insurers. On October 15, 2015, the Court approved the settlement. On February 12, 2016, the distribution of the settlement proceeds to the members of the class commenced.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.
On August 7, 2015, our board of directors approved an estimated value per share of our common stock of (i) before giving effect to the declaration of the Special Distribution together with the payment of the Penalty Interest, $6.81 per share based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares and operating partnership units outstanding, all as of July 1, 2015, and (b) after giving effect to the declaration of the Special Distribution and the payment of the Penalty Interest, $6.57 per share as of August 7, 2015, based on the foregoing and input from the Advisor with respect to the absence of material changes concerning the foregoing between July 1, 2015 and August 7, 2015. We are providing this estimated value per share to assist broker-dealers that participated in the Offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340 as required by FINRA. The valuation as of July 1, 2015 was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association (“IPA”) in April 2013.
Our independent directors are responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine our estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The estimated value per share was determined after consultation with the Advisor and with Robert A. Stanger & Co, Inc. (“Stanger”), an independent third-party valuation firm. The engagement of Stanger was approved by our board of directors, including all of its independent members. Stanger prepared appraisal reports, summarizing key inputs and assumptions, for each of the real estate properties it appraised, and reviewed our real estate related investments, cash, other assets, mortgage debt and other liabilities, using our financial information provided by the Advisor. The methodologies and assumptions used to determine the estimated value of our assets and liabilities are described further below.
Stanger used the appraised values of our real estate properties, together with its estimated value of our notes payable and non-controlling interests and the Advisor’s estimated value of each of our other assets and liabilities, to calculate and recommend an estimated net asset value per share of our common stock as of July 1, 2015 and before giving effect to the declaration of the Special Distribution and the payment of the Penalty Interest. Stanger estimated a net asset value per share of our common stock as of July 1, 2015 after giving effect to the declaration of the Special Distribution and the payment of the Penalty Interest. Upon the board of directors’ receipt and review of Stanger’s valuation report, and in light of other factors considered, the board of directors, including the independent directors, approved (a) $6.81 as the estimated value of our common stock as of July 1, 2015 before giving effect to the declaration of the Special Distribution and the payment of the Penalty Interest, and (b) $6.57 as the estimated value of our common stock as of August 7, 2015 after giving effect to the declaration of the Special Distribution and the payment of the Penalty Interest, which determinations are ultimately and solely the responsibility of the board of directors.
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The table below sets forth the calculation of our estimated value per share as of July 1, 2015 both before and after giving effect to the Special Distribution and the payment of the Penalty Interest:
(Unaudited)
Strategic Realty Trust, Inc. and Subsidiaries
Estimated Value Per Share
(Dollars in Thousands, Except Per Share)
| Assets | ||||
| Investments in real estate, net | $ | 144,425 | ||
| Cash and cash equivalents | 3,394 | |||
| Restricted cash | 5,530 | |||
| Prepaid expenses | 796 | |||
| Accounts receivable, net | 713 | |||
| Notes receivable | 7,152 | |||
| Investment in unconsolidated joint venture | 5,432 | |||
| Deferred costs and intangibles, net | - | |||
| Total assets | 167,443 | |||
| Liabilities | ||||
| Notes payable | $ | 87,035 | ||
| Accounts payable and accrued expenses | 2,549 | |||
| Other liabilities | 745 | |||
| Below market lease intangibles, net | - | |||
| Total liabilities | 90,329 | |||
| Total stockholders equity | 77,114 | |||
| Shares & OP units outstanding | 11,323,594 | |||
| Estimated value per share before giving effect to the special distribution and penalty interest | $ | 6.81 | ||
| Special Distribution | (0.20 | ) | ||
| Penalty interest | (0.04 | ) | ||
| Estimated value per share after giving effect to the special distribution and penalty interest | $ | 6.57 |
Based on input from the Advisor regarding the absence of material developments with respect to the foregoing and in order to comply with Internal Revenue Service requirements with respect to the Special Distribution, the board of directors brought forward the foregoing valuation to be as of August 7, 2015, for purposes of arriving at a valuation that is after giving effect to the declaration of the Special Distribution.
FINRA’s current rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of our assets less our liabilities according to U.S. GAAP, nor does it represent a liquidation value of our assets and liabilities or the amount our shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties that are not held for sale, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt.
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Methodology
Our goal in calculating an estimated value per share was to arrive at a value that is reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions and a process that is in compliance with the valuation guidelines established by the IPA. The following is a summary of the valuation and appraisal methodologies used to value our assets and liabilities:
Real Estate
Independent Valuation Firm
Stanger was selected by our Advisor and approved by our independent directors and board of directors to appraise our real estate properties. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to Stanger is based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. Each appraisal was reviewed, approved and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its appraisal reports, Stanger did not, and was not requested to, solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of the Company.
Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties. Stanger relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or our Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, board of directors and/or our Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density or shape are pending or being considered. Furthermore, Stanger’s analyses, opinions and conclusions were necessarily based upon market, economic, financial and other circumstances and conditions existing as of or prior to the date of the appraisal, and any material change in such circumstances and conditions may affect Stanger’s analyses and conclusions. Stanger’s appraisal reports contain other assumptions, qualifications and limitations that qualify the analyses, opinions and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger’s analyses.
Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations and similar transactions. We engaged Stanger to deliver the appraisal reports and assist in the net asset value calculation and Stanger received compensation for those efforts. In addition, we have agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the determination of our estimated value, Stanger provided commercial real estate advisory services for us and has received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services for us, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable appraisal report.
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Although Stanger considered any comments received from us or our Advisor in their appraisal reports, the final appraised values of our real estate properties were determined by Stanger. The appraisal reports for our real estate properties were addressed solely to us to assist us in calculating and recommending an updated estimated value per share of our common stock. The appraisal reports were not addressed to the public and may not be relied upon by any other person to establish an estimated value per share of our common stock and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to Stanger’s appraisal reports. All of the Stanger appraisal reports, including the analysis, opinions and conclusions set forth in such reports, are qualified by the assumptions, qualifications and limitations set forth in the respective appraisal reports.
Real Estate Valuation
Stanger appraised each of our real estate properties, using various methodologies including a direct capitalization analysis, discounted cash flow analyses and sales comparison approach and relied primarily on 10-year discounted cash flow analyses for the final valuations of each of the real estate properties. Stanger calculated the discounted cash flow value of our real estate properties using property-level cash flow estimates, terminal capitalization rates and discount rates that fall within ranges they believe would be used by similar investors to value the properties we own based on recent comparable market transactions adjusted for unique property and market-specific factors.
As of July 1, 2015, we wholly owned 12 real estate assets. The total acquisition cost of these properties was $129,752,000 excluding acquisition fees and expenses. In addition, through July 1, 2015 we had invested $1,577,000 in capital and tenant improvements on these 12 real estate assets since inception. As of July 1, 2015, the total appraised value of our wholly-owned real estate properties was provided by Stanger using the appraisal methods described above was $144,425,000. The total appraised real estate value as of July 1, 2015, compared to the total acquisition cost of our real estate properties plus subsequent capital improvements through July 1, 2015, results in an overall increase in the real estate value of approximately $13,096,000 or approximately 9.97%. The following summarizes the key assumptions that were used in the discounted cash flow models used to arrive at the appraised real estate property values:
| Weighted | ||||||||
| Range | Average | |||||||
| Terminal capitalization rate | 6.75%-8.50% | 7.42% | ||||||
| Discount rate | 7.50%-10.00% | 8.47% | ||||||
| Income and expense growth rate | 3.00% | 3.00% | ||||||
As of July 1, 2015, we owned three properties through a joint venture between a wholly-owned subsidiary of the Company, Grocery Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree Real Estate Opportunities Fund VI, L.P., and GLB SGO, LLC, a wholly-owned subsidiary of Glenborough Property Partners, LLC (the “Joint Venture”). Stanger valued the Joint Venture using the terms of the joint venture agreement relating to the allocation of the economic interests between us and our joint venture partners, as applied to a 10-year discounted cash flow analysis derived from the appraisals of each of the properties and the terms of liabilities encumbering the Joint Venture properties and other fees and expenses of the Joint Venture.
While we believe that Stanger’s assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the calculation of the appraised value of our real estate properties and thus, the estimated value per share. The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to the real estate properties referenced in the table above. Additionally, the table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 5% in accordance with the IPA guidance:
| Increase (Decrease) on the Estimated Value Per Share due to | ||||||||||||||||
| - 25 Basis Points | + 25 Basis Points | - 5% | + 5% | |||||||||||||
| Terminal capitalization rates | $ | 0.25 | $ | (0.22 | ) | $ | 0.37 | $ | (0.32 | ) | ||||||
| Discount rates | $ | 0.24 | $ | (0.22 | ) | $ | 0.42 | $ | (0.39 | ) | ||||||
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Notes Payable
Values for mortgage loans were estimated by Stanger using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term, loan-to-value ratios, debt-service-coverage ratios, prepayment terms, and collateral property attributes (i.e. age, location, etc.). The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 4.10% to 8.00%.
As of July 1, 2015, Stanger’s estimate of fair value and the carrying value of our notes payable were $87.0 million and $85.2 million, respectively. The weighted-average discount rate applied to the future estimated debt payments, which have a weighted-average remaining term of 3.6 years, was approximately 4.5%. The table below illustrates the impact on our estimated value per share if the discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to our notes payable. Additionally, the table below illustrates the impact on the estimated value per share if the discount rates were adjusted by 5% in accordance with the IPA guidance:
| Adjustment to Discount Rates | ||||||||||||||||
| + 25 Basis Points | - 25 Basis Points | + 5% | - 5% | |||||||||||||
| Estimated fair value | $ | 86,471 | $ | 87,607 | $ | 86,527 | $ | 87,549 | ||||||||
| Weighted average discount rate | 4.8 | % | 4.3 | % | 4.8 | % | 4.3 | % | ||||||||
| Change in value per share | $ | (0.05 | ) | $ | 0.05 | $ | (0.04 | ) | $ | 0.04 | ||||||
Other Assets and Liabilities
The carrying values of a majority of our other assets and liabilities are considered to equal their fair value due to their short maturities or liquid nature. Certain balances, such as straight-line rent receivables, lease intangible assets and liabilities, deferred financing costs, unamortized lease commissions and unamortized lease incentives, have been eliminated for the purpose of the valuation due to the fact that the value of those balances were already considered in the valuation of the respective investments.
Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets.
Special Distribution
As further described below under “ – Special Distribution”, on August 7, 2015, our board of directors authorized a Special Distribution of $2,248,000 on our common stock, par value $0.01 per share, as of the close of business on August 10, 2015. On November 4, 2015, we paid $449,600 in cash and issued 273,729 common shares with a value of $1,798,000 pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution
Limitations of Estimated Value per Share
As mentioned above, we are providing this estimated value per share to assist broker-dealers that participated in the Offering in meeting their customer account statement reporting obligations and to comply with IPA valuation guidelines. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to GAAP.
Accordingly, with respect to the estimated value per share, we can give no assurance that:
| · | a stockholder would be able to resell his or her shares at this estimated value; |
| · | a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company; |
| · | our shares of common stock would trade at the estimated value per share on a national securities exchange; |
| · | an independent third-party appraiser or other third-party valuation firm would agree with our estimated value per share; or |
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| · | the methodology used to estimate our value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements. |
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share does not take into account estimated disposition costs and fees for real estate properties that are not held for sale, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt. We currently expect to utilize the Advisor and/or an independent valuation firm to update the estimated value per share in 2016, in accordance with the recommended IPA guidelines.
Special Distribution
In June 2011, we acquired the Distressed Debt for $18 million under our prior advisor, TNP Strategic Retail Advisor, LLC. In October 2011, we received the underlying Collateral with respect to the Distressed Debt in full Settlement of its debt claim. At the time of the Settlement, we received an independent valuation of the Collateral’s FMV of $27.6 million. The Settlement resulted in taxable income to us in an amount equal to the FMV of the Collateral less our adjusted basis for tax purposes in the Distressed Debt. Such income was not properly reported on our 2011 federal income tax return, and we did not make a sufficient distribution of taxable income for purposes of the REIT qualification rules (i.e., the 2011 Underreporting). We believe that we were able to rectify the 2011 Underreporting by paying a Special Distribution to our stockholders.
On August 7, 2015, the board of directors authorized the Special Distribution of $2,248,000 on our common stock as of the close of business on August 10, 2015 (the “Record Date”). The Special Distribution was payable in cash, common stock or a combination of cash and common stock to, and at the election of, the stockholders of record as of the Record Date, provided, however, that the total amount of cash payable to all stockholders in the Special Distribution was $449,600 (the “Cash Amount”), with the balance of the Special Distribution, or $1,798,400 (the “Share Amount”), payable in the form of shares of common stock. Stockholders who did not return an election form, or who otherwise failed to properly complete an election form, before the deadline, received their pro rata portion of the Special Dividend entirely in shares of common stock.
On November 4, 2015, we paid $450,000 in cash and issued 273,729 common shares of with a value of $1,798,000 pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. Although we believe the Special Distribution allowed us to maintain our qualification as a REIT, there can be no complete assurance in this regard.
Stockholder Information
As of March 20, 2016, we had 11,037,948 shares of our common stock outstanding held by a total of approximately 3,200 stockholders. The number of stockholders is based on the records of our transfer agent.
Distributions
To maintain our qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction or net capital gain) and which does not necessarily equal results of operations as calculated in accordance with GAAP. Our board of directors may 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.
Under the terms of the Amended and Restated Revolving Credit Agreement with KeyBank (as discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—KeyBank Amended and Restated Credit Facility Agreement”), we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds described in the agreement with KeyBank; provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. Our board of directors evaluates our ability to make quarterly distributions based on our operational cash needs.
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The following table sets forth the distributions, excluding the Special Distribution, declared and paid or payable to our common stockholders and holders of non-controlling common units in our operating partnership for the years ended December 31, 2015 and 2014, respectively:
| Distribution Record Date | Distribution Payable Date | Distribution Per Share of Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2015 | 3/31/2015 | 4/30/2015 | $ | 0.06 | $ | 658,000 | $ | 26,000 | $ | 684,000 | ||||||||||
| Second Quarter 2015 | 6/30/2015 | 7/30/2015 | $ | 0.06 | 654,000 | 26,000 | 680,000 | |||||||||||||
| Third Quarter 2015 | 9/30/2015 | 10/30/2015 | $ | 0.06 | 654,000 | 26,000 | 680,000 | |||||||||||||
| Fourth Quarter 2015 | 12/31/2015 | 1/30/2016 | $ | 0.06 | 661,000 | 25,000 | 686,000 | |||||||||||||
| $ | 2,627,000 | $ | 103,000 | $ | 2,730,000 | |||||||||||||||
| Distribution Record Date | Distribution Payable Date | Distribution Per Share of Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2014 | 3/31/2014 | 4/30/2014 | $ | 0.05 | $ | 548,000 | $ | 22,000 | $ | 570,000 | ||||||||||
| Second Quarter 2014 | 6/30/2014 | 7/30/2014 | $ | 0.06 | 658,000 | 26,000 | 684,000 | |||||||||||||
| Third Quarter 2014 | 9/30/2014 | 10/31/2014 | $ | 0.06 | 658,000 | 26,000 | 684,000 | |||||||||||||
| Fourth Quarter 2014 | 12/31/2014 | 1/30/2015 | $ | 0.06 | 658,000 | 26,000 | 684,000 | |||||||||||||
| $ | 2,522,000 | $ | 100,000 | $ | 2,622,000 | |||||||||||||||
The tax composition of our distributions paid during the years ended December 31, 2015 and 2014, was as follows:
| 2015 | 2014 | |||||||
| Ordinary income | 42 | % | 0 | % | ||||
| Capital gain | 58 | % | 0 | % | ||||
| Return of capital | 0 | % | 100 | % | ||||
| Total | 100 | % | 100 | % | ||||
Share Redemption Program
On April 1, 2015, our board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “Amended and Restated SRP”). Under the Amended and Restated SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the Amended and Restated SRP) of a stockholder are eligible for repurchase by us. The number of shares to be redeemed is limited to the lesser of (i) a total of $2,000,000 for redemptions sought upon a stockholder’s death and a total of $1,000,000 for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted average of the number of shares of our common stock outstanding during the prior calendar year. Share repurchases pursuant to the share redemption program are made at our sole discretion. We reserve the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the Amended and Restated SRP.
The redemption price for shares that are redeemed is 100% of our most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or disability, unless such death or disability occurred between January 15, 2013 and April 1, 2015, when the share redemption program was suspended. Any stockholder whose death or disability occurred during this time period must submit their redemption request within one year after the adoption of the Amended and Restated SRP.
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The Amended and Restated SRP provides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If we cannot honor all redemption requests received in a given quarter, all requests, including death and disability redemptions, will be honored on a pro rata basis. If we do not completely satisfy a redemption request in one quarter, we will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. We may increase or decrease the amount of funding available for redemptions under the Amended and Restated SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
The other material terms of the Amended and Restated SRP are consistent with the terms of the share redemption program that was in effect immediately prior to January 15, 2013.
On August 7, 2015, our board of directors approved the amendment and restatement of the Amended and Restated SRP (the “Second Amended and Restated SRP” and, together with the Amended and Restated SRP, the “SRP”). Under the Second Amended and Restated SRP, the redemption date with respect to third quarter 2015 redemptions was November 10, 2015 or the next practicable date as our Chief Executive Officer determined so that redemptions with respect to the third quarter of 2015 were delayed until after the payment date for the Special Distribution. With this revision, stockholders who were to have 100% of their shares redeemed were not left holding a small number of shares from the Special Distribution after the date of the redemption of their shares. The other material terms of the Second Amended and Restated SRP are consistent with the terms of the Amended and Restated SRP.
During the year ended December 31, 2015, we received requests to redeem 213,495 shares of common stock pursuant to the SRP and we redeemed 205,495 shares of common stock for $1,392,000. During the three months ended December 31, 2015, we redeemed shares as follows:
| Total Number of Shares | Approximate Dollar | |||||||||||||||
| Redeemed as Part of a | Value of Shares That | |||||||||||||||
| Total Number of | Average Price | Publicly Announced Plan | May Yet be Redeemed | |||||||||||||
| Period | Shares Redeemed (1) | Paid per Share | or Program (2) | Under the Program (3) | ||||||||||||
| October 2015 | - | $ | - | - | $ | 2,456,000 | ||||||||||
| November 2015 | 87,599 | $ | 6.57 | 87,599 | $ | 1,880,223 | ||||||||||
| December 2015 | 39,981 | $ | 6.56 | 39,981 | $ | 1,617,866 | ||||||||||
| Total | 127,580 | 127,580 | ||||||||||||||
| (1) | All of our purchases of equity securities during the three months ended December 31, 2015, were made pursuant to the SRP. |
| (2) | We previously announced a share redemption program in connection with the Offering. The program was suspended in January 2013 and reinstated by the board in April 2015. For additional information regarding the SRP, see the disclosure above under “–Share Redemption Program.” |
| (3) | We currently limit the dollar value and number of shares that may yet be repurchased under the SRP as described above under “–Share Redemption Program.” |
Unregistered Sales of Equity Securities and Use of Offering Proceeds
During the year ended December 31, 2015, we did not issue any securities that were not registered under the Securities Act.
| ITEM 6. | SELECTED FINANCIAL DATA |
Selected financial data has been omitted as permitted under rules applicable to smaller reporting companies.
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto included in this Annual Report. Also see “Forward Looking Statements” preceding Part I.
Overview
We are a Maryland corporation that was formed on September 18, 2008 to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we intend to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership. We have no paid employees.
On November 4, 2008, we filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) for our initial public offering of up to 100,000,000 shares of our common stock at $10.00 per share in our primary offering and up to 10,526,316 shares of our common stock to our stockholders at $9.50 per share pursuant to our distribution reinvestment plan (“DRIP”). On August 7, 2009, the SEC declared our registration statement effective and we commenced our initial public offering. On February 7, 2013, we terminated our initial public offering and ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan.
As of February 2013 when we terminated the initial public offering, we had accepted subscriptions for, and issued, 10,688,940 shares of common stock in the initial public offering for gross offering proceeds of $104,700,000, and 391,182 shares of common stock pursuant to the DRIP for gross offering proceeds of $3,620,000. We have also granted 50,000 shares of restricted stock and we issued 273,729 shares of common stock to pay a portion of a special distribution. See Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for details regarding the special distribution.
Due to short-term liquidity issues and defaults under certain of our loan agreements, we suspended our share redemption program, including with respect to redemptions upon death and disability, effective as of January 15, 2013. On April 1, 2015, our board of directors approved the reinstatement of the share redemption program and adopted the Amended and Restated Share Redemption Program (the “Amended and Restated SRP”). For more information regarding our share redemption program, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities – Share Redemption Program.” Cumulatively, through December 31, 2015, we have redeemed 365,903 shares of common stock sold in the Offering for $2,995,000.
Since our inception, our business has been managed by an external advisor. We no longer have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed in August 2014 and August 2015. The current term of the Advisory Agreement terminates on August 10, 2016. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Beginning in December 2012 and ending upon execution of the Advisory Agreement, Glenborough performed certain services for the Company pursuant to a consulting agreement (“Consulting Agreement”). We entered the Consulting Agreement to assist us with the process of transitioning to a new external advisor, as well as to provide other services.
Market Outlook – Real Estate and Real Estate Finance Markets
The market for retail property investment continues to improve. According to data from Jones Lang LaSalle, sales of retail investment properties totaled $76.6 billion in 2015, up 1% from 2014. This sales total was above the prior peak for the second year in a row. According to data from CoStar, retail net absorption for the U.S. totaled 110.5 million square feet in 2015. Net absorption has been steadily growing since 2010. Deliveries of new space for the year continue to track below the absorption at 81.1 million square feet helping to push down the vacancy rate approximately 40 basis points in 2015. The U.S retail vacancy rate was 5.6% down from 6.0% in the first quarter of 2015. At year end average quoted lease rates were up 1.58% from a year ago. Shopping Centers, according to CoStar, ended the year with a vacancy rate of 8.8%, the highest of all of the retail categories.
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2015 Significant Events
Property Dispositions and Loan Pay-offs
| · | In March 2015, we completed the sales of Osceola Village, Constitution Trail and Aurora Commons for a gross sales price of $22.0 million, $23.1 million and $8.5 million, respectively. The three properties were sold to the SGO Joint Venture (as defined below) as part of its formation. We used $36.4 million of the sales proceeds to retire the debt associated with the sold properties. |
| · | In October 2015, we completed the sales of Northgate Plaza, Moreno Marketplace and Summit Point for a gross sales price of $12.8 million, $19.4 million and $19.6 million, respectively. We used $12.1 million in net proceeds from the sale of Northgate Plaza, $18.6 million in net proceeds from the sale of Moreno Marketplace, and $4.0 million in loan proceeds under the Amended and Restated Credit Facility with KeyBank (as discussed below under “—Results of Operations—KeyBank Amended and Restated Credit Facility Agreement”) to pay $31.7 million in outstanding secured term loans. We paid off the entire $4.0 million draw on the Amended and Restated Credit Facility in November 2015. We used part of the $19.6 million in net proceeds from the sale of Summit Point to pay off the $11.9 million mortgage loan associated with Summit Point, with the remainder added to cash reserves. |
| · | In October 2015, we paid off the entire $1.2 million outstanding balance on our unsecured loan. |
Entry into Joint Ventures
| · | On March 11, 2015, we, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC (the “SGO Joint Venture”) with an institutional investor. The SGO Joint Venture was our first venture intended to focus on investing in value –add strategies for retail real estate assets. The SGO Joint Venture acquired three grocery anchor shopping centers with over 400,000 square feet for a total price of $53.6 million. |
| · | On September 30, 2015, we, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC (the “SGO MN Joint Venture”) with an institutional investor. The SGO MN Joint Venture was our second venture intended to focus on investing in value –add strategies for retail real estate assets. The SGO MN Joint Venture acquired 16 retail properties consisting of five grocery anchor shopping centers, six retail strip centers, one mall, one mixed use retail/office property and three single tenant retail properties with over 1,045,000 square feet for a total price of $80.6 million. |
| · | On December 21, 2015, we, through wholly owned subsidiaries, entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture”) with an institutional investor. |
Share Redemptions under the Share Redemption Program
| · | In April 2015, our board of directors approved the reinstatement of the share redemption program and adopted the Amended and Restated SRP. In August 2015, our board of directors approved the amendment and restatement of the Amended and Restated SRP (the “Second Amended and Restated SRP” and, together with the Amended and Restated SRP, the “SRP”). |
| · | During the year ended December 31, 2015, we redeemed 205,495 shares of common stock for $1,392,000 under the SRP at an average price of $6.77 per share. |
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Special Distribution
| · | In November 2015, we paid a special distribution of in connection with the underreporting of taxable income on our 2011 federal income tax return. See “–Special Distribution” below for details regarding the payment of the special distribution. The total amount of cash paid to stockholders pursuant to the special distribution was $449,600 and 273,729 common shares with a value of $1,798,000 were issued pursuant to the special distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. |
Settlement of Class Action
| · | In October 2015, the United States District Court for the Northern District of California granted final approval to the settlement of a class action brought against several named defendants, including the Company, as disclosed in Part I, Item 3. “Legal Proceedings.” |
Review of our Policies
Our board of directors, including our independent directors, has reviewed our policies described in this Annual Report and determined that they are in the best interest of our stockholders because: (1) they increase the likelihood that we will be able to successfully maintain and manage our current portfolio of investments and acquire additional income-producing properties and other real estate-related investments in the future; (2) our executive officers, directors and affiliates of our Advisor have expertise with the type of properties in our current portfolio; and (3) to the extent that we acquire additional real properties or other real estate-related investments in the future, the use of leverage should enable us to acquire assets and earn rental income more quickly, thereby increasing the likelihood of generating income for our stockholders.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies and estimates that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated 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.
Revenue Recognition
Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
| · | whether the lease stipulates how a tenant improvement allowance may be spent; |
| · | whether the amount of a tenant improvement allowance is in excess of market rates; |
| · | whether the tenant or landlord retains legal title to the improvements at the end of the lease term; |
| · | whether the tenant improvements are unique to the tenant or general-purpose in nature; and |
| · | whether the tenant improvements are expected to have any residual value at the end of the lease term. |
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For leases with minimum scheduled rent increases, we recognize income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in reported revenue amounts which differ from those that are contractually due from tenants. If we determine the collectability of straight-line rents is not reasonably assured, we limit future recognition to amounts contractually owed and paid, and, when appropriate, establish an allowance for estimated losses.
We maintain an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We monitor the liquidity and creditworthiness of our tenants on an ongoing basis. For straight-line rent amounts, our assessment is based on amounts estimated to be recoverable over the term of the lease.
Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.
We recognize gains or losses on sales of real estate in accordance with Accounting Standards Codification (“ASC”) 360. Profits are not recognized until (1) a sale has been consummated; (2) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (3) our receivable, if any, is not subject to future subordination; and (4) we have transferred to the buyer the usual risks and reward of ownership, and we do not have a substantial continuing involvement with the property. The results of operations of income producing properties where we do not have a continuing involvement are presented in the discontinued operations section of our consolidated statements of operations for properties sold prior to April 30, 2014.
Investment in Real Estate
Real property is recorded at estimated fair value at time of acquisition with subsequent additions at cost, less accumulated depreciation and amortization. Costs include those related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of predevelopment and certain direct and indirect costs of development.
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows:
| Years | ||
| Buildings and improvements | 5 - 30 years | |
| Tenant improvements | 1 - 36 years |
Tenant improvement costs recorded as capital assets are depreciated over the tenant’s remaining lease term which the Company has determined approximates the remaining useful life of the improvement.
Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized.
Business Combinations
We record the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination when the acquired property meets the definition of a business. Assets acquired and liabilities assumed in a business combination are generally measured at their acquisition date fair values. Tenant improvements recognized represent the tangible assets associated with the existing leases valued on a fair value basis at the acquisition date, are classified as an asset under investments in real estate and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases which come in three forms: (1) leasing commissions and legal costs, which represent the value associated with “cost avoidance” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in markets in which we operate; (2) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased; and (3) above or below market value of in-place leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks. The value of in-place leases are recorded in acquired lease intangibles, and amortized over the remaining lease term. Above or below market-rate leases are classified in acquired lease intangibles, or in acquired below market lease intangibles, depending on whether the contractual terms are above or below market. Above market leases are amortized as a decrease to rental revenue over the remaining non-cancelable terms of the respective leases and below market leases are amortized as an increase to rental revenue over the remaining initial lease term and any fixed rate renewal periods, if applicable.
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Transaction costs are expensed as incurred, and costs incurred in pursuit of targeted properties for acquisitions not yet closed or those determined to no longer be viable have been expensed and included in transaction expense, in the consolidated statements of operations.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities which would impact the amount of our net income. These allocations also impact the amount of revenue we recognize, depreciation expense and gains or losses recorded on future sales of properties.
Impairment of Long-lived Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets and liabilities, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures, property sales capitalization rates and expected holding period of the property.
We evaluate our equity investments for impairment in accordance with ASC 320, Investments – Debt and Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss.
We did not record any impairment loss on our investments in real estate and related intangible assets during the year ended December 31, 2015. For the year ended December 31, 2014, we recorded impairment losses of $2,500,000 and $1,400,000 on our investments in Constitution Trail and Topaz Marketplace, respectively. See Part II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for more information regarding the methodologies used to estimate fair value of the investments in real estate.
Assets Held for Sale and Discontinued Operations
When certain criteria are met, long-lived assets are classified as held for sale and are reported at the lower of their carrying value or their fair value less costs to sell and are no longer depreciated. Prior to April 30, 2014, discontinued operations was a component of an entity that had either been disposed of or was deemed to be held for sale and (1) the operations and cash flows of the component had been or would be eliminated from ongoing operations as a result of the disposal transaction and (2) the entity would not have any significant continuing involvement in the operations of the component after the disposal transaction. With the adoption of Accounting Standards Update No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment on April 30, 2014, only disposed properties that represent a strategic shift that has (or will have) a major effect on our operations and financial results are reported as discontinued operations.
Fair Value Measurements
Under GAAP, we are required to measure or disclose certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
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| · | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
| · | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| · | Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement. |
When available, we utilize quoted market prices or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to use significant judgment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for an asset owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets; or (ii) a present value technique that considers the future cash flows based on contractual obligations discounted by an observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
We consider the following factors to be indicators of an inactive market (1) there are few recent transactions; (2) price quotations are not based on current information; (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets); (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability; (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability; (6) there is a wide bid-ask spread or significant increase in the bid-ask spread; (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities; and (8) little information is released publicly (for example, a principal-to-principal market).
We consider the following factors to be indicators of non-orderly transactions (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions; (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant; (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced); and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal results of operations as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT. Even if we qualify as a REIT, we may be subject to certain state or local income taxes and to U.S. Federal income and excise taxes on our undistributed income.
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We evaluate tax positions taken in the consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.
When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.
Our tax returns remain subject to examination and consequently, the taxability of our distributions is subject to change. During the current year, we were subject to alternative minimum state/federal taxes totaling approximately $200,000.
Results of Operations
As of December 31, 2015, our real estate portfolio included 9 properties, including 1 property classified as held for sale, acquired for an aggregate purchase price of approximately $96,960,000. The occupancy rate for our property portfolio, including the property classified as held for sale, was 90% based on approximately 766,000 rentable square feet as of December 31, 2015, compared to an occupancy rate of 88% based on approximately 1,471,000 rentable square feet as of December 31, 2014. In 2015 and 2014, there were no property acquisitions. In 2015, there were six property dispositions and in 2014 there were two property dispositions.
Leasing Information
Committed tenant improvement costs and leasing commissions for new leases during the year ended December 31, 2015 were $8.22 per square foot and $4.05 per square foot, respectively. Committed tenant improvement costs and leasing commissions for new leases during the year ended December 31, 2014 were $13.48 per square foot and $6.98 per square foot, respectively. The following table provides information regarding our leasing activity, excluding leasing activity in held for sale property, for the year ended December 31, 2015.
| Total Vacant Rentable Sq. Feet at December 31, 2014 | Lease Expirations in 2015 (Sq. Feet) | New Leases in 2015 (Sq. Feet) | Lease Renewals in 2015 (Sq. Feet) | Total Vacant Rentable Sq. Feet at December 31, 2015 | Tenant Retention Rate in 2015 | |||||||||||||||||
| 60,000 | 54,000 | 5,000 | 35,000 | 74,000 | 65 | % | ||||||||||||||||
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Comparison of the year ended December 31, 2015 to the year ended December 31, 2014
The following table provides summary information about our results of operations for the years ended December 31, 2015 and 2014:
| Years Ended December 31, | Increase | Percentage | ||||||||||||||
| 2015 | 2014 | (Decrease) | Change | |||||||||||||
| Rental revenue and reimbursements | $ | 16,047,000 | $ | 21,703,000 | $ | (5,656,000 | ) | (26.1 | )% | |||||||
| Operating and maintenance expenses | 5,648,000 | 7,760,000 | (2,112,000 | ) | (27.2 | )% | ||||||||||
| General and administrative expenses | 3,171,000 | 4,343,000 | (1,172,000 | ) | (27.0 | )% | ||||||||||
| Depreciation and amortization expenses | 4,840,000 | 7,869,000 | (3,029,000 | ) | (38.5 | )% | ||||||||||
| Transaction expenses | 147,000 | - | 147,000 | 100.0 | % | |||||||||||
| Interest expense | 5,459,000 | 8,983,000 | (3,524,000 | ) | (39.2 | )% | ||||||||||
| Operating loss | (3,218,000 | ) | (7,252,000 | ) | 4,034,000 | (55.6 | )% | |||||||||
| Other income (expense), net | 17,209,000 | (4,696,000 | ) | 21,905,000 | (466.5 | )% | ||||||||||
| Income (loss) from continuing operations | 13,991,000 | (11,948,000 | ) | 25,939,000 | (217.1 | )% | ||||||||||
| Gain (loss) from discontinued operations | - | 3,059,000 | (3,059,000 | ) | 100.0 | % | ||||||||||
| Net income (loss) | $ | 13,991,000 | $ | (8,889,000 | ) | $ | 22,880,000 | (257.4 | )% | |||||||
Revenue
The decrease in revenue in 2015 was primarily due to the dispositions of Osceola Village, Constitution Trail and Aurora Commons in the first quarter of 2015, Northgate Plaza, Moreno Marketplace and Summit Point in the fourth quarter of 2015, and San Jacinto in the fourth quarter of 2014.
Operating and maintenance expenses
The decrease in operating and maintenance expenses in 2015 was primarily due to the dispositions of Osceola Village, Constitution Trail and Aurora Commons in the first quarter of 2015, and Northgate Plaza, Moreno Marketplace and Summit Point in the fourth quarter of 2015.
General and administrative expenses
The decrease in general and administrative expenses in 2015 was primarily due to higher legal costs incurred during the year ended December 31, 2014 related to our securities litigation as disclosed in Part I, Item 3 of our 2014 Annual Report on Form 10-K and updated in Part II. Item I “Legal Proceedings” in this Annual Report on Form 10-K, partly offset by the 2015 write-off of the remaining unamortized premium of the insurance policy which covered the payout prescribed by the settlement of the securities litigation. Additionally, asset management fees have decreased in 2015 due to properties sold.
Depreciation and amortization expenses
The decrease in depreciation and amortization expense in 2015 was primarily due to the disposition of Osceola Village, Constitution Trail and Aurora Commons in the first quarter of 2015, and Northgate Plaza, Moreno Marketplace and Summit Point in the fourth quarter of 2015.
Transaction expenses
Transaction expenses in 2015 relate to fees incurred in connection with our investment in the SGO MN Joint Venture. No transaction expenses were incurred in connection with the investment in the SGO Joint Venture.
Interest expense
Interest expense decreased in 2015 primarily due to the payoff of outstanding loan balances associated with the disposed properties.
Other income and expense
Other income for the year ended December 31, 2015, was comprised primarily of a $20,844,000 gain resulting from the disposal of properties and was partly offset by a $3,365,000 loss resulting from the early extinguishment of debt associated with the disposed properties. Other expense for the year ended December 31, 2014, was comprised primarily of $2,500,000 and $1,400,000 impairment losses recorded on our investments in Constitution Trail and Topaz Marketplace, respectively.
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Discontinued operations
We had no income or expense from discontinued operations for the year ended December 31, 2015. Income from discontinued operations for the year ended December 31, 2014, was primarily due to the gain associated with the disposal of Visalia Marketplace in January 2014.
Liquidity and Capital Resources
As of December 31, 2015, our portfolio included 9 retail properties including 1 property classified as held for sale, with an aggregate purchase price of approximately $96,960,000. Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
During the year ended December 31, 2015, we utilized the net proceeds from the disposition of our properties to reduce our debt and invest in the SGO Joint Venture and the SGO MN Joint Venture. We expect to utilize any remaining proceeds from such dispositions to invest in other real estate and to fund death and “qualifying disability” redemptions under the SRP.
As of December 31, 2015, our cash and cash equivalents were $8,793,000 and our restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs) was $2,693,000. For properties with lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.
On April 1, 2013, we entered into a forbearance agreement relating to our original credit facility with KeyBank (the “Forbearance Agreement”), and on July 31, 2013, we entered into an amendment to the Forbearance Agreement with KeyBank which extended the forbearance period to January 31, 2014. On December 11, 2013, we entered into a second amendment to the Forbearance Agreement which further extended the term of the forbearance period to July 31, 2014, and on July 31, 2014, KeyBank agreed to extend the forbearance period under the Forbearance Agreement to August 14, 2014. On August 4, 2014, we entered into an Amended and Restated Revolving Credit Facility and resolved the forbearance issue relating to the original KeyBank credit facility (see “—KeyBank Amended and Restated Credit Facility Agreement” below for additional information).
Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of December 31, 2015 and 2014, our borrowings were approximately 65.3% and 268.4%, respectively, of the value of our net assets.
Cash Flows from Operating Activities
The increase in net cash provided by operating activities of $1,764,000 in 2015, as compared to net cash used in operating activities of $495,000 in 2014, was primarily due to the $1 million decrease in accounts payable and accrued expenses from December 31, 2014 to December 31, 2015, and a release by lenders of $1.4 million of restricted cash in 2015.
Cash Flows from Investing Activities
During the year ended December 31, 2015, net cash provided by investing activities was $96,189,000 compared to net cash provided by investing activities of $22,917,000 during the year ended December 31, 2014. The increase was primarily due to net proceeds, before the pay down of debt, from the sales of real estate.
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Cash Flows from Financing Activities
During the year ended December 31, 2015, net cash used in financing activities was $92,371,000 compared to $21,444,000 used during the year ended December 31, 2014. In 2015, cash used in financing activities included net repayment of notes payable in the amount of $82,362,000 and redemptions of member interests and of common stock of $3,494,000. The primary components of net cash used in financing activities for the year ended December 31, 2014 were repayments of notes payable in the amount of $37,982,000, attributable primarily to the Visalia Marketplace sale, San Jacinto Esplanade sale, and Constitution Trail debt refinancing, and the payment of distributions to stockholders in the amount of $2,595,000. This was partially offset by the proceeds attributable to adding Constitution Trail to the new KeyBank credit facility resulting in proceeds of $19,900,000.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment of principal and interest on our outstanding indebtedness. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties and the sale of shares of our common stock. Due to the termination of our initial public offering on February 7, 2013, we may fund our short-term operating cash needs from operations, from the sales of properties and from debt. On November 4, 2015, we paid $449,600 in cash and issued 273,729 common shares with a value of $1,798,000 pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. Additionally, on December 31, 2015, we declared a quarterly distribution to stockholders totaling $688,000, and we will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares, and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. Until the termination of our initial public offering on February 7, 2013, our cash needs for acquisitions were satisfied from the net proceeds of the public offering and from debt financings. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. See Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” and Note 8. “Notes Payable” to our consolidated financial statements included in this Annual Report for additional information on the maturity dates and terms of our outstanding indebtedness.
KeyBank Amended and Restated Credit Facility Agreement
On August 4, 2014, we entered into an Amended and Restated Revolving Credit Facility with KeyBank to amend and restate the 2010 Credit Facility (defined below) in its entirety and to establish a revolving credit facility with an initial maximum aggregate commitment of $30,000,000 (as adjusted, the “Facility Amount”). Subject to certain terms and conditions contained in the loan documents, we may request that the Facility Amount be increased to a maximum of $60,000,000. The Amended and Restated Credit Facility was initially secured by San Jacinto Esplanade, Aurora Commons and Constitution Trail.
The Amended and Restated Credit Facility matures on August 4, 2017. We have the right to prepay the Amended and Restated Credit Facility in whole at any time or in part from time to time, subject to the payment of certain expenses, costs or liabilities potentially incurred by the lenders as a result of the prepayment and subject to certain other conditions contained in the loan documents.
Each loan made pursuant to the Amended and Restated Credit Facility will be either a LIBOR rate loan or a base rate loan, at our election, plus an applicable margin, as defined. Monthly payments are interest only with the entire principal balance and all outstanding interest due at maturity. We pay KeyBank an unused commitment fee, quarterly in arrears, which accrues at 0.30% per annum if the usage under the Amended and Restated Credit Facility is less than or equal to 50% of the Facility Amount, and 0.20% per annum if the usage under the Amended and Restated Credit Facility is greater than 50% of the Facility Amount.
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We are responsible for all of our obligations under the Amended and Restated Credit Facility and all other loan documents in connection with the Amended and Restated Credit Facility. We also paid Glenborough a financing coordination fee of $300,000 in connection with the Amended and Restated Credit Facility.
On August 4, 2014, as required by the Amended and Restated Credit Facility, the OP contributed 100% of its sole membership interest in SRT Constitution Trail, LLC, which owns the Constitution Trail property, to SRT Secured Holdings, LLC (“Secured Holdings”) (the “Constitution Transaction”). At the time, Secured Holdings was jointly owned by the OP and SRT Secured Holdings Manager, LLC (“SRT Manager”), an affiliate of Glenborough. Prior to the Constitution Transaction, the OP owned 88% of the membership interests in Secured Holdings and SRT Manager owned 12% of the membership interests in Secured Holdings. Following the Constitution Transaction, the OP owned 91.67% of the membership interests in Secured Holdings and SRT Manager owned 8.33% of the membership interests in Secured Holdings, which was derived based on the fair value of the properties as of the date of the contribution. In March 2015, Secured Holdings paid SRT Manager $2,102,000 in full redemption of SRT Manager’s 8.33% membership interest in Secured Holdings.
In connection with the Constitution Transaction, the entire outstanding note payable balance due to Constitution Trail’s prior lender was fully paid, and the new outstanding principal balance of the Amended and Restated Credit Facility was $20,800,000, as of August 4, 2014.
In connection with the sale of Constitution Trail and Aurora Commons to the SGO Joint Venture on March 11, 2015 (see Note 4. “Investment in Unconsolidated Joint Ventures” to our consolidated financial statements included in this Annual Report), we used a portion of the net proceeds from the sale of Constitution Trail to pay off the entire $19 million outstanding balance associated with the Amended and Restated Credit Facility. We intend to maintain the Amended and Restated Credit Facility for our future cash needs.
On October 29, 2015, we drew $4.0 million under the Amended and Restated Credit Facility and used the loan proceeds, along with the proceeds from the sale of Moreno Marketplace and Northgate Plaza, to pay off a portion of the outstanding secured term loans. On November 2, 2015, we paid off the entire $4.0 million draw on the Amended and Restated Credit Facility.
The original credit facility was entered into on December 17, 2010, between us, through our subsidiary, Secured Holdings, and KeyBank (and certain other lenders, collectively referred to as the “lenders,”) to establish a revolving credit facility with an initial maximum aggregate commitment of $35,000,000 (the “2010 Credit Facility”). On August 4, 2014, the 2010 Credit Facility was replaced by the Amended and Restated Credit Facility.
Under the 2010 Credit Facility, we were required to comply with certain restrictive and financial covenants. In January 2013, we became aware of a number of events of default under the 2010 Credit Facility relating to, among other things, our failure to use the net proceeds from our sale of our shares in our public offering and the sale of our assets to repay our borrowings under the 2010 Credit Facility and our failure to satisfy certain financial covenants under the 2010 Credit Facility, which we collectively referred to as the “existing events of default.” We also failed to comply with certain financial covenants as of March 31, 2013. Due to the existing events of default, KeyBank and the other lenders became entitled to exercise all of their rights and remedies under the 2010 Credit Facility and applicable law.
On April 1, 2013, our OP, certain subsidiaries of our OP which are borrowers under the 2010 Credit Facility (each a “Borrower” and collectively the “Borrowers”) and KeyBank, as lender and agent for the other lenders, entered into the Forbearance Agreement which amended the terms of the 2010 Credit Facility and provided for certain additional agreements with respect to the existing events of default. On July 31, 2014, in connection with the negotiation of the Amended and Restated Credit Facility, KeyBank agreed to extend the forbearance period under the Forbearance Agreement to August 14, 2014.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the year ended December 31, 2015, our total operating expenses did not exceed the 2%/25% Guidelines.
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Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly Distributions
In order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders.
Under the terms of the Amended and Restated Credit Facility, we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds specified in the Amended and Restated Credit Facility provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.
For a presentation of our quarterly distributions, not including Special Distributions, declared and paid to our common stockholders and holders of our common units, refer to Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
The tax composition of our distributions paid during the years ended December 31, 2015 and 2014, was as follows:
| 2015 | 2014 | |||||||
| Ordinary Income | 42 | % | 0 | % | ||||
| Capital gain | 58 | % | 0 | % | ||||
| Return of Capital | 0 | % | 100 | % | ||||
| Total | 100 | % | 100 | % | ||||
Special Distribution
In June 2011, we acquired a debt obligation (the “Distressed Debt”) for $18 million under our prior advisor, TNP Strategic Retail Advisor, LLC. In October 2011, we received the underlying collateral (the “Collateral”) with respect to the Distressed Debt in full settlement of our debt claim (the “Settlement”). At the time of the Settlement, we received an independent valuation of the Collateral’s fair market value (“FMV”) of $27.6 million. The Settlement resulted in taxable income to us in an amount equal to the FMV of the Collateral less our adjusted basis for tax purposes in the Distressed Debt. Such income was not properly reported on our 2011 federal income tax return, and we did not make a sufficient distribution of taxable income for purposes of the REIT qualification rules (the “2011 Underreporting”). We believe that we were able to rectify the 2011 Underreporting by making a special distribution (the “Special Distribution”) to our stockholders.
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On August 7, 2015, the board of directors authorized the Special Distribution of $2,248,000 on our common stock as of the close of business on August 10, 2015 (the “Record Date”). The Special Distribution was payable in cash, common stock or a combination of cash and common stock to, and at the election of, the stockholders of record as of the Record Date, provided, however, that the total amount of cash payable to all stockholders in the Special Distribution was $449,600 (the “Cash Amount”), with the balance of the Special Distribution, or $1,798,400 (the “Share Amount”), payable in the form of shares of common stock. Stockholders who did not return an election form, or who otherwise failed to properly complete an election form, before the deadline, received their pro rata portion of the Special Dividend entirely in shares of common stock.
On November 4, 2015, we paid $449,600 in cash and issued 273,729 shares of common stock having a value of $1,798,000 pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. Although we believe the Special Distribution allowed us to maintain our qualification as a REIT, there can be no complete assurance in this regard.
Funds from Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of a real estate company’s operating performance. The National Association of Real Estate Investment Trusts, or “NAREIT”, an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as in indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.
We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
The calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows:
| For the Years | ||||||||
| Ended December 31, | ||||||||
| FFO | 2015 | 2014 | ||||||
| Net income (loss) (1) | $ | 13,991,000 | $ | (8,889,000 | ) | |||
| Adjustments: (2) | ||||||||
| Net income related to membership interest | (173,000 | ) | (116,000 | ) | ||||
| Gain on disposal of assets | (20,764,000 | ) | (2,825,000 | ) | ||||
| Adjustment to reflect FFO of unconsolidated joint ventures | 480,000 | - | ||||||
| Depreciation of real estate | 3,482,000 | 5,492,000 | ||||||
| Amortization of in-place leases and other intangibles | 1,332,000 | 2,307,000 | ||||||
| FFO attributable to common shares and Common Units | (1,652,000 | ) | (4,031,000 | ) | ||||
| FFO per share/Common Unit | $ | (0.15 | ) | $ | (0.35 | ) | ||
| Weighted average common shares and Common Units outstanding | 11,392,509 | 11,401,610 | ||||||
| (1) | Our Common Units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to Common Units in the computation of FFO and including the Common Units together with weighted average shares outstanding for the computation of FFO per share and Common Unit. |
| (2) | Where applicable, adjustments exclude amounts attributable to membership interest. |
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Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist primarily of our investments in joint ventures and are described in Note 4. “Investments in Unconsolidated Joint Ventures” to the consolidated financial statements in this Annual Report. Our joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture members, and do not represent a liability of the members other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of December 31, 2015, we have provided carve-out guarantees in connection with our two unconsolidated joint ventures; in connection with those carve-out guarantees we have certain rights of recovery from our joint venture members.
Subsequent Events
Distributions
On January 30, 2016, we paid a fourth quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of December 31, 2015, totaling $684,000.
Gelson’s Development Joint Venture
On January 7, 2016, we, through wholly owned subsidiaries, entered into the Limited Liability Company Agreement of Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture Agreement”) to form a joint venture with Sunset & Gardner LA, LLC (“S&G LA” and together with us the “Gelson’s Members”), a subsidiary of Cadence Capital Investments, LLC (“Cadence”). Cadence is a real estate development and investment firm focused on commercial properties. They offer high-quality, market-driven developments, and have expertise in market planning and site selection build to suit and small center developments, redevelopment and repositioning of existing properties.
The Gelson’s Joint Venture Agreement provides for the ownership and operation of certain real property by Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture”), in which we own a 100% capital interest and a 50% profits interest. In exchange for ownership in the Gelson’s Joint Venture, we have agreed to contribute cash in an amount up to $7 million in initial capital contributions and $700,000 in subsequent capital contribution to the Gelson’s Joint Venture. S&G LA contributed its rights to acquire the real property, its interest under a 20 year lease with Gelson’s Markets (the “Gelson’s Lease”) and agreed to provide certain management and development services.
On January 28, 2016, the Gelson’s Joint Venture used our capital contributions, together with the proceeds of a loan from Buchanan Mortgage Holdings, LLC in the amount of $10,700,000, to purchase certain real property located at the corner of Sunset Boulevard and Gardner in Hollywood, California (the “Gelson’s Property”) from a third party seller, for a total purchase price of $12,950,000. The Gelson’s Joint Venture intends to proceed with obtaining all required governmental approvals and entitlements to replace the existing improvements on the property with a build to suit grocery store for Gelson’s Markets with an expected size of approximately 38,000 square feet. Gelson’s Markets was founded in 1951 and is recognized as one of the nation’s premier supermarket chains. Gelson’s Markets currently has 18 locations throughout Southern California.
Pursuant to the Gelson’s Joint Venture Agreement, S&G LA will manage and conduct the day-to-day operations and affairs of the Gelson’s Joint Venture, subject to certain major decisions set forth in the Gelson’s Joint Venture Agreement that require the consent of all the Gelson’s Members. Income, losses and distributions will generally be allocated based on the Gelson’s Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Gelson’s Joint Venture Agreement, we may be required to make additional capital contributions to the Gelson’s Joint Venture, in proportion to the Gelson’s Members’ respective ownership interests. Until we have received back our capital contribution all distributions go to us; thereafter, the Gelson’s Joint Venture will distribute the profits 50% to us and 50% to S&G LA.
We are currently evaluating the appropriate accounting treatment for the Gelson’s Joint Venture.
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3032 Wilshire Joint Venture
On March 7, 2015, we contributed $5,700,000 to the Wilshire Joint Venture in order to fund the acquisition of certain property commonly known as 3032 Wilshire Boulevard and 1210 Berkeley Street in Santa Monica, California (the “Wilshire Property”). The Wilshire Joint Venture Agreement provides for the ownership and operation of certain real property by 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture”), in which we own a 100% capital interest and a 50% profits interest.
On March 8, 2016, the Wilshire Joint Venture used our capital contributions, together with the proceeds of a loan from Buchanan Mortgage Holdings, LLC in the amount of $8,500,000, to acquire the Property from a third party seller, for a total purchase price of $13,500,000. The Wilshire Joint Venture intends to reposition and re-lease the existing improvements on the property. In connection with those efforts, in addition to the amounts funded for the closing, we have agreed to contribute $300,000 in subsequent capital contribution to the Wilshire Joint Venture. 3032 Wilshire SM contributed its rights to acquire the real property and agreed to provide certain management and leasing and redevelopment services.
Pursuant to the Wilshire Joint Venture Agreement, 3032 Wilshire SM will manage and conduct the day-to-day operations and affairs of the Wilshire Joint Venture, subject to certain major decisions set forth in the Wilshire Joint Venture Agreement that require the consent of all the Wilshire Members. Income, losses and distributions will generally be allocated based on the Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Wilshire Joint Venture Agreement, we may be required to make additional capital contributions to the Wilshire Joint Venture, in proportion to the Wilshire Members’ respective ownership interests. Until we have received back our capital contribution all distributions go to us; thereafter, the Wilshire Joint Venture will distribute the profits 50% to us and 50% to 3032 Wilshire SM.
We are currently evaluating the appropriate accounting treatment for the Wilshire Joint Venture.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Omitted as permitted under rules applicable to smaller reporting companies.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements and
supplementary data can be found beginning on Page F-1 of this Annual Report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. In connection with the preparation of this Annual Report, our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2015, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on its assessment, our management concluded that, as of December 31, 2015, our internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC applicable to smaller reporting companies.
Changes in Internal Control Over Financial Reporting
There has been no significant change in our internal control over financial reporting that occurred during the quarter ended December 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
As of the quarter ended December 31, 2015, all items required to be disclosed under Form 8-K were reported under Form 8-K.
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| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
Our current directors and executive officers and their respective ages and positions are listed below:
|
Name |
Age |
Position | ||
| Andrew Batinovich | 57 | Chief Executive Officer, Corporate Secretary and Director | ||
| Todd A. Spitzer | 55 | Chairman of the Board and Independent Director | ||
| Phillip I. Levin | 76 | Independent Director | ||
| Jeffrey S. Rogers | 47 | Independent Director | ||
| Terri Garnick | 55 | Chief Financial Officer and Treasurer |
Andrew Batinovich has served as our Chief Executive Officer and as a member of our board of directors since August 2013. Mr. Batinovich has also served as our Corporate Secretary since October 2013. From August 2013 through January 2014, Mr. Batinovich also served as our Chief Financial Officer. Mr. Batinovich has over 30 years of experience in the acquisition and management of commercial properties including retail, office and industrial. Mr. Batinovich also serves as President and Chief Executive Officer of Glenborough, a privately held full service real estate investment and management company focused on the acquisition, management and leasing of institutional quality commercial properties including retail, office and industrial properties. From December 2006 to October 2010, Mr. Batinovich served as President and Chief Executive Officer of Glenborough Acquisition Co., a company formed by an affiliate of Morgan Stanley which acquired Glenborough Realty Trust, a NYSE-listed REIT, in 2006 in a transaction valued at $1.9 billion. In 1996, Mr. Batinovich co-founded Glenborough Realty Trust, and served as President from 1997 to 2010, and as Chief Executive Officer from 2003 to 2010. Mr. Batinovich also served as Glenborough Realty Trust’s Chief Operating Officer from 1996 to 2002 and Chief Financial Officer from 1996 to 1997. During his 11 years with Glenborough Realty Trust, the company grew from just over $100 million in assets to approximately $1.9 billion. Prior to founding Glenborough Realty Trust, Mr. Batinovich served as Chief Operating Officer and Chief Financial Officer of Glenborough Corporation, a private real estate investment and management company, from 1984 until its merger with Glenborough Realty Trust in 1996. Prior to joining Glenborough Corporation in 1983, Mr. Batinovich was an officer of Security Pacific National Bank. Mr. Batinovich has served as an independent director of Sunstone Hotel Investors (SHO: NYSE), a public REIT that invests in hotel properties, since November 2011, and as an independent director of RAIT Financial Trust (RAS: NYSE), a public REIT that provides debt financing options to owners of commercial real estate and invests directly into commercial real estate, since March 2013. In addition, Mr. Batinovich is currently an independent director of G. W. Williams Co., a privately owned real estate company primarily focused on West Coast multi-family properties. Mr. Batinovich earned a BA in International Business Administration from the American University of Paris.
Mr. Batinovich is a Class I director with a term of office expiring at the 2016 annual meeting of stockholders. The board of directors has determined that Mr. Batinovich is qualified to serve as one of our directors due to his significant management experience for public and private real estate companies.
Todd A. Spitzer has served as one of our independent directors since January 22, 2014. Mr. Spitzer has also served as the Chairman of our board of directors and the Co-Chair of the Audit Committee since January 2014. Mr. Spitzer is currently the Orange County California Supervisor for the Third District. Mr. Spitzer has chaired the Orange County California Transportation Authority’s Finance and Administration Committee since January 2013 where he oversees the finances of the $1.2 billion agency, as well as the funds managed through the county’s transportation taxes. Since January 2013, he has also been a voting member of the Foothill and San Joaquin Hills Transportation Corridor Agencies. In addition, since 2011, Mr. Spitzer has been a consultant and social media advisor with expertise designing social media platforms and policies for broker–dealers regulated by FINRA and the SEC. From 2010 to the present, Mr. Spitzer has also served as an attorney at law at the Spitzer Law Office. From 2008 through 2010, Mr. Spitzer served as an assistant district attorney in the Orange County California District Attorney’s Office. Between December 2002 and November 2008, Mr. Spitzer served as an elected member of the California State Assembly. Mr. Spitzer earned a Master in Public Policy degree from the University of California, Berkeley in Berkeley, California, a Juris Doctorate degree from the University of California Hastings College of Law, in San Francisco, California, and a Bachelor of Arts degree in Government from the University of California, Los Angeles in Los Angeles, California.
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Mr. Spitzer is a Class II director with a term of office scheduled to expire at the 2017 annual meeting of stockholders. The board of directors has determined that Mr. Spitzer is qualified to serve as one of our directors due to the depth of his experience in public policy and governance and his professional experience as an attorney. The board has also determined that Mr. Spitzer meets the independence standards of our corporate governance documents, the SEC, the New York Stock Exchange and applicable law.
Phillip I. Levin has served as one of our independent directors since April 2011. Mr. Levin has served, since 1991, as President of Levin Development Company, a real estate development and consulting firm. Prior to founding Levin Development Company in 1991, Mr. Levin served for approximately 16 years with Coopers & Lybrand, L.L.P. (now PricewaterhouseCoopers), where he became the Managing Partner of the firm’s consulting practice in Michigan. From 1970 to 1974, Mr. Levin served as Manager of the Consulting Services Division of Arthur Young & Company (now Ernst & Young) in Toledo, Ohio. Prior to joining Arthur Young & Company, Mr. Levin served as a Financial Analyst for Ford Motor Company for approximately eight years. Mr. Levin holds a Master of Business Administration in Finance and a Bachelor of Science degree in Accounting from the University of Pittsburgh.
Mr. Levin is a Class III director with a term of office scheduled to expire at the 2015 annual meeting of stockholders (the “2015 Annual Meeting”). Mr. Levin was nominated for reelection at the 2015 Annual Meeting. However, the number of shares present in person or by proxy at the 2015 Annual Meeting was insufficient to establish a quorum for transacting business at the meeting. As a result, no matters were submitted to a vote of security holders. We did not adjourn the meeting to seek additional votes in order to establish a quorum. Mr. Levin will remain in office until his successor is elected and qualified.
The board of directors has determined that Mr. Levin is qualified to serve as one of our directors due to his experience as an officer of a real estate development and consulting firm and his professional experience as a certified public accountant. In addition, the board of directors believes that Mr. Levin is qualified to serve as the financial expert and chairperson of the audit committee due to his extensive experience as a certified public accountant.
Jeffrey S. Rogers has served as one of our independent directors since March 2009. Currently, Mr. Rogers is the President and Chief Executive Officer of LiftForward, Inc. LiftForward is an online financial community that connects investors with small businesses seeking capital. Prior to LiftForward, Mr. Rogers was the President of Zazma, Inc. (now known as Behalf, Inc.), which provides online financing to small and medium-sized businesses for the purchase of inventory, supplies, equipment and services. Prior to Zazma (now known as Behalf, Inc.), Mr. Rogers, as President and Chief Operating Officer, grew and managed one of the largest professional services firms in the United States, Integra Realty Resources, Inc. Integra, with 64 offices in the United States and Mexico, serves financial institutions, corporations, law firms, and government agencies. Under his leadership, the company built proprietary analytical technology in the industry, which fueled record growth for the company over a nine-year period. Prior to joining Integra, Mr. Rogers held other operating positions and worked for several Wall Street firms as an investment banker. Mr. Rogers currently serves on the board of directors of Presidential Realty Corp., a public REIT. Mr. Rogers has also served on the Finance Committee of the Young Presidents Organization since March 2009 and as Audit Committee Chairman from July 2010 to July 2012. Mr. Rogers earned a Master of Business Administration degree from The Darden School, University of Virginia in Charlottesville, Virginia, a Juris Doctorate degree from Washington and Lee University School of Law in Lexington, Virginia and a Bachelor of Arts degree in Economics from Washington and Lee University.
Mr. Rogers is a Class III director with a term of office scheduled to expire at the 2015 Annual Meeting. Mr. Rogers was nominated for reelection at the 2015 Annual Meeting. However, the number of shares present in person or by proxy at the 2015 Annual Meeting was insufficient to establish a quorum for transacting business at the meeting. As a result, no matters were submitted to a vote of security holders. We did not adjourn the meeting to seek additional votes in order to establish a quorum. Mr. Rogers will remain in office until his successor is elected and qualified.
The board of directors has determined that Mr. Rogers is qualified to serve as one of our directors due to his previous leadership position with a commercial real estate valuation and counseling firm and his professional experience.
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Terri Garnick has served as our Chief Financial Officer and Treasurer since January 2014. Since April 2005, Ms. Garnick has served as Senior Vice President and Chief Accounting Officer for our property manager, Glenborough. Ms. Garnick oversees all property management accounting, financial statement preparation, SEC reporting, cash management, internal audit, external audit coordination, and tax returns for Glenborough and its investment affiliates, as well as information technology and human resources functions. Ms. Garnick and Glenborough have been providing accounting services to the Company since May 2013. From June 2001 until April 2005, Ms. Garnick worked as Special Projects Coordinator at Glenborough. Between January 1996 and June 2001, Ms. Garnick served as Senior Vice President and Chief Accounting Officer for Glenborough Realty Trust, Inc., a real estate investment trust with a portfolio of primarily office properties. Prior to the merger of Glenborough with Glenborough Realty Trust, Inc., Ms. Garnick served from August 1992 until January 1996 as Vice President of Glenborough Corporation, a private real estate investment and management firm. Prior to her promotion to Vice President, Ms. Garnick worked at Glenborough Corporation as an Accounting Manager from October 1989 until August 1992. Before joining Glenborough Corporation in 1989, Ms. Garnick was Controller at August Financial Corporation, a real estate investment and management company and a Senior Accountant at Deloitte, Haskins & Sells, an accounting firm. Ms. Garnick earned a certified public accountant designation from the state of California and holds a Bachelor of Science degree in Accounting from San Diego State University.
Section 16(a) Beneficial Ownership Reporting Compliance
Our directors and executive officers, and any persons holding more than 10% of our outstanding common stock, have filed reports with the SEC with respect to their initial ownership of common stock and any subsequent changes in that ownership. We believe that during 2015 each of our officers and directors complied with any applicable filing requirements. In making this statement, we have relied solely on written representations of our directors and executive officers and copies of reports that they have filed with the SEC. In 2015, no person held more than 10% of the outstanding common stock.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that contains general guidelines for conducting our business and is designed to help directors, employees and independent consultants resolve ethical issues in an increasingly complex business environment. The Code of Ethics applies to all of our officers, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions and all members of our board of directors. The Code of Ethics covers topics including, but not limited to, conflicts of interest, record keeping and reporting, payments to foreign and U.S. government personnel and compliance with laws, rules and regulations. We will provide to any person without charge a copy of our Code of Ethics, including any amendments or waivers, upon written request delivered to our principal executive office at the address listed on the cover page of this Annual Report.
Audit Committee Financial Expert
The audit committee consists of independent directors Phillip I. Levin, Jeffrey S. Rogers and Todd A. Spitzer. Mr. Levin and Mr. Spitzer are co-chairmen of the audit committee. Our board of directors has determined that Mr. Levin is an “audit committee financial expert,” as defined by the rules of the SEC. The biography of Mr. Levin, including his relevant qualifications, is previously described in this Item 10.
| ITEM 11. | EXECUTIVE COMPENSATION |
Executive Officer Compensation
None of our executive officers are employed by us or receive any compensation from us in exchange for their service as our executive officers. Currently, Andrew Batinovich serves as our Chief Executive Officer and Corporate Secretary, and Terri Garnick serves as our Chief Financial Officer and Treasurer. We have no other executive officer positions. Our executive officers are officers and/or employees of our Advisor or its affiliates, and our executive officers are compensated by our Advisor or its affiliates, in part, for their services to us or our subsidiaries. See Part III, Item 13, “Certain Relationships and Related Transactions and Director Independence” for a discussion of the fees paid to our Advisor and its affiliates.
Director Compensation
If a director is also one of our executive officers or an affiliate of our Advisor, we do not pay any compensation to that person for services rendered to us as a director. The amount and form of compensation payable to our independent directors for their service to us is determined by our board of directors, based upon recommendations from our Advisor.
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The following table sets forth the compensation paid to our directors for the year ended December 31, 2015:
| Name | Fees Earned or Paid in Cash (1) | Restricted Stock Grants (2) | All Other Compensation | Total | ||||||||||||
| Phillip I. Levin | $ | 50,000 | $ | — | $ | — | $ | 50,000 | ||||||||
| Jeffrey S. Rogers | 40,000 | — | — | 40,000 | ||||||||||||
| Todd A. Spitzer | 50,000 | — | — | 50,000 | ||||||||||||
| Andrew Batinovich (3) | — | — | — | — | ||||||||||||
| (1) | The amounts shown in this column include fees earned for services rendered in 2015, regardless of when paid. |
| (2) | Reflects grants of shares of restricted common stock pursuant to our incentive award plan. The amounts shown in this column reflect the aggregate fair value computed as of the grant date in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. |
| (3) | Andrew Batinovich does not receive compensation as a director because he serves as our Chief Executive Officer and Secretary. |
Cash Compensation
All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attending meetings of the board of directors. If a director is also one of our officers, we will not pay any compensation to such person for services rendered as a director.
We pay each of our independent directors an annual fee of $40,000, which fee is paid monthly in arrears and prorated for the actual period of service. We pay each of the audit committee co-chairs an additional annual fee of $10,000, which is paid monthly in arrears and prorated for the actual period of service. We do not pay any additional fees for committee service, service as chairman of the board or a committee, or attendance at board of directors or committee meetings. Under our bylaws, director compensation for 2015 was limited to $40,000 per year, except that each chairman of the audit committee was entitled to an additional $2,500 per quarter.
Equity Plan Compensation
We have reserved 2,000,000 shares of common stock for stock grants pursuant to our 2009 Long-Term Incentive Award Plan, which we refer to as the “incentive award plan.” We did not grant any equity compensation awards pursuant to the incentive award plan during the year ended December 31, 2015.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under our incentive award plan, as of December 31, 2015:
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |||||||||
| Equity compensation plans approved by security holders: | — | $ | — | 1,950,000 | ||||||||
| Equity compensation plans not approved by security holders: | N/A | N/A | N/A | |||||||||
| Total | — | — | 1,950,000 | |||||||||
| (1) | One-third of any restricted stock granted to each independent director pursuant to the terms of our incentive award plan becomes non-forfeitable on the grant date and one-third of the remaining shares of restricted stock become non-forfeitable on each of the first two anniversaries of the grant date. |
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Security Ownership of Beneficial Owners
The following table sets forth the beneficial ownership of our common stock, as of March 2, 2016, for each person or group that holds more than 5% of our common stock, for each of our current directors and executive officers and for our current directors and executive officers as a group. To our knowledge, each person that beneficially owns our shares has sole voting and disposition power with regard to such shares.
Unless otherwise indicated below, each person or entity has an address in care of our principal executive offices at 400 South El Camino Real, Suite 1100, San Mateo, California 94402.
| Name of Beneficial Owner (1) | Number of Shares Beneficially Owned | Percent of All Shares | ||||||
| Andrew Batinovich (2) | 138,362 | 1.26 | % | |||||
| Todd A. Spitzer | 0 | * | ||||||
| Phillip I. Levin | 10,000 | * | ||||||
| Jeffrey S. Rogers | 13,944 | * | ||||||
| Terri Garnick | 0 | * | ||||||
| All directors and executive officers as a group | 162,306 | 1.48 | % | |||||
| * | Less than 1% of the outstanding common stock. |
| (1) | Under SEC rules, a person is deemed to be a “beneficial owner” of a security if he or she has or shares “voting power,” which includes the power to dispose of or to direct the disposition of such security. A person also is deemed to be a beneficial owner of any securities that he or she has a right to acquire within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which he or she has no economic or pecuniary interest. |
| (2) | Includes 138,362 shares held by Glenborough Property Partners, LLC. Mr. Batinovich may be deemed to have beneficial ownership of the shares beneficially owned by Glenborough Property Partners, LLC. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The following describes all transactions and currently proposed transactions between us and any related person, since January 1, 2014, in which more than $120,000 was or will be involved and such related person had or will have a direct or indirect material interest. Our independent directors are specifically charged with and have examined the fairness of such transactions to our stockholders, and (except as noted below) are of the view that all such transactions are fair and reasonable to us.
Guaranty Fee
In connection with the acquisition financing on Osceola Village, we entered into a Master Lease Agreement with TNP SRT Osceola Village Master Lessee, LLC, a wholly owned subsidiary of our operating partnership. Pursuant to the Master Lease Agreement, our former sponsor, Thompson National Properties, LLC (“TNP”), made certain guarantees with respect to the Master Lease Agreement. As consideration for the guaranty, we entered into a reimbursement and fee agreement to provide for up-front payments and annual guaranty fee payments for the duration of the guaranty period. For the years ended December 31, 2015 and 2014, we paid $1,000 and $14,000, respectively, in guaranty fees to our Prior Advisor and its affiliates. As of December 31, 2014, guaranty fees of approximately $1,000 were included in amounts due to affiliates.
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Fees Paid to our Advisor
In August 2013 we entered into an advisory agreement with our Advisor and on August 3, 2015, we entered into the Second Amendment to the Advisory Agreement (as amended, the “Advisory Agreement”) with our Advisor to renew the Advisory Agreement for an additional term of twelve months, beginning on August 10, 2015. In all other material respects, the terms of the Advisory Agreement remained unchanged.
Pursuant to the terms of the Advisory Agreement, we pay our Advisor the fees described below, subject to certain limitations set forth in the Advisory Agreement and our charter.
| · | We pay our Advisor an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by us or (2) our allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. For the year ended December 31, 2015, we paid our Advisor $79,000 in acquisition fees. For the year ended December 31, 2014, we did not pay our Advisor any acquisition fees. |
| · | We pay our Advisor an origination fee equal to 1% of the amount funded by us to acquire or originate real estate-related loans, including any acquisition expenses related to such investment and any debt used to fund the acquisition or origination of the real estate-related loans. We will not pay an origination fee to our Advisor with respect to any transaction pursuant to which we are required to pay our Advisor an acquisition fee. For the years ended December 31, 2015 and 2014, we did not pay our Advisor any origination fees. |
| · | We pay our Advisor a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by us or our operating partnership and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by us or our operating partnership. For the year ended December 31, 2015, we paid our Advisor a financing coordination fee of $87,000. For the year ended December 31, 2014, we paid our Advisor a financing coordination fee of $300,000. |
| · | We pay our Advisor a disposition fee of up to 50% of a competitive real estate commission, but not to exceed 3% of the contract sales price, in connection with the sale of an asset in which our Advisor or any of its affiliates provides a substantial amount of services, as determined by our independent directors. For the year ended December 31, 2015, we paid our Advisor $1,173,000 in disposition fees. For the year ended December 31, 2014, we paid our Advisor $268,000 in disposition fees. |
| · | We pay our Advisor an asset management fee equal to a monthly fee of 1/12th of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments we own, including any debt attributable to such investments or (2) the fair market value of our investments (before non-cash reserves and deprecation) if our board has authorized the estimate of a fair market value of our investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year. For the year ended December 31, 2015, our Advisor earned $978,000 in asset management fees, and $19,000 was included in amounts due to affiliates at December 31, 2015. For the year ended December 31, 2014, our Advisor earned $1,320,000 in asset management fees, and there was no amount included in amounts due to affiliates at December 31, 2014. |
In addition to the fees we will pay to our Advisor, we or our operating partnership will pay directly, or reimburse our Advisor for, certain third-party expenses paid or incurred by our Advisor or its affiliates in connection with the services our Advisor provides pursuant to the Advisory Agreement, subject to certain limitations as set forth in the Advisory Agreement. Those limitations include, after the first four fiscal quarters following our Advisor’s engagement, the 2%/25% Guidelines discussed below with respect to certain general and administrative expenses. In addition, under the Advisory Agreement, to the extent that our Advisor or any affiliate receives fees from any of our subsidiaries for services rendered to such subsidiary, then the amount of such fees will be offset against any amounts due to our Advisor for the same services. For the year ended December 31, 2015, we incurred $250,000 of reimbursed operating expenses to our Advisor, and $27,000 of reimbursed operating expenses was included in amounts due to affiliates at December 31, 2015. For the year ended December 31, 2014, we incurred $72,000 of reimbursed operating expenses to our Advisor, and there were no operating expenses amounts due to affiliates at December 31, 2014.
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2%/25% Guidelines
Under the Advisory Agreement, our Advisor and its affiliates are entitled to reimbursement of actual expenses incurred for certain administrative and other services provided to us for which they do not otherwise receive a fee. We will not reimburse our Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between our operating partnership and our Advisor or its affiliates. After the first four fiscal quarters following our Advisor’s engagement, we will not reimburse our Advisor or its affiliates at the end of any fiscal quarter in which “total operating expenses” for the four consecutive fiscal quarters then ended, or the expense year, exceed the greater of (1) 2% of our average invested assets or (2) 25% of our net income for such expense year. Our Advisor is required to reimburse us quarterly for any amounts by which our total operating expenses exceed the 2%/25% Guidelines in the previous expense year, or we may elect to subtract such excess amount from the “total operating expenses” for the subsequent fiscal quarter.
For purposes of the 2%/25% Guidelines, “total operating expenses” means all costs and expenses paid or incurred by us, as determined under U.S. generally accepted accounting principles, that are in any way related to our operation or to corporate business, including Advisory fees, but excluding (1) the expenses of raising capital such as legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and listing of the shares, (2) interest payments, (3) taxes, (4) non-cash expenditures such as depreciation, amortization and bad debt reserves, (5) incentive fees, (6) acquisition fees, origination fees and acquisition expenses, (7) real estate commissions on the sale of property, and (8) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property). For purposes of calculating the excess amount, our board of directors has determined that “total operating expenses” will not include (a) amounts (i) paid to our Prior Advisor or its affiliates related to or in connection with the termination of the Prior Advisory Agreement, the dealer manager agreement, or any property management agreements or other agreements with our Prior Advisor or its affiliates, or (ii) amounts incurred in connection with the termination of the agreements described in the foregoing clause (i), including, without limitation, attorney’s fees, litigation costs and expenses and amounts paid in settlement (but excluding costs associated with obtaining lender approvals to any such termination and engagement of our Advisor or its affiliates as a replacement under such agreements), and (b) “total operating expenses” incurred prior to the date of the execution of the Advisory Agreement.
Our “average invested assets” for any period are equal to the average book value of our assets invested in equity interests in, and loans secured by, real estate before deducting reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during the period. Our “net income” for any period is equal to our total revenues less total expenses other than additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for such period.
Our Advisor is required to reimburse the excess amount to us during the fiscal quarter following the end of the expense year unless (1) we elect to subtract the excess amount from the “total operating expenses” for the subsequent fiscal quarter, or (2) the independent directors determine that the excess expenses are justified based on unusual and non-recurring factors which they deem sufficient. If the independent directors determine that the excess expenses are justified, the excess amount may be carried over and included in “total operating expenses” in subsequent expense years and we will send our stockholders written disclosure, together with an explanation of the factors the independent directors considered in making such a determination. The determination will also be reflected in the minutes of the board of directors.
Issuance of Special Units to our Advisor
Pursuant to the Advisory Agreement, in April 2014 we caused our operating partnership to issue to our Advisor a separate series of limited partnership interests of our operating partnership in exchange for a capital contribution to our operating partnership of $1,000. The terms of the special units entitle our Advisor to (i) 15% of our net sale proceeds upon disposition of our assets after our stockholders receive a return of their investment plus a 7% cumulative, non-compounded rate of return or (ii) an equivalent amount in the event we list our shares of common stock on a national securities exchange or upon certain terminations of the Advisory Agreement after our stockholders are deemed to have received a return of their investment plus a 7% cumulative, non-compounded rate of return.
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Capital Infusion by Affiliate of our Advisor
To enable us to meet our short-term liquidity needs for operations, as well as to build working capital for future operations, we determined that we needed to obtain a cash infusion of approximately $1,500,000 to $2,000,000 on or before July 15, 2013. In considering the available options for securing such cash infusion, we noted that all of our real property assets were encumbered with secured financing obligations, which would have restricted our ability to obtain secondary or junior financing secured by the assets. We also considered the sale of real property assets as a means of raising cash, but concluded that (1) the timing and uncertainty of such sales was disadvantageous, (2) the sale of properties with secured debt outside our line of credit with KeyBank would have resulted in significant prepayment penalties to retire current debt and (3) the sale of properties securing the KeyBank credit facility would not have resulted in net proceeds to us because, pursuant to the terms of the KeyBank credit facility, at the time all of the sales proceeds would be required to be used to pay down the KeyBank credit facility. We elected not to pursue third-party unsecured financing because such financing would have likely carried a relatively high interest rate. Further, any new financing would have required the consent of KeyBank. After considering the foregoing options, we ultimately approved a cash infusion of $1,929,000 in the form of an equity investment in Secured Holdings, our wholly owned subsidiary, by SRT Manager, an affiliate of Glenborough, as described below. As discussed below, under the agreement SRT Manager exercised control over the day-to-day business of Secured Holdings, provided that we retained control over certain major decisions with regard to property sales, acquisition, leasing and financing. We believed that, in addition to the benefits of obtaining the required infusion of working capital, the transition in day-to-day management of Secured Holdings might strengthen our position in ongoing negotiations with KeyBank with regard to an extension of our forbearance agreement with KeyBank and the restructuring of the KeyBank credit facility. The approval of KeyBank was obtained with respect to the transaction.
On July 9, 2013, SRT Manager acquired a 12% membership interest in Secured Holdings pursuant to a Membership Interest Purchase Agreement (the “Purchase Agreement”) by and among SRT Manager, Secured Holdings, us and our operating partnership. As of December 31, 2014, SRT Manager owned an 8.33% membership interest in Secured Holdings, and Secured Holdings owned two of the 15 multi-tenant retail properties in the Company’s property portfolio. For information regarding the ownership of Secured Holdings see “Transfer of Constitution Trail to Secured Holdings” and “–Entry Into Joint Venture Agreements–SGO Joint Venture” below.
Pursuant to the Purchase Agreement, SRT Manager contributed $1,929,000 to Secured Holdings in exchange for its membership interest. Following the acquisition of the 12% membership interest by SRT Manager, the remaining 88% membership interest in Secured Holdings was held by us, through our operating partnership. We also agreed to jointly and severally indemnify Secured Holdings and SRT Manager and their respective affiliates from and against any liabilities, damages, costs or expenses (including legal fees) resulting from or related to the termination of the management agreements between Secured Holdings or its subsidiaries and TNP Property Manager.
In connection with the acquisition of the membership interest in Secured Holdings by SRT Manager, SRT Manager and the operating partnership entered into the First Amended and Restated Limited Liability Company Agreement of Secured Holdings (the “Operating Agreement”) in July 2013. The day-to-day business, property and affairs of Secured Holdings were under the management and control of SRT Manager, as the sole manager of Secured Holdings. The Operating Agreement provided us with consent rights with respect to certain major decisions. The Manager could be removed for conduct constituting fraud, deceit, gross negligence, reckless or intentional misconduct or a knowing violation of law.
Pursuant to the Operating Agreement, we had the right, at any time, to initiate a buy-sell option with respect to the interests in Secured Holdings (the “Buy Sell Option”). SRT Manager could not exercise this Buy Sell Option. If we elected to exercise the Buy Sell Option, SRT Manager would have 30 days from the receipt of the option notice to elect to either (1) purchase our membership interest in Secured Holdings for the Distribution Amount (as defined below) allocable to us on the closing date or (2) sell its membership interest to us for the Distribution Amount allocable to SRT Manager on the closing date. The “Distribution Amount” would be an amount equal to the respective amounts that would be received by the members pursuant to the Operating Agreement (subject to adjustment on the closing date for outstanding cash balances, accounts payable and accounts receivable) in the event that Secured Holdings sold all of its properties and assets for the net asset value of the properties and assets (based upon third-party appraisals) free and clear of all liabilities other than then-existing mortgage loans and distributed the net proceeds from such sale to the members pursuant to the Operating Agreement, assuming that Secured Holdings had paid all liabilities and any and all applicable transfer taxes, document stamps, or similar fees.
Pursuant to the terms of the Operating Agreement, not less often than quarterly, after having made provisions for adequate cash reserves for current and future operating and working capital, the Manager would make distributions of available operating cash to the members in proportion to the members’ interests in Secured Holdings. In the event of the disposition or refinancing of a property, the net proceeds thereof would be distributed to the members within 30 days as follows: (1) first, to SRT Manager until it has received its previously unreturned capital contributions with respect to such property; (2) second, to SRT Manager until it has achieved a 7% internal rate of return with respect to its capital contributions with respect to such property; (3) next, to us until we have received our previously unreturned capital contributions with respect to such property; and (4) next, to all members in proportion to their respective membership interests.
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The Operating Agreement further provided that, in the event a proposed disposition of a property (a “Proposed Disposition”) was approved by one member but failed to receive the required unanimous approval of all members, the Manager would notify the non-consenting member (the “Non-Consenting Member”) in writing and the Non-Consenting Member would have a right of first opportunity (the “ROFO”) to acquire the property that is the subject of the Proposed Disposition. If the Non-Consenting Member failed to deliver an offer for such property within 30 days’ notice, the Manager could pursue the Proposed Disposition on behalf of Secured Holdings. If the Non-Consenting Member did provide an offer, the Manager would have 10 business days from receipt of the offer to accept or reject the offer. If the Manager rejected the offer from the Non-Consenting Member, the property would be marketed for sale to unrelated third-parties at a price in excess of the offer from the Non-Consenting Member, as set forth in the Operating Agreement.
Pursuant to the Operating Agreement, SRT Manager or its affiliates were entitled to receive the following fees from Secured Holdings:
| · | An acquisition fee payable for services rendered in connection with the selection, investigation and acquisition of investments by Secured Holdings. The total amount of the acquisition fees payable to SRT Manager or its affiliates equaled 1% of the cost of all investments, including acquisition expenses and any debt attributable to the investments. |
| · | A financing coordination fee payable for services rendered in connection with any financing obtained or assumed, directly or indirectly, by Secured Holdings or its subsidiaries and used to acquire investments, or the refinancing of any financing obtained or assumed, directly or indirectly, by Secured Holdings or its subsidiaries, in an amount equal to 1% of the amount made available or outstanding under any such financing or refinancing. |
| · | A disposition fee payable for services rendered in connection with the sale or transfer of any assets of Secured Holdings in an amount equal to up to 50% of a competitive real estate commission, but not to exceed 1% of the contract sales price. |
| · | A monthly asset management fee payable for services rendered in connection with the management of Secured Holdings’ assets in an amount equal to equal to 1/12th of 0.6% of the higher of (1) the aggregate cost of all investments Secured Holdings owns, including the debt attributable to such investments, or (2) the fair market value of all investments Secured Holdings owns. |
In addition to the foregoing fees, SRT Manager or its affiliates were entitled to compensation for property management services pursuant to property management agreements between the Company, Secured Holdings and SRT Manager or its affiliates. In addition, under the Advisory Agreement, to the extent that Manager received fees from any of our subsidiaries for services rendered to such subsidiary, then the amount of such fees would be offset against any amounts due to our Advisor for the same services.
In connection with the Company’s entry into the Oaktree Joint Venture, as discussed further below under “Oaktree Joint Venture,” Secured Holdings sold its two properties to the Oaktree Joint Venture. Pursuant to the Operating Agreement, the proceeds from the sale were distributed to the members of Secured Holdings. As a result, on March 12, 2015, Secured Holdings paid SRT Manager $2,102,000 in full redemption of its 8.33% membership interest in Secured Holdings.
Transfer of Constitution Trail to Secured Holdings
On August 4, 2014, the operating partnership, Secured Holdings, TNP SRT San Jacinto, LLC, at the time a wholly owned subsidiary of Secured Holdings, TNP SRT Aurora Commons, LLC, at the time a wholly owned subsidiary of Secured Holdings, and SRT Constitution Trail, LLC, at the time a wholly owned subsidiary of Secured Holdings (collectively, the “Borrowers”), entered into the Amended and Restated Credit Facility with KeyBank. On August 4, 2014, as required by the Amended and Restated Credit Facility, the operating partnership contributed 100% of its sole membership interest in SRT Constitution Trail, LLC, which owned Constitution Trail, to Secured Holdings (the “Constitution Transaction”). Prior to the Constitution Transaction, the operating partnership owned 88% of the membership interests in Secured Holdings and SRT Manager owned 12% of the membership interests in Secured Holdings. Following the Constitution Transaction, the operating partnership owned 91.67% of the membership interests in Secured Holdings and SRT Manager owned 8.33% of the membership interests in Secured Holdings. For purposes of calculating the revised membership interests in Secured Holdings, the parties used the third-party valuations for Constitution Trail and other assets held by Secured Holdings that were obtained in connection with the publication of an estimated value per share by the Company in July 2014.
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The Company provided a guaranty of all of the obligations of the Borrowers under the Amended and Restated Credit Facility and all other loan documents in connection with the Amended and Restated Credit Facility. The Company also paid Glenborough a financing coordination fee of $300,000 in 2014 in connection with the Amended and Restated Credit Facility.
As further described below under “–Entry into Joint Venture Agreements–SGO Joint Venture”, Constitution Trail was sold to the SGO Joint Venture on March 11, 2015, as part of the formation of the SGO Joint Venture.
Entry into Joint Venture Agreements
SGO Joint Venture
Entry into SGO Joint Venture Agreement
On March 11, 2015, we, through a wholly owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisition Venture, LLC (the “SGO Agreement”) to form a joint venture with Grocery Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree Real Estate Opportunities Fund VI, L.P. (“Oaktree”), and GLB SGO, LLC, a wholly owned subsidiary of Glenborough Property Partners, LLC (“GPP” and together with us and Oaktree, the “SGO Members”). GPP is an affiliate of our property manager, Glenborough, and an affiliate of our Advisor.
The SGO Agreement provides for the ownership and operation of SGO Retail Acquisition Venture, LLC (the “SGO Joint Venture”), in which we own a 19% interest, GPP owns a 1% interest, and Oaktree owns an 80% interest. In exchange for ownership in the SGO Joint Venture, we contributed $4.5 million to the SGO Joint Venture, which amount was credited against our sale of the Initial SGO Properties (as defined below) to the Joint Venture (as described below), GPP contributed $0.2 million to the SGO Joint Venture, and Oaktree contributed $19.1 million to the SGO Joint Venture. We advanced $7.0 million to Oaktree to finance Oaktree’s capital contribution to the SGO Joint Venture in exchange for a recourse demand note from Oaktree at a rate of 7% interest. We had the right to call back the advanced funds upon 12 days written notice. As of December 31, 2015, the entire $7.0 million note from Oaktree has been paid off. We negotiated for this loan structure in order to maximize short-term returns and minimize short-term dilution related to the use of the SGO Joint Venture proceeds pending their reinvestment.
Pursuant to the SGO Agreement, GPP will manage and conduct the day-to-day operations and affairs of the SGO Joint Venture, subject to certain major decisions set forth in the SGO Agreement that require the consent of at least two members, one of whom must be Oaktree. Income, losses and distributions will generally be allocated based on the members’ respective ownership interests. Additionally, in certain circumstances described in the SGO Agreement, the members may be required to make additional capital contributions to the SGO Joint Venture, in proportion to the members’ respective ownership interests.
Pursuant to the SGO Agreement, the SGO Joint Venture will pay GPP a monthly asset management fee equal to a percentage of the aggregate investment value of the property owned by the SGO Joint Venture in the preceding month. In addition, if Oaktree has received a 12% internal rate of return on its capital contribution, then promptly following the sale of the last of the Initial SGO Properties, the SGO Joint Venture will pay GPP a disposition fee equal to one percent of the aggregate net sales proceeds received by the SGO Joint Venture from the sales of the Initial SGO Properties.
The SGO Joint Venture will make distributions of net cash flow to the Members no less than quarterly, if appropriate. Distributions will be pro rata to the SGO Members in proportion to their respective ownership interests in the SGO Joint Venture until the SGO Members have received a 12% internal rate of return on their capital contribution. Thereafter distributions will be 5% to us, 5% to GPP and the balance to us, GPP and Oaktree pro rata in proportion to each SGO Member’s respective ownership interests in the SGO Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 17% internal rate of return on its capital contribution and a 1.5 equity multiple on its capital contribution. Distributions will then be 12.5% to us, 5% to GPP and the balance to us, GPP and Oaktree pro rata in proportion to each SGO Member’s respective ownership interests in the SGO Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 22% internal rate of return on its capital contribution and a 1.75 equity multiple on its capital contribution (the “SGO Promoted Returns”). Distributions will then be 20% to us, 5% to GPP and the balance to us, GPP and Oaktree pro rata in proportion to each SGO Member’s respective ownership interests in the SGO Joint Venture. The portion of the SGO Promoted Returns payable to GPP are referred to herein as the “GPP SGO Incentive Fee.” The portion of the SGO Promoted Returns payable to us are referred to herein as our “SGO Earn Out.” As a part of the negotiations for the SGO Joint Venture, Glenborough agreed to reduce certain property management and related charges payable by the SGO Joint Venture from levels that were in place for these assets when held by us; the GPP SGO Incentive Fee was implemented in order to provide GPP and its affiliates with an opportunity to recoup those reductions should the SGO Joint Venture assets perform well financially.
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The SGO Joint Venture structure, as originally discussed between Oaktree and us, contemplated that we would be a 20% participant in the SGO Joint Venture and that we or one of our subsidiaries would serve as managing member of the SGO Joint Venture. Under that proposed structure, Oaktree required that it have the right to restrict our ability to terminate our Advisor during the term of the SGO Joint Venture. This was not acceptable to our board of directors, including all of our independent directors, or our Advisor. Further, our SGO Promoted Returns would be at risk if Glenborough as property manager or our Advisor committed certain defaults under the transaction documents, or failed to achieve certain financial results within the SGO Joint Venture. These same triggers could also have resulted in giving Oaktree the right to remove us as managing member from the SGO Joint Venture. This would have put us at risk of potentially losing the SGO Promoted Returns and our position as managing member of the SGO Joint Venture based on the actions of our Advisor as it managed the day-to-day operations of the SGO Joint Venture on our behalf. Neither of these provisions were acceptable to our board of directors, including all of our independent directors, or our Advisor; accordingly our board of directors, including all of our independent directors, endorsed a structure whereby GPP agreed to pay cash to become a 1% managing member, and put that position and the GPP SGO Incentive Fee at risk of removal/forfeiture, while insulating our 19% position and our SGO Earn Out from those risks, while further permitting the board of directors to retain full discretion over the continued employment of our advisor.
Entry into Property Management Agreement
On March 11, 2015, the SGO Joint Venture, through its wholly owned subsidiaries, also entered into a Property Management Agreement with Glenborough (the “SGO Property Management Agreement”), pursuant to which Glenborough will act as the property manager for the Initial SGO Properties and will have responsibility for the day-to-day management, operation and maintenance of the Initial SGO Properties. The initial term of the SGO Property Management Agreement will continue for so long as the SGO Joint Venture owns the Initial SGO Properties and Glenborough owns at least a 0.5% interest in the SGO Joint Venture, and provided that no event of default by Glenborough or any of its affiliates under the SGO Joint Venture Agreement exists and Glenborough has not been removed as the managing member of the SGO Joint Venture pursuant to the SGO Joint Venture Agreement.
Under the SGO Property Management Agreement, Glenborough will receive fees for its services as set forth below:
| · | Management fee. Glenborough earns a monthly management fee equal to 3.0% of the gross revenues collected from the operation of each property. |
| · | Construction management fee. Glenborough earns a construction management fee (on a project-by-project basis) for any construction projects the cumulative cost of which, as defined in the SGO Property Management Agreement, exceed $25,000. The construction management fee is equal to: (i) five percent (5.00%) of the first $300,000 of the cumulative costs; (ii) four percent (4.00%) of the cumulative costs which exceed $300,000 but are less than or equal to $500,000; and (iii) three percent (3.00%) of all cumulative costs in excess of $500,000. |
| · | Leasing commissions. Glenborough earns leasing commissions equal to: (i) six percent (6%) of base rent for the first one hundred twenty (120) months of the initial term for new leases procured by Glenborough and expansions of existing leases, and (ii) three percent (3%) of base rent for the first one hundred twenty (120) months of the renewal term for extensions and renewals of existing leases. In certain circumstances, pursuant to the SGO Property Management Agreement, if the foregoing leasing commission structure is not the structure that is commonly used in a particular market area where a property is located, then the SGO Joint Venture and Glenborough may use an alternative leasing commission structure that is commonly used in such market area. It is expected that Glenborough will pay out some or all of these leasing commissions to third-party brokers who participate in the leasing process. |
Sale of Initial Properties to SGO Joint Venture
On March 11, 2015, as part of the formation of the SGO Joint Venture, we, through TNP SRT Osceola Village, LLC, our indirect wholly owned subsidiary, SRT Constitution Trail, LLC, a wholly owned subsidiary of SRT Secured Holdings, LLC (“SRT Holdings”), and TNP SRT Aurora Commons, LLC, a wholly owned subsidiary of SRT Holdings, entered into a Purchase and Sale Agreement effective March 11, 2015, to sell Osceola Village, Constitution Trail and Aurora Commons (together with Osceola Village and Constitution Trail, the “Initial SGO Properties”) to the SGO Joint Venture. SRT Holdings is jointly owned by our operating partnership and SRT Manager, an affiliate of Glenborough. The closing of the sale was conditioned on the SGO Joint Venture issuing us a 19% membership interest and GPP a 1% membership interest in the SGO Joint Venture.
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The cash sale price for the Initial SGO Properties was $22.0 million for Osceola Village, $23.1 million for Constitution Trail, and $8.5 million for Aurora Commons. Of the aggregate $53.6 million cash purchase price for the Initial SGO Properties, the SGO Joint Venture obtained a $34.0 million mortgage loan from Bank of America Merrill Lynch, an unaffiliated third party, as lender, of which $30.0 million was available at closing, and paid the balance in cash.
Due to the related party membership interests in the SGO Joint Venture, the sale of the Initial Properties is considered a partial sale in accordance with ASC Subtopic 360-20, Property, Plant, and Equipment – Real Estate Sales. The related party interests consist of our 19% and GPP’s 1% membership interests in the SGO Joint Venture. As a result, we deferred $1.2 million, representing 20%, of the total realized gain from the sale of the Initial Properties to the SGO Joint Venture.
SGO MN Joint Venture
On September 30, 2015, we, through wholly owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC (the “SGO MN Agreement”) to form a joint venture with MN Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree, and GLB SGO MN, LLC, a wholly owned subsidiary of GPP (together with us and Oaktree, the “SGO MN Members”).
The SGO MN Agreement provides for the ownership and operation of SGO MN Retail Acquisition Venture, LLC (the “SGO MN Joint Venture”), in which we own a 10% interest, GPP owns a 10% interest, and Oaktree owns an 80% interest. In exchange for ownership in the SGO MN Joint Venture, we contributed cash in the amount of $2.8 million to the SGO MN Joint Venture, GPP contributed $2.8 million to the SGO MN Joint Venture, and Oaktree contributed $22.7 million to the SGO MN Joint Venture.
On September 30, 2015, the SGO MN Joint Venture used the capital contributions of the SGO MN Members, together with the proceeds of a loan from Bank of America, NA in the amount of $50.5 million, to acquire 14 retail properties located in Minnesota, North Dakota and Nebraska (the “SGO MN Properties”) from a subsidiary of IRET Properties, L.P., a subsidiary of Investors Real Estate Trust (“IRET”), for a total purchase price of $79.0 million. Subsequently, the SGO MN Joint Venture purchased an additional two retail properties in Minnesota from IRET for a purchase price of $1.6 million, one transaction closed on December 23, 2015, and the other on January 8, 2016.
Pursuant to the SGO MN Agreement, GPP will manage and conduct the day-to-day operations and affairs of the SGO MN Joint Venture, subject to certain major decisions set forth in the SGO MN Agreement that require the consent of at least two of the SGO MN Members, one of whom must be Oaktree. Income, losses and distributions will generally be allocated based on the SGO MN Members’ respective ownership interests. Additionally, in certain circumstances described in the SGO MN Agreement, the SGO MN Members may be required to make additional capital contributions to the SGO MN Joint Venture, in proportion to the Members’ respective ownership interests.
Pursuant to the SGO MN Agreement, the SGO MN Joint Venture will pay GPP a monthly asset management fee equal to a percentage of the aggregate investment value of the property owned by the SGO MN Joint Venture in the preceding month. In addition, if Oaktree has received a 12% internal rate of return on its capital contribution, then promptly following the sale of the last of the SGO MN Properties, the SGO MN Joint Venture will pay GPP a disposition fee equal to one percent of the aggregate net sales proceeds received by the SGO MN Joint Venture from the sales of the SGO MN Properties.
The SGO MN Joint Venture will make distributions of net cash flow to the SGO MN Members no less than quarterly, if appropriate. Distributions will be pro rata to the SGO MN Members in proportion to their respective ownership interests in the SGO MN Joint Venture until the SGO MN Members have received a 12% internal rate of return on their capital contribution. Thereafter distributions will be 10% to GPP and the balance to us, GPP and Oaktree pro rata in proportion to each SGO MN Member’s respective ownership interests in the SGO MN Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 17% internal rate of return on its capital contribution and a 1.5 equity multiple on its capital contribution. Distributions will then be 17.5% to GPP and the balance to us, GPP and Oaktree pro rata in proportion to each SGO MN Member’s respective ownership interests in the SGO MN Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 22% internal rate of return on its capital contribution and a 1.75 equity multiple on its capital contribution (the “Promoted Returns”). Distributions will then be 25% to GPP and the balance to us, GPP and Oaktree pro rata in proportion to each SGO MN Member’s respective ownership interests in the SGO MN Joint Venture. The portion of the Promoted Returns payable to GPP are referred to herein as the “GPP Incentive Fee.” As a part of the negotiations for the SGO MN Joint Venture, Glenborough agreed to certain reduced property management and related charges payable by the SGO MN Joint Venture; the GPP Incentive Fee was implemented in order to provide GPP and its affiliates with an opportunity to recoup those reductions should the SGO MN Joint Venture assets perform well financially.
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Property Management Agreement with Glenborough
In August 2013, Glenborough and wholly owned subsidiaries of our operating partnership entered into property and asset management agreements with respect to each of our current properties (the “Glenborough Property Management Agreements”). Pursuant to the Glenborough Property Management Agreements, Glenborough will supervise, manage, lease, operate and maintain each of our properties. For the year ended December 31, 2015, we paid Glenborough $612,000 in property management fees, of which $3,000 was outstanding and included in amounts due to affiliates at December 31, 2015. For the year ended December 31, 2014, we incurred and paid Glenborough $857,000 in property management fees, and no property management fees were included in amounts due to affiliates at December 31, 2014.
Pursuant to each Glenborough Property Management Agreement, we pay Glenborough the following fees, subject to certain limitations:
| · | An annual property management fee equal to 4% of the “gross revenue” (as defined in the Glenborough Property Management Agreements) of the property subject to the property management agreement. |
| · | In connection with coordinating and facilitating all construction, including all maintenance, repairs, capital improvements, common area refurbishments and tenant improvements, on a project-by-project basis, a construction management fee equal to 5% of the hard costs for the project in question. |
| · | A market-based leasing fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants. |
| · | A market-based legal leasing fee for the negotiation and production of new leases, renewals and amendments. |
Each Glenborough Property Management Agreement has an initial term of one year and will automatically renew for successive one-year terms unless either party provides written notice to the other party at least 30 days’ prior to the expiration of the then-current term. We have the right to terminate each Glenborough Property Management Agreement upon 30 days’ written notice to Glenborough for cause. In addition, we have the right to terminate each Glenborough Property Management Agreement for any reason upon 60 days’ written notice to Glenborough at any time after the end of the first year of the term of the property management agreement.
Glenborough Property Partners, LLC’s Purchase of Company Securities
On January 24, 2014, Glenborough Property Partners, LLC (“GPP”), an affiliate of our Advisor, purchased 22,222 and 111,111 shares of our common stock from TNP and Sharon D. Thompson, respectively, for $8 per share. This transaction was part of the larger settlement agreement relating to the proxy contest in connection with the 2013 annual meeting and was not considered an arm’s length transaction. Therefore, the share purchase price may not reflect a market price or value for our common stock.
Director Independence
We have a four-member board of directors. We do not consider Andrew Batinovich to be an independent director. Mr. Batinovich is affiliated with our Advisor and property manager and currently serves as our Chief Executive Officer. The three remaining directors comprising our current board of directors qualify as “independent directors” as defined in our charter in compliance with the requirements of the North American Securities Administrators Association’s Statement of Policy Regarding Real Estate Investment Trusts. Although our shares are not listed on any national securities exchange, we consider our three current independent directors, all of whom constitute the members of our audit committee, to be “independent” as defined by the New York Stock Exchange.
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Our charter provides that a majority of the directors must be “independent directors.” As defined in our charter, an “independent director” is a person who is not, on the date of determination, and within the last two years from the date of determination has not been, directly or indirectly, associated with our sponsor or our Advisor by virtue of (1) ownership of an interest in our sponsor, our Advisor, or any of their affiliates, other than us, (2) employment by our sponsor, our Advisor, or any of their affiliates, (3) service as an officer or director of our sponsor, our Advisor, or any of their affiliates, other than as one of our directors, (4) performance of services, other than as a director, for us, (5) service as a director or trustee of more than three real estate investment trusts organized by our sponsor or advised by our Advisor, or (6) maintenance of a material business or professional relationship with our sponsor, our Advisor, or any of their affiliates. A business or professional relationship is considered “material” if the aggregate gross revenue derived by the director from the sponsor, the Advisor, and their affiliates (excluding fees for serving as one of our directors or other REIT or real estate program organized or advised or managed by the Advisor or its affiliates) exceeds 5% of either the director’s annual gross revenue during either of the last two years or the director’s net worth on a fair market value basis. An indirect association with the sponsor or the Advisor shall include circumstances in which a director’s spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, or brother- or sister-in-law is or has been associated with the sponsor, the Advisor, any of their affiliates, or with us. None of our independent directors face conflicts of interest because of affiliations with other programs sponsored by our sponsor and its affiliates.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Pre-Approval Polices
The audit committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent registered public accounting firm, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(b) of the Exchange Act and the rules and regulations of the SEC. All services rendered by our independent registered public accounting firm for the years ended December 31, 2015 and 2014 were pre-approved in accordance with the policies and procedures described above.
Audit Fees and Non-Audit Fees
The aggregate fees billed to us for professional accounting services, including the audit of our financial statements, and the non-audit fees charged to us by our independent registered public accounting firm, all of which were pre-approved by the audit committee, are set forth in the table below.
| 2015 | 2014 | |||||||
| Audit fees | $ | 337,500 | $ | 357,400 | ||||
| Audit-related fees | — | — | ||||||
| Tax fees | — | 66,350 | ||||||
| All other fees | — | — | ||||||
| Total | $ | 337,500 | $ | 423,750 | ||||
For purposes of the preceding table, all professional fees are classified as follows:
| · | Audit fees — These are fees for professional services performed for the audit of our annual financial statements and the required review of quarterly financial statements and other procedures performed by our independent auditors in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements. |
| · | Audit-related fees — These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews, and consultation concerning financial accounting and reporting standards. |
| · | Tax fees — These are fees for all professional services performed by professional staff in our independent auditor’s tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning, and tax advice, including federal, state, and local issues. Services may also include assistance with tax audits and appeals before the Internal Revenue Service and similar state and local agencies, as well as federal, state, and local tax issues related to due diligence. |
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| · | All other fees — These are fees for any services not included in the above-described categories, including assistance with internal audit plans and risk assessments. |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
| 1. | The list of the financial statements contained herein is set forth on page F-1 hereof. |
| 2. | Financial Statement Schedules — |
Schedule III—Real Estate Operating Properties and Accumulated Depreciation is set forth beginning on page S-1 hereof.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
| 3. | The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto. |
(b) See (a) 3 above.
(c) See (a) 2 above.
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Index to Consolidated Financial Statements
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Strategic Realty Trust, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Strategic Realty Trust, Inc. and Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, equity, and cash flows for the years then ended. Our audits of the consolidated financial statements included the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Strategic Realty Trust, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Moss Adams LLP
San Francisco, California
March 30, 2016
F-2
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Investments in real estate | ||||||||
| Land | $ | 15,981,000 | $ | 45,740,000 | ||||
| Building and improvements | 56,158,000 | 109,998,000 | ||||||
| Tenant improvements | 3,676,000 | 10,267,000 | ||||||
| 75,815,000 | 166,005,000 | |||||||
| Accumulated depreciation | (10,068,000 | ) | (16,717,000 | ) | ||||
| Investments in real estate, net | 65,747,000 | 149,288,000 | ||||||
| Cash and cash equivalents | 8,793,000 | 3,211,000 | ||||||
| Restricted cash | 2,693,000 | 5,163,000 | ||||||
| Prepaid expenses and other assets, net | 731,000 | 1,363,000 | ||||||
| Tenant receivables, net | 1,664,000 | 2,678,000 | ||||||
| Investments in unconsolidated joint ventures | 6,902,000 | - | ||||||
| Lease intangibles, net | 4,290,000 | 13,658,000 | ||||||
| Assets held for sale | 9,896,000 | 342,000 | ||||||
| Deferred financing costs, net | 918,000 | 1,788,000 | ||||||
| TOTAL ASSETS | $ | 101,634,000 | $ | 177,491,000 | ||||
| LIABILITIES AND EQUITY | ||||||||
| LIABILITIES | ||||||||
| Notes payable | $ | 34,391,000 | $ | 122,148,000 | ||||
| Accounts payable and accrued expenses | 1,486,000 | 2,516,000 | ||||||
| Amounts due to affiliates | 49,000 | 1,000 | ||||||
| Other liabilities | 1,479,000 | 1,767,000 | ||||||
| Liabilities related to assets held for sale | 7,036,000 | - | ||||||
| Below market lease intangibles, net | 3,303,000 | 5,541,000 | ||||||
| Deferred gain on sale of properties to unconsolidated joint venture | 1,225,000 | - | ||||||
| TOTAL LIABILITIES | 48,969,000 | 131,973,000 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| EQUITY | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 400,000,000 shares authorized, 11,037,948 and 10,969,714 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | 111,000 | 110,000 | ||||||
| Additional paid-in capital | 96,684,000 | 96,279,000 | ||||||
| Accumulated deficit | (46,124,000 | ) | (54,451,000 | ) | ||||
| Total stockholder's equity | 50,671,000 | 41,938,000 | ||||||
| Non-controlling interests | 1,994,000 | 3,580,000 | ||||||
| TOTAL EQUITY | 52,665,000 | 45,518,000 | ||||||
| TOTAL LIABILITIES & EQUITY | $ | 101,634,000 | $ | 177,491,000 | ||||
See accompanying notes to consolidated financial statements.
F-3
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenue: | ||||||||
| Rental and reimbursements | $ | 16,047,000 | $ | 21,703,000 | ||||
| Expense: | ||||||||
| Operating and maintenance | 5,648,000 | 7,760,000 | ||||||
| General and administrative | 3,171,000 | 4,343,000 | ||||||
| Depreciation and amortization | 4,840,000 | 7,869,000 | ||||||
| Transaction expenses | 147,000 | - | ||||||
| Interest expense | 5,459,000 | 8,983,000 | ||||||
| Total expense | 19,265,000 | 28,955,000 | ||||||
| Operating loss | (3,218,000 | ) | (7,252,000 | ) | ||||
| Other income (expense): | ||||||||
| Other expense | (134,000 | ) | (610,000 | ) | ||||
| Equity in losses of unconsolidated joint ventures | (236,000 | ) | - | |||||
| Loss on impairment of real estate | - | (3,900,000 | ) | |||||
| Loss on extinguishment of debt | (3,365,000 | ) | (295,000 | ) | ||||
| Gain on disposal of real estate | 20,944,000 | 109,000 | ||||||
| Income (loss) from continuing operations | 13,991,000 | (11,948,000 | ) | |||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations | - | (25,000 | ) | |||||
| Gain on disposal of real estate | - | 3,084,000 | ||||||
| Income (loss) from discontinued operations | - | 3,059,000 | ||||||
| Net income (loss) | 13,991,000 | (8,889,000 | ) | |||||
| Net income (loss) attributable to non-controlling interests | 681,000 | (226,000 | ) | |||||
| Net income (loss) attributable to common stockholders | $ | 13,310,000 | $ | (8,663,000 | ) | |||
| Basic earnings (loss) per common share: | ||||||||
| Continuing operations | $ | 1.21 | $ | (1.02 | ) | |||
| Discontinued operations | - | 0.23 | ||||||
| Net earnings (loss) attributable to common shares | $ | 1.21 | $ | (0.79 | ) | |||
| Diluted earnings (loss) per common share: | ||||||||
| Continuing operations | $ | 1.21 | $ | (1.02 | ) | |||
| Discontinued operations | - | 0.23 | ||||||
| Net earnings (loss) attributable to common shares | $ | 1.21 | $ | (0.79 | ) | |||
| Weighted average shares outstanding used to calculate earnings (loss) per common share: | ||||||||
| Basic | 10,960,613 | 10,969,714 | ||||||
| Diluted | 10,960,613 | 10,969,714 | ||||||
See accompanying notes to consolidated financial statements.
F-4
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
| Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total
Stockholders' Equity | Non-controlling Interests | Total Equity | ||||||||||||||||||||||
| BALANCE — December 31, 2013 | 10,969,714 | $ | 110,000 | $ | 96,261,000 | $ | (43,266,000 | ) | $ | 53,105,000 | $ | 3,978,000 | $ | 57,083,000 | ||||||||||||||
| Issuance of common shares | - | - | 18,000 | - | 18,000 | - | 18,000 | |||||||||||||||||||||
| Quarterly distributions | - | - | - | (2,522,000 | ) | (2,522,000 | ) | (172,000 | ) | (2,694,000 | ) | |||||||||||||||||
| Net loss | - | - | - | (8,663,000 | ) | (8,663,000 | ) | (226,000 | ) | (8,889,000 | ) | |||||||||||||||||
| BALANCE — December 31, 2014 | 10,969,714 | 110,000 | 96,279,000 | (54,451,000 | ) | 41,938,000 | 3,580,000 | 45,518,000 | ||||||||||||||||||||
| Redemption of member interests | - | - | - | - | - | (2,102,000 | ) | (2,102,000 | ) | |||||||||||||||||||
| Redemption of common shares | (205,495 | ) | (2,000 | ) | (1,390,000 | ) | - | (1,392,000 | ) | - | (1,392,000 | ) | ||||||||||||||||
| Quarterly distributions | - | - | - | (2,627,000 | ) | (2,627,000 | ) | (165,000 | ) | (2,792,000 | ) | |||||||||||||||||
| Special distribution | 273,729 | 3,000 | 1,795,000 | (2,356,000 | ) | (558,000 | ) | - | (558,000 | ) | ||||||||||||||||||
| Net income | - | - | - | 13,310,000 | 13,310,000 | 681,000 | 13,991,000 | |||||||||||||||||||||
| BALANCE — December 31, 2015 | 11,037,948 | $ | 111,000 | $ | 96,684,000 | $ | (46,124,000 | ) | $ | 50,671,000 | $ | 1,994,000 | $ | 52,665,000 | ||||||||||||||
See accompanying notes to consolidated financial statements.
F-5
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 13,991,000 | $ | (8,889,000 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Net (gain) loss on impairment and disposal of real estate | (20,944,000 | ) | 707,000 | |||||
| Loss on extinguishment of debt | 3,365,000 | 295,000 | ||||||
| Straight-line rent | (127,000 | ) | (286,000 | ) | ||||
| Equity in losses of unconsolidated joint ventures | 236,000 | - | ||||||
| Amortization of deferred costs and notes payable premium/discount | 544,000 | 747,000 | ||||||
| Depreciation and amortization | 4,840,000 | 7,869,000 | ||||||
| Amortization of above and below-market leases | (193,000 | ) | 51,000 | |||||
| Bad debt expense (income) | 15,000 | (255,000 | ) | |||||
| Stock-based compensation expense | - | 18,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (31,000 | ) | 153,000 | |||||
| Tenant receivables | (89,000 | ) | 775,000 | |||||
| Accounts payable and accrued expenses | (1,030,000 | ) | 274,000 | |||||
| Amounts due to affiliates | 48,000 | (441,000 | ) | |||||
| Other liabilities | (272,000 | ) | (1,640,000 | ) | ||||
| Net change in restricted cash for operational expenditures | 1,411,000 | 127,000 | ||||||
| Net cash provided by (used in) operating activities | 1,764,000 | (495,000 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Net proceeds from the sale of real estate | 103,113,000 | 25,832,000 | ||||||
| Investments in unconsolidated joint ventures | (7,630,000 | ) | - | |||||
| Distributions from unconsolidated joint ventures | 492,000 | - | ||||||
| Improvements, capital expenditures, and leasing costs | (845,000 | ) | (2,100,000 | ) | ||||
| Issuance of note receivable | (7,000,000 | ) | - | |||||
| Principal payment received on note receivable | 7,000,000 | - | ||||||
| Net change in restricted cash for capital expenditures | 1,059,000 | (815,000 | ) | |||||
| Net cash provided by investing activities | 96,189,000 | 22,917,000 | ||||||
| Cash flows from financing activities: | ||||||||
| Redemptions of member interests | (2,102,000 | ) | - | |||||
| Redemptions of common stock | (1,392,000 | ) | - | |||||
| Quarterly distributions | (2,792,000 | ) | (2,595,000 | ) | ||||
| Special distribution | (558,000 | ) | - | |||||
| Proceeds from notes payable | 4,000,000 | 19,900,000 | ||||||
| Repayment of notes payable | (86,362,000 | ) | (37,982,000 | ) | ||||
| Payment of penalties associated with early repayment of notes payable | (2,964,000 | ) | - | |||||
| Payment of loan fees and financing costs | (201,000 | ) | (767,000 | ) | ||||
| Net cash used in financing activities | (92,371,000 | ) | (21,444,000 | ) | ||||
| Net increase in cash and cash equivalents | 5,582,000 | 978,000 | ||||||
| Cash and cash equivalents – beginning of year | 3,211,000 | 2,233,000 | ||||||
| Cash and cash equivalents – end of year | $ | 8,793,000 | $ | 3,211,000 | ||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| and other cash flow information: | ||||||||
| Distributions declared but not paid | $ | 688,000 | $ | 684,000 | ||||
| Cash paid for interest | $ | 5,796,000 | $ | 8,132,000 | ||||
| Non-cash financing activity associated with stock distribution | $ | 1,798,000 | $ | - | ||||
See accompanying notes to the consolidated financial statements.
F-6
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
1. ORGANIZATION AND BUSINESS
Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008 as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations. The Company was initially capitalized by the sale of shares of common stock to Thompson National Properties, LLC (“TNP LLC”) on October 16, 2008.
On November 4, 2008, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 shares of our common stock to the public in our primary offering at $10.00 per share and a maximum of 10,526,316 shares of its common stock to the Company’s stockholders at $9.50 per share pursuant to its distribution reinvestment plan (“DRIP”) (collectively, the “Offering”). On August 7, 2009, the SEC declared the registration statement effective and the Company commenced the Offering. On February 7, 2013, the Company terminated the Offering and ceased offering shares of common stock in the primary offering and under the DRIP. As of the termination of the Offering, the Company had accepted subscriptions for, and issued, 10,688,940 shares of common stock in its Offering for gross offering proceeds of $104,700,000 and 391,182 shares of common stock pursuant to the DRIP for gross offering proceeds of $3,620,000. The Company also granted 50,000 shares of restricted stock and issued 273,729 common shares to pay a portion of a special distribution. See Note 10. “Equity” for details regarding the special distribution. Cumulatively, through December 31, 2015, the Company has redeemed 365,903 shares of common stock sold in the Offering for $2,995,000.
As a result of the termination of the Offering, offering proceeds are not currently available to fund the Company’s cash needs, and will not be available unless the Company engages in an offering of its securities.
Since the Company’s inception, its business has been managed by an external advisor, the Company has no direct employees and all management and administrative personnel responsible for conducting the Company’s business are employed by its advisor. Currently the Company is externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed in August 2014 and August 2015. The current term of the Advisory Agreement terminates on August 10, 2016. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (the “OP”). During the Offering, as the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. The Company is the sole general partner of the OP. As of both December 31, 2015 and 2014, the Company owned 96.2% of the limited partnership interest in the OP.
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders and investments in unconsolidated joint ventures. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.
The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on grocery anchored multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. As of December 31, 2015, the Company’s portfolio was comprised of 9 properties, including 1 property held for sale, with approximately 766,000 rentable square feet of retail space located in 7 states. As of December 31, 2015, the rentable space at the Company’s retail properties, including the property held for sale, which was 90% leased.
F-7
On March 11, 2015 the Company invested in a joint venture with Grocery Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree Real Estate Opportunities Fund V.I. L.P. (“Oaktree”) and GLB SGO, LLC a wholly-owned subsidiary of Glenborough Property Partners, LLC (“GPP”). On September 30, 2015, the Company invested in a joint venture with MN Retail Grand Avenue Partners, LLC a subsidiary of Oaktree and GLB SGO MN, a wholly-owned subsidiary of GPP. GPP is an affiliate of the Advisor and the Company’s property manager. These joint ventures own property types similar to properties that are directly owned by the Company.
On December 21, 2015, the Company entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC, to form a joint venture. See further discussion at Note 15. “Subsequent Events.”
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-K and Regulation S-X.
The consolidated financial statements include the accounts of the Company, the OP, and their direct and indirect owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included.
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of December 31, 2015, the Company held ownership interests in two unconsolidated joint ventures (see Note 4. “Investments in Unconsolidated Joint Ventures” for additional information).
Non-Controlling Interests
The Company’s non-controlling interests are comprised primarily of common units in the OP (“Common Units”) and, until its redemption on March 12, 2015, the membership interest in SRT Secured Holdings, LLC (“Secured Holdings”), one of the Company’s subsidiaries. The Company accounts for non-controlling interests in accordance with ASC 810. In accordance with ASC 810, the Company reports non-controlling interests in subsidiaries within equity in the consolidated financial statements, but separate from stockholders’ equity. Net income (loss) attributable to non-controlling interests is presented as a reduction from net income (loss) in calculating net income (loss) attributable to common stockholders on the consolidated statement of operations. Acquisitions or dispositions of non-controlling interests that do not result in a change of control are accounted for as equity transactions. In addition, ASC 810 requires that a parent company recognize a gain or loss in the Company’s results of operations when a subsidiary is deconsolidated upon a change in control. In accordance with ASC 480-10, Distinguishing Liabilities from Equity, non-controlling interests that are determined to be redeemable are carried at their fair value or redemption value as of the balance sheet date and reported as liabilities or temporary equity depending on their terms. The Company periodically evaluates individual non-controlling interests for the ability to continue to recognize the non-controlling interest as permanent equity in the consolidated balance sheets. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as liabilities or temporary equity. All non-controlling interests at December 31, 2015 and 2014 qualified as permanent equity.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in the Company’s consolidated financial statements, and actual results could differ from the estimates or assumptions used by management. Additionally, other companies may utilize different estimates that may impact the comparability of the Company’s consolidated results of operations to those of companies in similar businesses. The Company considers significant estimates to include the carrying amounts and recoverability of investments in real estate, impairments, real estate acquisition purchase price allocations, allowance for doubtful accounts, estimated useful lives to determine depreciation and amortization and fair value determinations, among others.
F-8
Cash and Cash Equivalents
Cash and cash equivalents represents current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.
Restricted Cash
Restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders.
Revenue Recognition
Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
| • | whether the lease stipulates how a tenant improvement allowance may be spent; |
| • | whether the amount of a tenant improvement allowance is in excess of market rates; |
| • | whether the tenant or landlord retains legal title to the improvements at the end of the lease term; |
| • | whether the tenant improvements are unique to the tenant or general-purpose in nature; and |
| • | whether the tenant improvements are expected to have any residual value at the end of the lease. |
For leases with minimum scheduled rent increases, the Company recognizes income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue amounts which differ from those that are contractually due from tenants on a cash basis. If the Company determines the collectability of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed and paid, and, when appropriate, establishes an allowance for estimated losses.
The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants on an ongoing basis. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. The Company’s straight-line rent receivable which is included in tenant receivables, net, on the consolidated balance sheets, was $592,000 (not including receivables on property held for sale) and $1,681,000 at December 31, 2015 and 2014, respectively.
Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, insurance and CAM is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.
The Company recognizes gains or losses on sales of real estate in accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”). Gains are not recognized and are deferred until (a) a sale has been consummated; (b) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (c) the Company’s receivable, if any, is not subject to future subordination; and (d) the Company has transferred to the buyer the usual risks and reward of ownership, and the Company does not have a substantial continuing involvement with the property. As of December 31, 2015, deferred gain on the sale of properties to the SGO Joint Venture was $1.2 million.
F-9
Valuation of Accounts Receivable
The Company makes estimates of the collectability of its tenant receivables related to base rents, including deferred rents receivable, expense reimbursements and other revenue or income.
The Company analyzes tenant receivables, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Concentration of Credit Risk
A concentration of credit risk arises in the Company’s business when a nationally or regionally-based tenant occupies a substantial amount of space in multiple properties owned by the Company. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to the Company, exposing the Company to potential losses in rental revenue, expense recoveries, and percentage rent. Generally, the Company does not obtain security deposits from the nationally-based or regionally-based tenants in support of their lease obligations to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk. As of December 31, 2015, excluding property classified as held for sale, Ralph’s Grocery accounted for 10% of the Company’s annual minimum rent. As of December 31, 2015, $33,000 was outstanding from Ralph’s Grocery for reimbursement of property taxes billed in December 2015.
Business Combinations
The Company records the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination when the acquired property meets the definition of a business. Assets acquired and liabilities assumed in a business combination are generally measured at their acquisition-date fair values, including tenant improvements and identifiable intangible assets or liabilities. Tenant improvements recognized represent the tangible assets associated with the existing leases valued on a fair value basis at the acquisition date. Tenant improvements are classified as assets under investments in real estate and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases which come in three forms: (1) leasing commissions and legal costs, which represent the value associated with “cost avoidance” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in markets in which the Company operates; (2) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased; and (3) above- or below-market value of in-place leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks. The value of in-place leases is recorded in acquired lease intangibles and amortized over the remaining lease term. Above- or below-market-rate leases are classified in acquired lease intangibles, or in acquired below-market lease intangibles, depending on whether the contractual terms are above- or below-market. Above-market leases are amortized as a decrease to rental revenue over the remaining non-cancelable terms of the respective leases and below-market leases are amortized as an increase to rental revenue over the remaining initial lease term and any fixed rate renewal periods, if applicable.
Acquisition costs are expensed as incurred. During the years ended December 31, 2015 and 2014, the Company did not acquire any properties. Costs incurred in pursuit of targeted properties for acquisitions not yet closed or those determined to no longer be viable and costs incurred which are expected to result in future period disposals of property not currently classified as held for sale properties have been expensed and are also classified in the consolidated statements of operations as transaction expenses.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s results of operations. These allocations also impact depreciation expense, amortization expense and gains or losses recorded on future sales of properties.
F-10
Reportable Segments
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. The Company has one reportable segment, income-producing retail properties, which consists of activities related to investing in real estate. The retail properties are geographically diversified throughout the United States, and the Company evaluates operating performance on an overall portfolio level.
Investments in Real Estate
Real property is recorded at estimated fair value at time of acquisition with subsequent additions at cost, less accumulated depreciation and amortization. Costs include those related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of pre-development and certain direct and indirect costs of development.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
|
Years | ||
| Buildings and improvements | 5 - 30 years | |
| Tenant improvements | 1 – 36 years | |
Tenant improvement costs recorded as capital assets are depreciated over the tenant’s remaining lease term which the Company has determined approximates the remaining useful life of the improvement.
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized.
Impairment of Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that the Company estimates in this analysis include projected rental rates, capital expenditures, property sale capitalization rates, and expected holding period of the property.
The Company evaluates its equity investments for impairment in accordance with ASC 320, Investments – Debt and Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss.
The Company did not record any impairment losses for the year ended December 31, 2015. For the year ended December 31, 2014, the Company recorded impairment losses of $2,500,000 and $1,400,000 on its investments in Constitution Trail and Topaz Marketplace, respectively. The Company subsequently sold Constitution Trail on March 11, 2015. For information regarding the sale of Constitution Trail, refer to Note 3. “Real Estate Investments.”
F-11
Assets Held for Sale and Discontinued Operations
When certain criteria are met, long-lived assets are classified as held for sale and are reported at the lower of their carrying value or their fair value, less costs to sell, and are no longer depreciated. For property sales prior to May 1, 2014, discontinued operations is a component of an entity that has either been disposed of or is deemed to be held for sale and (i) the operations and cash flows of the component have been eliminated from ongoing operations as a result of the disposal transaction and (ii) the entity does not have any significant continuing involvement in the operations of the component after the disposal transaction. For property sales on or after May 1, 2014, a disposal of a component of an entity is required to be reported as discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. See Note 3. “Real Estate Investments” for a discussion of property sales and discontinued operations.
Fair Value Measurements
Under GAAP, the Company is required to measure or disclose certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
| • | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
| • | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| • | Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement. |
When available, the Company utilizes quoted market prices or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to use significant judgment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for an asset owned by it to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and external appraisals) and establishes a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets; or (ii) a present value technique that considers the future cash flows based on contractual obligations discounted by observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
The Company considers the following factors to be indicators of an inactive market: (1) there are few recent transactions; (2) price quotations are not based on current information; (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets); (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability; (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability; (6) there is a wide bid-ask spread or significant increase in the bid-ask spread; (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities; and (8) little information is released publicly (for example, a principal-to-principal market).
F-12
The Company considers the following factors to be indicators of non-orderly transactions: (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions; (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant; (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced); and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.
Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the straight-line method which approximates the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financings that do not close are expensed in the period in which it is determined that the financing will not close.
Accounting for Investments in Unconsolidated Joint Ventures
The Company accounts for its current investments in joint ventures under the equity method of accounting. Under the equity method of accounting, the Company records its initial investment in a joint venture at cost and subsequently adjusts the cost for the Company’s share of the joint venture’s income or loss and cash contributions and distributions each period. See Note 4. “Investments in Unconsolidated Joint Ventures” for a discussion of the Company’s investments in joint ventures.
The Company monitors its investments in unconsolidated joint ventures periodically for impairment.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT. Even if the Company qualifies as a REIT, it may be subject to certain state or local income taxes, and to U.S. Federal income and excise taxes on its undistributed income.
The Company evaluates tax positions taken in the consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, the Company may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.
When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.
The Company’s tax returns remain subject to examination and consequently, the taxability of the distributions is subject to change.
During the current year, the Company was subject to alternative minimum state/federal taxes totaling approximately $200,000.
F-13
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company accounts for non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
Reclassification
Assets sold or held for sale and related liabilities have been reclassified on the consolidated balance sheets. For operating properties sold prior to May 1, 2014, the related operating results have been reclassified from continuing to discontinued operations on the consolidated statements of operations. For operating properties sold on or after May 1, 2014, the related operating results remain in continuing operations on the consolidated statements of operations unless the sold properties represent a strategic shift that have had (or will have) a major effect on the Company’s operations and financial results.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU No. 2014-09”). ASU No. 2014-09 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively defers the adoption of ASU 2014-09 to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may apply either a full retrospective or a modified retrospective approach to adopt this guidance. The Company is currently evaluating the transition methods and the impact of the guidance on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU No. 2014-15”). ASU No. 2014-15 provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance requires that management evaluate for each annual and interim reporting period whether conditions exist that give rise to substantial doubt about the entity’s ability to continue as a going concern within one year from the financial statement issuance date, and if so, provide related disclosures. Disclosures are only required if conditions give rise to substantial doubt, whether or not the substantial doubt is alleviated by management’s plans. No disclosures are required specific to going concern uncertainties if an assessment of the conditions does not give rise to substantial doubt. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. The guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-03”). The amendments in ASU No. 2015-03 require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU No. 2015-03 is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. ASU No. 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and is to be applied retrospectively, with early adoption permitted for financial statements that have not been previously issued. The adoption of ASU No. 2015-03 would change the presentation of debt issuance costs as the Company presents debt issuance costs as deferred financing costs, net on the accompanying consolidated balance sheets. ASU 2015-03 does not address how debt issuance costs related to line-of-credit arrangements should be presented on the balance sheet or amortized. Given this absence of authoritative guidance within ASU 2015-03, the FASB issued ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which clarifies that the SEC Staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
F-14
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments, which requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Further, the acquirer is required to record, in the financial statements for the same period, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Entities must also present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by the line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance should be applied prospectively and early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. The guidance retains a distinction between finance leases and operating leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous guidance. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. The amendments in this guidance are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
3. REAL ESTATE INVESTMENTS
Acquisition of Properties
The Company did not have any property acquisitions for the years ended December 31, 2015 and 2014.
F-15
Sale of Properties
During the year ended December 31, 2015, the Company sold the following six properties:
| Gross | Original | |||||||||||||
| Property | Location | Acquisition Date | Sale Date | Sale Price | Purchase Price | (1) | ||||||||
| Osceola Village | Kissimmee, FL | 10/11/2011 | 3/11/2015 | $ | 22,000,000 | $ 21,800,000 | (2) | |||||||
| Constitution Trail | Normal, IL | 10/21/2011 | 3/11/2015 | 23,100,000 | 18,000,000 | |||||||||
| Aurora Commons | Aurora, OH | 3/20/2012 | 3/11/2015 | 8,500,000 | 7,000,000 | |||||||||
| Moreno Marketplace | Moreno Valley, CA | 11/19/2009 | 10/29/2015 | 19,400,000 | 12,500,000 | |||||||||
| Northgate Plaza | Tuczon, AZ | 7/6/2010 | 10/29/2015 | 12,800,000 | 8,050,000 | |||||||||
| Summit Point | Fayetteville, GA | 12/21/2011 | 10/30/2015 | 19,600,000 | 18,250,000 | |||||||||
| $ | 105,400,000 | $ | 85,600,000 | |||||||||||
| (1) | The original purchase price amounts do not include acquisition fees. |
| (2) | The original purchase price for Osceola Village included an additional pad which was sold for $875,000 prior to this transaction. |
The sale of these six properties did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and, as a result, was not included in discontinued operations for the year ended December 31, 2015. The Company’s consolidated statements of operations include net operating income of $128,000 for the year ended December 31, 2015 and net operating loss of $2,400,000 for the year ended December 31, 2014, relating to the results of operations for these sold properties.
The Company used the net sales proceeds from the sale of Moreno Marketplace and Northgate Plaza to pay off a portion of $30.7 million in outstanding secured term loans. The Company used the net sales proceeds from the sale of Summit Point, to pay off an $11.9 million mortgage loan.
The sale of Osceola Village, Constitution Trail and Aurora Commons (the “SGO Properties”) was completed in connection with the formation of the SGO Joint Venture, as defined and further described in Note 4. “Investments in Unconsolidated Joint Ventures.” The three properties were sold to the SGO Joint Venture, and the closing of the sale was conditioned on the Company receiving a 19% membership interest in the SGO Joint Venture. In exchange for this 19% membership interest, the Company contributed $4.5 million to the SGO Joint Venture, which amount was credited against the Company’s proceeds from the sale of the three properties to the SGO Joint Venture. Of the net sales proceeds from the sale of the aforementioned properties, $36.4 million was used by the Company to retire the debt associated with the sold properties.
Pro Forma Financial Information
The pro forma financial information below is based on the Company’s historical consolidated statements of operations for the years ended December 31, 2015 and 2014, adjusted to give effect to the sale of the SGO Properties, Moreno Marketplace, Northgate Plaza and Summit Point as if they had been completed at the beginning of 2014. The pro forma financial information is presented for information purposes only, and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2015 and 2014, respectively, nor does it purport to represent results of operations for future periods.
F-16
| Moreno, Northgate | ||||||||||||||||
| SGO Properties | Summit Dispositions | Pro Forma | ||||||||||||||
| Year Ended | Disposition | Pro Forma | Year Ended | |||||||||||||
| December 31, 2015 | Pro Forma Adjustments | Adjustments | December 31, 2015 | |||||||||||||
| Rental and reimbursements | $ | 16,047,000 | $ | (1,058,000 | ) | $ | (3,558,000 | ) | $ | 11,431,000 | ||||||
| Income (loss) from continuing operations | $ | 13,991,000 | $ | (4,448,000 | ) | $ | (15,649,000 | ) | $ | (6,106,000 | ) | |||||
| Net income (loss) | $ | 13,991,000 | $ | (4,448,000 | ) | $ | (15,649,000 | ) | $ | (6,106,000 | ) | |||||
| Net income (loss) available to common shareholders | $ | 13,310,000 | $ | (4,280,000 | ) | $ | (15,649,000 | ) | $ | (6,619,000 | ) | |||||
| Weighted average shares outstanding | 10,960,613 | 10,960,613 | ||||||||||||||
| Net earnings (loss) per share attributable to | ||||||||||||||||
| common stockholders - basic and diluted | $ | 1.21 | $ | (0.60 | ) | |||||||||||
| Moreno, Northgate | ||||||||||||||||
| SGO Properties | Summit Dispositions | Pro Forma | ||||||||||||||
| Year Ended | Disposition | Pro Forma | Year Ended | |||||||||||||
| December 31, 2014 | Pro Forma Adjustments | Adjustments | December 31, 2014 | |||||||||||||
| Rental and reimbursements | $ | 21,703,000 | $ | (5,127,000 | ) | $ | (4,314,000 | ) | $ | 12,262,000 | ||||||
| Income (loss) from continuing operations | $ | (11,948,000 | ) | $ | 4,893,000 | $ | 303,000 | $ | (6,752,000 | ) | ||||||
| Net income (loss) | $ | (8,889,000 | ) | $ | 4,893,000 | $ | 303,000 | $ | (3,693,000 | ) | ||||||
| Net income (loss) available to common stockholders | $ | (8,663,000 | ) | $ | 4,707,000 | $ | 303,000 | $ | (3,653,000 | ) | ||||||
| Weighted avergae shares outstanding | 10,969,714 | 10,969,714 | ||||||||||||||
| Net earnings (loss) per share attributable to | ||||||||||||||||
| common stockholders - basic and diluted | $ | (0.79 | ) | $ | (0.33 | ) | ||||||||||
On November 25, 2014, the Company completed the sale of San Jacinto Esplanade in San Jacinto, California for a gross sales price of $5,700,000. The Company originally acquired San Jacinto Esplanade in August 2010 for $7,088,000 and subsequently sold three separate parcels of the property in 2011. Net proceeds from the 2014 sale were used to pay down and reduce the line of credit balance with KeyBank. The results of operations related to San Jacinto Esplanade are classified as continuing operations because the property was placed on the market for sale after April 30, 2014, which was the date that the Company implemented ASU No. 2014-08.
Discontinued Operations
The Company reports operating properties sold in periods prior to May 1, 2014, as discontinued operations. The results of these discontinued operations are included as a separate component on the consolidated statements of operations under the caption “Discontinued operations”.
On January 8, 2014, the Company completed the sale of Visalia Marketplace in Visalia, California for a gross sales price of $21,100,000. The Company originally acquired Visalia Marketplace in June 2012 for $19,000,000. In accordance with the terms of the loan documents with KeyBank at the time, 80% of the net proceeds from the sale were released from escrow to pay down and reduce the prior line of credit balance with KeyBank. The Company classified assets and liabilities (including the line of credit) related to Visalia Marketplace as held for sale in the consolidated balance sheet at December 31, 2013. The results of operations related to Visalia Marketplace continue to be classified as discontinued operations for the year ended December 31, 2014, because the property was classified as such in previously issued financial statements.
F-17
The components of income and expense relating to discontinued operations for the year ended December 31, 2014 are shown below.
| Year Ended December 31, | ||||
| 2014 | ||||
| Revenues from rental property | $ | 62,000 | ||
| Rental property expenses | 75,000 | |||
| Interest expense | 12,000 | |||
| Operating loss from discontinued operations | (25,000 | ) | ||
| Gain on disposal of real estate | 3,084,000 | |||
| Income (loss) from discontinued operations | $ | 3,059,000 | ||
F-18
Assets Held for Sale and Liabilities Related to Assets Held for Sale
At December 31, 2015, Bloomingdale Hills, located in Riverside, Florida, was classified as held for sale in the consolidated balance sheet. Since the sale of the property does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, its results of operations was not reported as discontinued operations on the Company’s financial statements. The Company intends to use part of the net proceeds from the sale to retire the outstanding debt associated with this property. The Company anticipates that the sale of Bloomingdale Hills will occur within one year from December 31, 2015. The Company’s consolidated statement of operations includes net operating income of $140,000 and net operating loss of $54,000 for the years ended December 31, 2015 and 2014, respectively, related to the assets held for sale.
On November 21, 2014, the Company entered into a sales contract with a buyer to purchase an undeveloped parcel at Osceola Village in Kissimmee, Florida. The gross sales price was $875,000, and the sale was expected to close in May 2015. Subsequently, on March 11, 2015, the entire Osceola Village Property was sold to the SGO Joint Venture. The land value associated with the parcel was classified as held for sale at December 31, 2014.
The major classes of assets and liabilities related to assets held for sale included in the consolidated balance sheets are as follows:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Investments in real estate | ||||||||
| Land | $ | 4,718,000 | $ | 342,000 | ||||
| Building and improvements | 4,697,000 | - | ||||||
| Tenant improvements | 499,000 | - | ||||||
| 9,914,000 | 342,000 | |||||||
| Accumulated depreciation | (891,000 | ) | - | |||||
| Investments in real estate, net | 9,023,000 | 342,000 | ||||||
| Lease intangibles, net | 694,000 | - | ||||||
| Deferred financing costs, net | 127,000 | - | ||||||
| Tenant receivables, net | 36,000 | - | ||||||
| Prepaid expenses | 16,000 | - | ||||||
| Assets held for sale | $ | 9,896,000 | $ | 342,000 | ||||
| LIABILITIES | ||||||||
| Notes payable | $ | 5,395,000 | $ | - | ||||
| Below market lease intangibles, net | 1,625,000 | - | ||||||
| Other liabilities | 16,000 | - | ||||||
| Liabilities related to assets held for sale | $ | 7,036,000 | $ | - | ||||
Amounts above are being presented at their carrying value which the Company believes to be lower than their estimated fair value less costs to sell.
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
SGO Joint Venture
Entry into SGO Joint Venture Agreement
On March 11, 2015, the Company, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisition Venture, LLC (the “SGO Agreement”) to form a joint venture with Grocery Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree Real Estate Opportunities Fund VI, L.P. (“Oaktree”), and GLB SGO, LLC, a wholly-owned subsidiary of Glenborough Property Partners, LLC (“GPP” and together with the Company and Oaktree, the “SGO Members”). GPP is an affiliate of the Company’s property manager, Glenborough, and an affiliate of the Advisor. The joint venture obtained a $34,000,000 non-recourse mortgage loan from an unaffiliated third-party lender to purchase properties.
F-19
The SGO Agreement provides for the ownership and operation of SGO Retail Acquisition Venture, LLC (the “SGO Joint Venture”), in which the Company owns a 19% interest, GPP owns a 1% interest, and Oaktree owns an 80% interest. In exchange for ownership in the SGO Joint Venture, the Company contributed $4.5 million to the SGO Joint Venture, which amount was credited against the sale of the Initial SGO Properties (as defined below) to the Joint Venture (as described below), GPP contributed $0.2 million to the SGO Joint Venture, and Oaktree contributed $19.1 million to the SGO Joint Venture. The Company advanced $7.0 million to Oaktree to finance Oaktree’s capital contribution to the SGO Joint Venture in exchange for a recourse demand note from Oaktree at a rate of 7% interest. The Company had the right to call back the advanced funds upon 12 days written notice. As of December 31, 2015, the entire $7.0 million note from Oaktree has been paid off.
Pursuant to the SGO Agreement, GPP will manage and conduct the day-to-day operations and affairs of the SGO Joint Venture, subject to certain major decisions set forth in the SGO Agreement that require the consent of at least two members, one of whom must be Oaktree. Income, losses and distributions will generally be allocated based on the members’ respective ownership interests. Additionally, in certain circumstances described in the SGO Agreement, the SGO Members may be required to make additional capital contributions to the SGO Joint Venture, in proportion to the SGO Members’ respective ownership interests.
Pursuant to the SGO Agreement, the SGO Joint Venture will pay GPP a monthly asset management fee equal to a percentage of the aggregate investment value of the property owned by the SGO Joint Venture in the preceding month. In addition, if Oaktree has received a 12% internal rate of return on its capital contribution, then promptly following the sale of the last of the Initial SGO Properties, the SGO Joint Venture will pay GPP a disposition fee equal to one percent of the aggregate net sales proceeds received by the SGO Joint Venture from the sales of the Initial SGO Properties.
The SGO Joint Venture will make distributions of net cash flow to the SGO Members no less than quarterly, if appropriate. Distributions will be pro rata to the SGO Members in proportion to their respective ownership interests in the SGO Joint Venture until the SGO Members have received a 12% internal rate of return on their capital contribution. Thereafter distributions will be 5% to the Company, 5% to GPP and the balance to the Company, GPP and Oaktree pro rata in proportion to each SGO Member’s respective ownership interests in the SGO Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 17% internal rate of return on its capital contribution and a 1.5 equity multiple on its capital contribution. Distributions will then be 12.5% to the Company, 5% to GPP and the balance to the Company, GPP and Oaktree pro rata in proportion to each SGO Member’s respective ownership interests in the SGO Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 22% internal rate of return on its capital contribution and a 1.75 equity multiple on its capital contribution (the “SGO Promoted Returns”). Distributions will then be 20% to the Company, 5% to GPP and the balance to the Company, GPP and Oaktree pro rata in proportion to each SGO Member’s respective ownership interests in the SGO Joint Venture. The portion of the SGO Promoted Returns payable to GPP are referred to herein as the “GPP SGO Incentive Fee.” The portion of the SGO Promoted Returns payable to the Company are referred to herein as the Company’s “SGO Earn Out.” As a part of the negotiations for the SGO Joint Venture, Glenborough agreed to reduce certain property management and related charges payable by the SGO Joint Venture from levels that were in place for these assets when held by the Company; the GPP SGO Incentive Fee was implemented in order to provide GPP and its affiliates with an opportunity to recoup those reductions should the SGO Joint Venture assets perform well financially.
Sale of Initial Properties to SGO Joint Venture
On March 11, 2015, as part of the formation of the SGO Joint Venture, the Company, through TNP SRT Osceola Village, LLC, its indirect wholly-owned subsidiary, SRT Constitution Trail, LLC, a wholly-owned subsidiary of SRT Secured Holdings, LLC (“SRT Holdings”), and TNP SRT Aurora Commons, LLC, a wholly-owned subsidiary of SRT Holdings, entered into a Purchase and Sale Agreement effective March 11, 2015 to sell Osceola Village, Constitution Trail and Aurora Commons (together with Osceola Village and Constitution Trail, the “Initial SGO Properties”) to the SGO Joint Venture. SRT Holdings is jointly owned by the OP and SRT Manager, an affiliate of Glenborough. At the time of the sale Secured Holdings was jointly owned by the OP and SRT Secured Holdings Manager, LLC (“SRT Manager”), an affiliate of Glenborough. Secured Holdings distributed the proceeds of the sale of the Initial Properties to its members. As a result, on March 12, 2015, Secured Holdings paid SRT Manager approximately $2.1 million in full redemption of its 8.33% membership interest in Secured Holdings.
The closing of the sale was conditioned on the SGO Joint Venture issuing the Company a 19% membership interest and GPP a 1% membership interest in the SGO Joint Venture. The cash sale price for the Initial Properties was $22.0 million for Osceola Village, $23.1 million for Constitution Trail, and $8.5 million for Aurora Commons. Gross proceeds from the sale totaled $53.6 million of which $36.4 million was used to retire the notes payable balances associated with the Initial Properties, and $4.5 million was credited against the Company’s proceeds from the sale of the Initial Properties to the SGO Joint Venture and served as its capital contribution to the SGO Joint Venture. As discussed above, another $7.0 million was loaned to Oaktree on a short-term demand note basis to enhance the Company’s short-term returns related to the proceeds of the SGO Joint Venture. As of December 31, 2015, the entire $7.0 million note from Oaktree has been paid off.
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Due to the related party membership interests in the SGO Joint Venture, the sale of the Initial Properties is considered a partial sale in accordance with ASC Subtopic 360-20, Property, Plant, and Equipment – Real Estate Sales. The related party interests consist of our 19% and GPP’s 1% membership interests in the SGO Joint Venture. As a result, we deferred $1.2 million, representing 20%, of the total realized gain from the sale of the Initial Properties to the SGO Joint Venture.
SGO MN Joint Venture
On September 30, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC (the “SGO MN Agreement”) to form a joint venture with MN Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree, and GLB SGO MN, LLC, a wholly-owned subsidiary of GPP (together with the Company and Oaktree, the “SGO MN Members”).
The SGO MN Agreement provides for the ownership and operation of SGO MN Retail Acquisition Venture, LLC (the “SGO MN Joint Venture”), in which the Company owns a 10% interest, GPP owns a 10% interest, and Oaktree owns an 80% interest. In exchange for ownership in the SGO MN Joint Venture, the Company contributed cash in the amount of $2.8 million to the SGO MN Joint Venture, GPP contributed $2.8 million to the SGO MN Joint Venture, and Oaktree contributed $22.7 million to the SGO MN Joint Venture.
On September 30, 2015, the SGO MN Joint Venture used the capital contributions of the SGO MN Members, together with the proceeds of a loan from Bank of America, NA in the amount of $50.5 million, to acquire 14 retail properties located in Minnesota, North Dakota and Nebraska (the “SGO MN Properties”) from a subsidiary of IRET Properties, L.P., a subsidiary of Investors Real Estate Trust (“IRET”), for a total purchase price of $79.0 million. Subsequently, the SGO MN Joint Venture purchased an additional two retail properties in Minnesota from IRET for a purchase price of $1.6 million, one transaction closed on December 23, 2015 and the other on January 8, 2016.
Pursuant to the SGO MN Agreement, GPP will manage and conduct the day-to-day operations and affairs of the SGO MN Joint Venture, subject to certain major decisions set forth in the SGO MN Agreement that require the consent of at least two of the SGO MN Members, one of whom must be Oaktree. Income, losses and distributions will generally be allocated based on the SGO MN Members’ respective ownership interests. Additionally, in certain circumstances described in the SGO MN Agreement, the SGO MN Members may be required to make additional capital contributions to the SGO MN Joint Venture, in proportion to the Members’ respective ownership interests.
Pursuant to the SGO MN Agreement, the SGO MN Joint Venture will pay GPP a monthly asset management fee equal to a percentage of the aggregate investment value of the property owned by the SGO MN Joint Venture in the preceding month. In addition, if Oaktree has received a 12% internal rate of return on its capital contribution, then promptly following the sale of the last of the SGO MN Properties, the SGO MN Joint Venture will pay GPP a disposition fee equal to one percent of the aggregate net sales proceeds received by the SGO MN Joint Venture from the sales of the SGO MN Properties.
The SGO MN Joint Venture will make distributions of net cash flow to the SGO MN Members no less than quarterly, if appropriate. Distributions will be pro rata to the SGO MN Members in proportion to their respective ownership interests in the SGO MN Joint Venture until the SGO MN Members have received a 12% internal rate of return on their capital contribution. Thereafter distributions will be 10% to GPP and the balance to the Company, GPP and Oaktree pro rata in proportion to each SGO MN Member’s respective ownership interests in the SGO MN Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 17% internal rate of return on its capital contribution and a 1.5 equity multiple on its capital contribution. Distributions will then be 17.5% to GPP and the balance to the Company, GPP and Oaktree pro rata in proportion to each SGO MN Member’s respective ownership interests in the SGO MN Joint Venture until Oaktree has received aggregate distributions in an amount necessary to provide Oaktree with the greater of a 22% internal rate of return on its capital contribution and a 1.75 equity multiple on its capital contribution (the “Promoted Returns”). Distributions will then be 25% to GPP and the balance to the Company, GPP and Oaktree pro rata in proportion to each SGO MN Member’s respective ownership interests in the SGO MN Joint Venture. The portion of the Promoted Returns payable to GPP are referred to herein as the “GPP Incentive Fee.” As a part of the negotiations for the SGO MN Joint Venture, Glenborough agreed to certain reduced property management and related charges payable by the SGO MN Joint Venture; the GPP Incentive Fee was implemented in order to provide GPP and its affiliates with an opportunity to recoup those reductions should the SGO MN Joint Venture assets perform well financially.
The following table summarizes the Company’s investments in unconsolidated joint ventures as of December 31, 2015:
| Joint Venture | Date of Investment | Ownership % | Investment | |||||||||
| SGO Retail Acquisitions Venture, LLC | 3/11/2015 | 19 | % | $ | 4,098,000 | |||||||
| SGO MN Retail Acquisitions Venture, LLC | 9/30/2015 | 10 | % | 2,804,000 | ||||||||
| Total | $ | 6,902,000 | ||||||||||
F-21
A summary of the Company’s equity method investments in the SGO Joint Venture and the SGO MN Joint Venture, and share of income/loss from such investments, is presented below:
| December 31, 2015 | ||||
| ASSETS | ||||
| Investments in real estate, net | $ | 110,901,000 | ||
| Other assets | 28,570,000 | |||
| Total assets | $ | 139,471,000 | ||
| LIABILITIES AND MEMBERS' CAPITAL | ||||
| Notes payable | 75,632,000 | |||
| Other liabilities | 14,229,000 | |||
| Total liabilities | 89,861,000 | |||
| Members' capital | 49,610,000 | |||
| Total liabilities and members' capital | $ | 139,471,000 | ||
| For the Period Ended | ||||
|
December 31, 2015 | ||||
| RESULTS OF OPERATIONS | ||||
| Revenues | $ | 7,372,000 | ||
| Expenses | (9,222,317 | ) | ||
| Operating loss | (1,850,317 | ) | ||
| Other income | 36,000 | |||
| Net income | $ | (1,814,317 | ) | |
On December 21, 2015, the Company entered into the Limited Liability Agreement of 3032 Wilshire Investors, LLC, to form a joint venture. See further discussion at Note 15. “Subsequent Events.”
The Company’s off-balance sheet arrangements consist primarily of investments in joint ventures as described above. The joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture members, and do not represent a liability of the members other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of December 31, 2015, the Company has provided carve-out guarantees in connection with the two aforementioned unconsolidated joint ventures; in connection with those carve-out guarantees, the Company has certain rights of recovery from the joint venture members.
5. FUTURE MINIMUM RENTAL INCOME
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of December 31, 2015, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 20 years with a weighted-average remaining term (excluding options to extend) of 5 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $175,000 and $437,000 as of December 31, 2015 and December 31, 2014, respectively.
As of December 31, 2015, the future minimum rental income from the Company’s properties, other than the held for sale properties, under non-cancelable operating leases was as follows:
| 2016 | $ | 7,043,000 | ||
| 2017 | 6,154,000 | |||
| 2018 | 5,070,000 | |||
| 2019 | 4,461,000 | |||
| 2020 | 3,680,000 | |||
| Thereafter | 7,365,000 | |||
| $ | 33,773,000 |
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6. ACQUIRED LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES
As of December 31, 2015 and 2014, the Company’s acquired lease intangibles and below-market lease liabilities were as follows:
| Lease Intangibles | Below - Market Lease Liabilities | |||||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | |||||||||||||
| Cost | $ | 8,089,000 | $ | 20,898,000 | $ | (4,463,000 | ) | $ | (6,991,000 | ) | ||||||
| Accumulated amortization | (3,799,000 | ) | (7,240,000 | ) | 1,160,000 | 1,450,000 | ||||||||||
| $ | 4,290,000 | $ | 13,658,000 | $ | (3,303,000 | ) | $ | (5,541,000 | ) | |||||||
The Company’s amortization of lease intangibles and below-market lease liabilities for the years ended December 31, 2015 and 2014, were as follows:
| Lease Intangibles | Below - Market Lease Liabilities | |||||||||||||||
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Amortization | $ | (1,510,000 | ) | $ | (2,791,000 | ) | $ | 365,000 | $ | 520,000 | ||||||
The scheduled future amortization of lease intangibles and below-market lease liabilities, as of December 31, 2015, was as follows:
| Acquired | Below-Market | |||||||
| Lease | Lease | |||||||
| Intangibles | Intangibles | |||||||
| 2016 | $ | 918,000 | $ | (274,000 | ) | |||
| 2017 | 772,000 | (243,000 | ) | |||||
| 2018 | 652,000 | (221,000 | ) | |||||
| 2019 | 589,000 | (212,000 | ) | |||||
| 2020 | 483,000 | (207,000 | ) | |||||
| Thereafter | 876,000 | (2,146,000 | ) | |||||
| $ | 4,290,000 | $ | (3,303,000 | ) | ||||
7. PREPAID EXPENSES AND OTHER ASSETS, NET
As of December 31, 2015 and 2014, the Company’s prepaid expenses and other assets, net consisted of the following:
| December 31, 2015 | December 31, 2014 | |||||||
| Sales tax rebate incentive, net of accumulated amortization | $ | 29,000 | $ | 672,000 | ||||
| Prepaid expenses | 194,000 | 593,000 | ||||||
| Tenant lease incentive | - | 60,000 | ||||||
| Utility deposits and other | 508,000 | 38,000 | ||||||
| $ | 731,000 | $ | 1,363,000 | |||||
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8. NOTES PAYABLE
As of December 31, 2015 and 2014, the Company’s notes payable, excluding long-term debt which has been classified as held for sale, consisted of the following:
| Principal Balance | Interest Rates At | |||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2015 | ||||||||||
| KeyBank credit facility | $ | - | $ | 19,014,000 | n/a | |||||||
| Secured term loans | 24,701,000 | 57,116,000 | 5.10 | % | ||||||||
| Mortgage loans | 9,690,000 | 44,768,000 | 5.63 | % | ||||||||
| Unsecured loans | - | 1,250,000 | n/a | |||||||||
| Total | $ | 34,391,000 | $ | 122,148,000 | ||||||||
During the years ended December 31, 2015 and 2014, the Company incurred $5,459,000 and $8,983,000, respectively, of interest expense, which included the amortization and write-off of deferred financing costs of $544,000 and $747,000, respectively.
As of December 31, 2015 and 2014, interest expense payable was $199,000 and $1,080,000, respectively.
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of December 31, 2015:
| Amount | ||||
| 2016 | $ | 578,000 | ||
| 2017 | 9,985,000 | |||
| 2018 | 473,000 | |||
| 2019 | 23,355,000 | |||
| 2020 | - | |||
| Thereafter | - | |||
| $ | 34,391,000 | |||
KeyBank Amended and Restated Credit Facility Agreement
On August 4, 2014, the Company entered into an Amended and Restated Revolving Credit Facility with KeyBank to amend and restate the 2010 Credit Facility (defined below) in its entirety and to establish a revolving credit facility with an initial maximum aggregate commitment of $30,000,000 (as adjusted, the “Facility Amount”). Subject to certain terms and conditions contained in the loan documents, the Company may request that the Facility Amount be increased to a maximum of $60,000,000. The Amended and Restated Credit Facility was initially secured by San Jacinto Esplanade, Aurora Commons and Constitution Trail.
The Amended and Restated Credit Facility matures on August 4, 2017. The Company has the right to prepay the Amended and Restated Credit Facility in whole at any time or in part from time to time, subject to the payment of certain expenses, costs or liabilities potentially incurred by the lenders as a result of the prepayment and subject to certain other conditions contained in the loan documents.
Each loan made pursuant to the Amended and Restated Credit Facility will be either a LIBOR rate loan or a base rate loan, at the election of the Company, plus an applicable margin, as defined. Monthly payments are interest only with the entire principal balance and all outstanding interest due at maturity. The Company will pay KeyBank an unused commitment fee, quarterly in arrears, which will accrue at 0.30% per annum if the usage under the Amended and Restated Credit Facility is less than or equal to 50% of the Facility Amount, and 0.20% per annum if the usage under the Amended and Restated Credit Facility is greater than 50% of the Facility Amount.
The Company is providing a guaranty of all of its obligations under the Amended and Restated Credit Facility and all other loan documents in connection with the Amended and Restated Credit Facility. The Company also paid Glenborough a financing coordination fee of $300,000 in 2014 in connection with the Amended and Restated Credit Facility.
F-24
On August 4, 2014, as required by the Amended and Restated Credit Facility, the OP contributed 100% of its sole membership interest in SRT Constitution Trail, LLC, which owns the Constitution Trail property, to SRT Holdings (the “Constitution Transaction”). At the time, SRT Holdings was jointly owned by the OP and SRT Manager, an affiliate of Glenborough. Prior to the Constitution Transaction, the OP owned 88% of the membership interests in SRT Holdings and SRT Manager owned 12% of the membership interests in SRT Holdings. Following the Constitution Transaction, the OP owned 91.67% of the membership interests in SRT Holdings and SRT Manager owned 8.33% of the membership interests in SRT Holdings, which was derived based on the fair value of the properties as of the date of the contribution. Subsequently, SRT Holdings paid SRT Manager $2,102,000 in full redemption of SRT Manager’s 8.33% membership interest in SRT Holdings.
In connection with the Constitution Transaction, the entire outstanding note payable balance due to Constitution Trail’s prior lender was fully paid, and the new outstanding principal balance of the Amended and Restated Credit Facility was $20,800,000, as of August 4, 2014.
On October 29, 2015, the Company drew $4.0 million under the Amended and Restated Credit Facility and used the loan proceeds, along with the proceeds from the sale of Moreno Marketplace and Northgate Plaza, to pay off a portion of the outstanding secured term loans. On November 2, 2015, the Company paid off the entire $4.0 million draw on the Amended and Restated Credit Facility.
In connection with the sale of Constitution Trail and Aurora Commons to the SGO Joint Venture on March 11, 2015 (see Note 4. “Investments in Unconsolidated Joint Ventures”), the Company used a portion of the net proceeds from the sale of Constitution Trail to pay off the entire $19 million outstanding balance associated with the Amended and Restated Credit Facility.
The original credit facility was entered into on December 17, 2010, between the Company, through its subsidiary, SRT Holdings, and KeyBank (and certain other lenders, collectively referred to as the “lenders,”) to establish a revolving credit facility with an initial maximum aggregate commitment of $35,000,000 (the “2010 Credit Facility”). On August 4, 2014, the 2010 Credit Facility was replaced by the Amended and Restated Credit Facility.
9. FAIR VALUE DISCLOSURES
The Company believes the total carrying values reflected on its consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, and amounts due to affiliates due to their short-term nature, except for the Company’s notes payable, which are disclosed below.
The fair value of the Company’s notes payable is estimated using a present value technique based on contractual cash flows and management’s observations of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. The Company significantly reduces the amount of judgment and subjectivity in its fair value determination through the use of cash flow inputs that are based on contractual obligations. Discount rates are determined by observing interest rates published by independent market participants for comparable instruments. The Company classifies these inputs as Level 2 inputs.
The following table provides the carrying values and fair values of the Company’s notes payable related to continuing operations as of December 31, 2015 and 2014:
| At December 31, 2015 | Carrying Value (1) | Fair Value (2) | ||||||
| Notes Payable | $ | 34,391,000 | $ | 35,099,000 | ||||
| At December 31, 2014 | Carrying Value (1) | Fair Value (2) | ||||||
| Notes Payable | $ | 122,148,000 | $ | 123,511,000 | ||||
| (1) | The carrying value of the Company’s notes payable represents outstanding principal as of December 31, 2015 and December 31, 2014. |
| (2) | The estimated fair value of the notes payable is based upon indicative market prices of the Company’s notes payable based on prevailing market interest rates. |
As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.
F-25
For the year ended December 31, 2015, the Company did not record any impairment losses. For the year ended December 31, 2014, the Company recorded impairment losses of $2,500,000 and $1,400,000 on its investments in Constitution Trail and Topaz Marketplace based on the properties’ excess carrying values over their appraised values at December 31, 2014. The appraised values of the two properties were based on third-party estimates, discounted cash flow analyses, and other market considerations. The appraised values used 11% and 10% as the discount rates, and 10% and 8.5% as the terminal capitalization rates for Constitution Trail and Topaz Marketplace, respectively. These estimates incorporate significant unobservable inputs and therefore are considered Level 3 inputs under the fair value hierarchy.
10. EQUITY
Common Stock
Under the Company’s Articles of Amendment and Restatement (the “Charter”), the Company has the authority to issue 400,000,000 shares of common stock. All shares of common stock have a par value of $0.01 per share. On October 16, 2008, the Company issued 22,222 shares of common stock to TNP LLC for an aggregate purchase price of $200,000. As of December 31, 2013, Sharon D. Thompson, the spouse of Anthony W. Thompson, the Company’s former co-chief executive officer and former president, independently owned 111,111 shares of the Company’s common stock for which she paid an aggregate purchase price of $1 million and TNP LLC, which is controlled by Mr. Thompson, owned 22,222 shares of the Company’s common stock. On January 24, 2014, GPP purchased both the 22,222 and 111,111 shares of the Company from TNP LLC and Sharon D. Thompson, respectively, for $8.00 per share. The share purchase transaction was part of a larger settlement of issues relating to the 2013 annual meeting proxy contest, and was not considered an arm’s length transaction. Therefore, the share purchase price may not reflect a market price or value for such securities.
On February 7, 2013, the Company terminated the Offering and ceased offering its securities. The Company sold 10,688,940 shares of common stock in its primary offering for gross operating proceeds of $104,700,000, 391,182 share of common stock under the DRIP for gross offering proceeds of $3,600,000, granted 50,000 shares of restricted stock and issued 273,729 common shares to pay a portion of the Special Distribution. Cumulatively, through December 31, 2015, the Company has redeemed 365,903 shares sold in the Offering for $2,995,000.
Common Units and Special Units
The Company’s prior advisor, TNP Strategic Retail Advisor, LLC, invested $1,000 in the OP in exchange for Common Units of the OP which were sold to GPP on January 24, 2014. On May 26, 2011, in connection with the acquisition of Pinehurst Square East, a retail property located in Bismarck, North Dakota, the OP issued 287,472 Common Units to certain of the sellers of Pinehurst Square East who elected to receive Common Units for an aggregate value of approximately $2.6 million, or $9.00 per Common Unit. On March 12, 2012, in connection with the acquisition of Turkey Creek, a retail property located in Knoxville, Tennessee, the OP issued 144,324 Common Units to certain of the sellers of Turkey Creek who elected to receive Common Units for an aggregate value of approximately $1.4 million, or $9.50 per Common Unit.
Pursuant to the Advisory Agreement, in April 2014 the Company caused the OP to issue to the Advisor a separate series of limited partnership interests of the OP in exchange for a capital contribution to the OP of $1,000 (the “Special Units”). The terms of the Special Units entitle the Advisor to (i) 15% of the Company’s net sale proceeds upon disposition of its assets after the Company’s stockholders receive a return of their investment plus a 7% cumulative, non-compounded rate of return or (ii) an equivalent amount in the event that the Company lists its shares of common stock on a national securities exchange or upon certain terminations of the Advisory Agreement after the Company’s stockholders are deemed to have received a return of their investment plus a 7% cumulative, non-compounded rate of return.
The holders of Common Units, other than the Company and the holder of the Special Units, generally have the right to cause the OP to redeem all or a portion of their Common Units for, at the Company’s sole discretion, shares of the Company’s common stock, cash or a combination of both. If the Company elects to redeem Common Units for shares of common stock, the Company will generally deliver one share of common stock for each Common Unit redeemed. Holders of Common Units, other than the Company and the holders of the Special Units, may exercise their redemption rights at any time after one year following the date of issuance of their Common Units; provided, however, that a holder of Common Units may not deliver more than two redemption notices in a single calendar year and may not exercise a redemption right for less than 1,000 Common Units, unless such holder holds less than 1,000 Common Units, in which case, it must exercise its redemption right for all of its Common Units.
F-26
Member Interests
On July 9, 2013, SRT Manager made a cash investment of approximately $1.9 million in SRT Holdings pursuant to a Membership Interest Purchase Agreement by and among the Company, SRT Manager, SRT Holdings, and the OP, which resulted in SRT Manager owning a 12% membership interest in SRT Holdings and the OP owning the remaining 88% membership interest in SRT Holdings. The Company’s independent directors negotiated and approved the transaction in order to help enable the Company to meet its short-term liquidity needs for operations, as well as to build working capital for future operations. Following the Constitution Transaction on August 4, 2014 (see Note 8. “Notes Payable”), the OP owned an 91.67% membership interest in SRT Holdings and SRT Manager owned a 8.33% membership interest in SRT Holdings. In connection with the sale of SRT Holding’s two properties to the SGO Joint Venture (see Note 4. “Investment in Unconsolidated Joint Ventures”), SRT Holdings paid SRT Manager approximately $2.1 million in full redemption of the then current value of its remaining 8.33% membership interest in SRT Holdings.
Preferred Stock
The Charter authorizes the Company to issue 50,000,000 shares of $0.01 par value preferred stock. As of December 31, 2015 and December 31, 2014, no shares of preferred stock were issued and outstanding.
Share Redemption Program
On April 1, 2015, the Company’s board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “Amended and Restated SRP”). Under the Amended and Restated SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the Amended and Restated SRP) of a stockholder are eligible for repurchase by the Company. The number of shares to be redeemed is limited to the lesser of (i) a total of $2,000,000 for redemptions sought upon a stockholder’s death and a total of $1,000,000 for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted average of the number of shares of the Company’s common stock outstanding during the prior calendar year. Share repurchases pursuant to the share redemption program are made at the sole discretion of the Company. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the Amended and Restated SRP.
The redemption price for shares that are redeemed is 100% of the Company’s most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or disability, unless such death or disability occurred between January 15, 2013 and April 1, 2015, when the share redemption program was suspended. Any stockholder whose death or disability occurred during this time period must submit their redemption request within one year after the adoption of the Amended and Restated SRP.
The Amended and Restated SRP provides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If the Company cannot honor all redemption requests received in a given quarter, all requests, including death and disability redemptions, will be honored on a pro rata basis. If the Company does not completely satisfy a redemption request in one quarter, it will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. The Company may increase or decrease the amount of funding available for redemptions under the Amended and Restated SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
The other material terms of the Amended and Restated SRP are consistent with the terms of the share redemption program that was in effect immediately prior to January 15, 2013.
On August 7, 2015, the board of directors approved the amendment and restatement of the Amended and Restated SRP (the “Second Amended and Restated SRP” and, together with the Amended and Restated SRP, the “SRP”). Under the Second Amended and Restated SRP, the redemption date with respect to third quarter 2015 redemptions was November 10, 2015 or the next practicable date as our Chief Executive Officer determined so that redemptions with respect to the third quarter of 2015 were delayed until after the payment date for the Special Distribution. With this revision, stockholders who were to have 100% of their shares redeemed were not left holding a small number of shares from the Special Distribution after the date of the redemption of their shares. The other material terms of the Second Amended and Restated SRP are consistent with the terms of the Amended and Restated SRP.
F-27
During the year ended December 31, 2015, the Company redeemed 205,495 shares of common stock for $1,392,000 under the SRP. The Company did not redeem any shares during the year ended December 31, 2014.
Distributions
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.
Under the terms of the Amended and Restated Credit Facility, the Company may pay distributions to its investors so long as the total amount paid does not exceed 100% of the cumulative Adjusted Funds From Operations provided, however, that the Company is not restricted from making any distributions necessary in order to maintain its status as a REIT. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
The following table sets forth the regular distributions declared to the Company’s common stockholders and Common Unit holders for the years ended December 31, 2015 and 2014, respectively:
| Distribution Record Date | Distribution Payable Date | Distribution Per Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2015 | 3/31/2015 | 4/30/2015 | $ | 0.06 | $ | 658,000 | $ | 26,000 | $ | 684,000 | ||||||||||
| Second Quarter 2015 | 6/30/2015 | 7/30/2015 | $ | 0.06 | $ | 654,000 | 26,000 | 680,000 | ||||||||||||
| Third Quarter 2015 | 9/30/2015 | 10/31/2015 | $ | 0.06 | $ | 654,000 | 26,000 | 680,000 | ||||||||||||
| Fourth Quarter 2015 | 12/31/2015 | 1/30/2016 | $ | 0.06 | $ | 661,000 | 25,000 | 686,000 | ||||||||||||
| $ | 2,627,000 | $ | 103,000 | $ | 2,730,000 | |||||||||||||||
| Distribution Record Date | Distribution Payable Date | Distribution Per Common Stock / Common Unit | Total Common Stockholders Distribution | Total Common Unit Holders Distribution | Total Distribution | |||||||||||||||
| First Quarter 2014 | 3/31/2014 | 4/30/2014 | $ | 0.05 | $ | 548,000 | $ | 22,000 | $ | 570,000 | ||||||||||
| Second Quarter 2014 | 6/30/2014 | 7/30/2014 | $ | 0.06 | 658,000 | 26,000 | 684,000 | |||||||||||||
| Third Quarter 2014 | 9/30/2014 | 10/31/2014 | $ | 0.06 | 658,000 | 26,000 | 684,000 | |||||||||||||
| Fourth Quarter 2014 | 12/31/2014 | 1/30/2015 | $ | 0.06 | 658,000 | 26,000 | 684,000 | |||||||||||||
| $ | 2,522,000 | $ | 100,000 | $ | 2,622,000 | |||||||||||||||
Special Distribution
In June 2011, the Company acquired a debt obligation (the “Distressed Debt”) for $18 million under its prior advisor, TNP Strategic Retail Advisor, LLC. In October 2011, the Company received the underlying collateral (the “Collateral”) with respect to the Distressed Debt in full settlement of its debt claim (the “Settlement”). At the time of the Settlement, the Company received an independent valuation of the Collateral’s fair market value (“FMV”) of $27.6 million. The Settlement resulted in taxable income to the Company in an amount equal to the FMV of the Collateral less its adjusted basis for tax purposes in the Distressed Debt. Such income was not properly reported on the Company’s 2011 federal income tax return, and the Company did not make a sufficient distribution of taxable income for purposes of the REIT qualification rules (the “2011 Underreporting”). The Company believes that it was able to rectify the 2011 Underreporting by making a special distribution (the “Special Distribution”) to its stockholders.
On August 7, 2015, the board of directors authorized the Special Distribution of $2,248,000 on the Company’s common stock as of the close of business on August 10, 2015 (the “Record Date”). The Special Distribution was payable in cash, common stock or a combination of cash and common stock to, and at the election of, the stockholders of record as of the Record Date, provided, however, that the total amount of cash payable to all stockholders in the Special Distribution was $449,600 (the “Cash Amount”), with the balance of the Special Distribution, or $1,798,400 (the “Share Amount”), payable in the form of shares of common stock. Stockholders who did not return an election form, or who otherwise failed to properly complete an election form, before the deadline, received their pro rata portion of the Special Dividend entirely in shares of common stock.
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On November 4, 2015, the Company paid $450,000 in cash and issued 273,729 shares of common stock having a value of $1,798,000 pursuant to the Special Distribution. On December 30, 2015, we paid an additional $108,000 in cash to correct errors made by the third party transfer agent in connection with the November 4, 2015 payment pursuant to the Special Distribution. Although the Company believes the Special Distribution allowed it to maintain its qualification as a REIT, there can be no complete assurance in this regard.
Distribution Reinvestment Plan
The Company adopted the DRIP to allow common stockholders to purchase additional shares of the Company’s common stock through the reinvestment of distributions, subject to certain conditions. The Company registered and reserved $100,000,000 in shares of its common stock for sale pursuant to the DRIP. The DRIP was terminated effective February 7, 2013 in connection with the expiration of the Offering and the Company’s deregistration of all of the unsold shares registered for sale pursuant to the Offering. As a result, for the years ended December 31, 2015 and 2014, no distributions were reinvested, and no shares of common stock were issued under the DRIP.
11. EARNINGS PER SHARE
Earnings per share (“EPS”) is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. There is no unvested stock as of December 31, 2015. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
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The following table sets forth the computation of the Company’s basic and diluted earnings (loss) per share:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Numerator - basic and diluted | ||||||||
| Net income (loss) from continuing operations | $ | 13,991,000 | $ | (11,948,000 | ) | |||
| Net income (loss) attributable to non-controlling interests | 681,000 | (709,000 | ) | |||||
| Net income (loss) attributable to common shares | 13,310,000 | (11,239,000 | ) | |||||
| Net income from discontinued operations | - | 3,059,000 | ||||||
| Net loss attributable to non-controlling interests | - | (483,000 | ) | |||||
| Net income (loss) attributable to common shares | $ | 13,310,000 | $ | (8,663,000 | ) | |||
| Denominator - basic and diluted | ||||||||
| Basic weighted average common shares | 10,960,613 | 10,969,714 | ||||||
| Effect of dilutive securities | ||||||||
| Common units (1) | - | - | ||||||
| Diluted weighted average common shares | 10,960,613 | 10,969,714 | ||||||
| Basic earnings (loss) per common share | ||||||||
| Net income (loss) from continuing operations attributable to common shares | $ | 1.21 | $ | (1.02 | ) | |||
| Net income from discontinued operations attributable to common shares | - | 0.23 | ||||||
| Net income (loss) attributable to common shares | $ | 1.21 | $ | (0.79 | ) | |||
| Diluted earnings (loss) per common share | ||||||||
| Net income (loss) from continuing operations attributable to common shares | $ | 1.21 | $ | (1.02 | ) | |||
| Net income from discontinued operations attributable to common shares | - | 0.23 | ||||||
| Net income (loss) attributable to common shares | $ | 1.21 | $ | (0.79 | ) | |||
| (1) | The effect of 431,986 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive. |
12. INCENTIVE AWARD PLAN
The Company adopted an incentive award plan on July 7, 2009 (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. The Company has reserved 2,000,000 shares of common stock for stock grants pursuant to the Incentive Award Plan.
Pursuant to the Company’s Amended and Restated Independent Directors Compensation Plan, which is a sub-plan of the Incentive Award Plan (the “Directors Plan”), the Company granted each of its independent directors an initial grant of 5,000 shares of restricted stock (the “initial restricted stock grant”) following the Company’s raising of the $2,000,000 minimum offering amount in the Offering on November 12, 2009. Each new independent director that subsequently joined the board of directors received the initial restricted stock grant on the date he or she joined the board of directors. In addition, until the Company terminated the Offering on February 7, 2013, on the date of each of the Company’s annual stockholders meetings at which an independent director was re-elected to the board of directors, he or she may have received 2,500 shares of restricted stock. The restricted stock vests one-third on the date of grant and one-third on each of the next two anniversaries of the grant date. The restricted stock will become fully vested and non-forfeitable in the event of an independent director’s termination of service due to his or her death or disability, or upon the occurrence of a change in control of the Company.
For the years ended December 31, 2015 and 2014, the Company recognized compensation expense of $0 and $18,000, respectively, related to restricted common stock grants to its independent directors, which is included in general and administrative expense in the Company’s accompanying consolidated statements of operations. Shares of restricted common stock have full voting rights and rights to dividends.
As of December 31, 2015 and 2014, all of the compensation expense related to non-vested shares of restricted common stock has been recognized. There were no restricted stock grants issued during the years ended December 31, 2015 and 2014.
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A summary of the changes in restricted stock grants for the years ended December 31, 2015 and 2014 is presented below.
| Weighted Average | ||||||||
| Restricted Stock | Grant Date | |||||||
| (Number of Shares) | Fair Value | |||||||
| Balance - December 31, 2013 | 3,333 | $ | 9.00 | |||||
| Granted | - | - | ||||||
| Vested | 3,333 | 9.00 | ||||||
| Balance - December 31, 2014 | - | $ | - | |||||
| Granted | - | - | ||||||
| Vested | ||||||||
| Balance - December 31, 2015 | - | $ | - | |||||
13. RELATED PARTY TRANSACTIONS
On August 7, 2013, the Company entered into the Advisory Agreement with Advisor. On August 3, 2015, the Advisory Agreement with the Advisor was renewed for an additional twelve months, beginning on August 10, 2015. Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.
On July 9, 2013, SRT Manager, an affiliate of Advisor, acquired an initial 12% membership interest in SRT Holdings, the Company’s wholly-owned subsidiary. Following the Constitution Transaction on August 4, 2014 (see Note 8. “Notes Payable”), SRT Manager’s membership interests in SRT Holdings decreased to 8.33%. In March 2015, SRT Holdings paid SRT Manager $2,102,000 in full redemption of SRT Manager’s 8.33% membership interest in SRT Holdings.
On January 24, 2014, GPP purchased 22,222 and 111,111 shares of the Company from TNP LLC and Sharon D. Thompson, respectively, for $8.00 per share. The share purchase transaction was part of a larger settlement of issues relating to the 2013 annual meeting proxy contest and was not considered an arm’s length transaction. Therefore, the share purchase price may not reflect a market price or value for such securities (see Note 10. “Equity”).
On March 11, 2015, the Company, through a wholly-owned subsidiary, entered into the SGO Agreement to form the SGO Joint Venture. On September 30, 2015, the Company, through wholly-owned subsidiaries, entered into the SGO MN Agreement to form the SGO MN Joint Venture. For additional information regarding the SGO Joint Venture and the SGO MN Joint Venture, see Note 4. “Investments in Unconsolidated Joint Ventures.”
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Summary of Related Party Fees
Summarized separately below are the Advisor related party costs incurred and payable by the Company for the years ended December 31, 2015 and 2014, respectively, and payable as of December 31, 2015 and 2014:
| Advisor Fees | Incurred | Payable | ||||||||||||||
| Years Ended December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Expensed | ||||||||||||||||
| Acquisition fees | $ | 79,000 | $ | - | $ | - | $ | - | ||||||||
| Financing coordination fees | 87,000 | - | - | - | ||||||||||||
| Asset management fees | 978,000 | 1,320,000 | 19,000 | - | ||||||||||||
| Reimbursement of operating expenses | 250,000 | 72,000 | 27,000 | - | ||||||||||||
| Property management fees | 612,000 | 857,000 | 3,000 | - | ||||||||||||
| Disposition fees | 1,173,000 | 268,000 | - | - | ||||||||||||
| Guaranty fees (1) | 1,000 | 14,000 | - | 1,000 | ||||||||||||
| $ | 3,180,000 | $ | 2,531,000 | $ | 49,000 | $ | 1,000 | |||||||||
| Capitalized | ||||||||||||||||
| Financing coordination fees | $ | - | $ | 300,000 | $ | - | $ | - | ||||||||
| Leasing fees | 122,000 | 127,000 | - | - | ||||||||||||
| Legal leasing fees | 124,000 | 222,000 | - | - | ||||||||||||
| Construction management fees | 19,000 | 56,000 | - | - | ||||||||||||
| $ | 265,000 | $ | 705,000 | $ | - | $ | - | |||||||||
| (1) | Guaranty fees were paid by the Company to its prior advisor, TNP Strategic Retail Advisor, LLC. |
Acquisition Fee
Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1.0% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments.
Origination Fee
Under the Advisory Agreement, the Advisor is entitled to receive an origination fee equal to 1.0% of the amount funded by the Company to acquire or originate real estate-related loans, including any acquisition expenses related to such investment and any debt used to fund the acquisition or origination of the real estate-related loans. The Company will not pay an origination fee to the Advisor with respect to any transaction pursuant to which it is required to pay the Advisor an acquisition fee.
Financing Coordination Fee
Under the Advisory Agreement, the Advisor is entitled to receive a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by the Company or the OP and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by the Company or the OP.
Asset Management Fee
Under the Advisory Agreement, the Advisor is entitled to receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments, or (2) the fair market value of the Company’s investments (before non-cash reserves and deprecation) if the board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.
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Reimbursement of Operating Expenses
The Company or the OP will pay directly, or reimburse the Advisor for, certain third-party expenses paid or incurred by the Advisor in connection with the services provided by the Advisor pursuant to the Advisory Agreement, subject to the limitation that the Company will not reimburse the Advisor at the end of any fiscal quarter in which the Company’s total operating expenses (including the asset management fee described below) for the four preceding fiscal quarters exceed the greater of (1) 2% of its average invested assets (as defined in the Charter); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year unless (i) the Company elects to subtract the excess amount from the “total operating expenses” for the subsequent fiscal quarter, or (ii) the independent directors determine that the excess expenses are justified based on unusual and nonrecurring factors which they deem sufficient. If the independent directors determine that the excess expenses are justified, the excess amount may be carried over and included in “total operating expenses” in subsequent expense years and the Company will send its stockholders written disclosure, together with an explanation of the factors the independent directors considered in making such a determination. The determination will also be reflected in the minutes of the board of directors. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. In addition, under the Advisory Agreement, to the extent that that the Advisor or any affiliate receives fees from any of the Company’s subsidiaries for services rendered to such subsidiary, then the amount of such fees will be offset against any amounts due to the Advisor for the same services.
For the years ended December 31, 2015 and 2014, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fee
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive an annual property management fee equal to 4% of the properties’ gross revenue. The property management agreements with Glenborough have been renewed for an additional twelve months, beginning on August 10, 2015.
Disposition Fee
Under the Advisory Agreement, the Advisor is entitled to receive a disposition fee of up to 50.0% of a competitive real estate commission, but not to exceed 3.0% of the contract sales price, in connection with the sale of an asset in which the Advisor or any of its affiliates provides a substantial amount of services, as determined by the Company’s independent directors.
Leasing Fee
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive a market-based leasing fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants.
Legal Leasing Fee
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive a market-based legal leasing fee for the negotiation and production of new leases, renewals and amendments.
Guaranty Fee
In connection with certain acquisition financings, the Company’s former chairman and former co-chief executive officer and/or TNP LLC had executed certain guaranty agreements to the respective lenders. As consideration for such guaranty, the Company entered into a reimbursement and fee agreement to provide for an upfront payment and an annual guaranty fee payment for the duration of the guarantee period. In March 2015, the Company retired the outstanding notes payable related to Osceola Village resulting in the expiration of the remaining guaranty agreement.
Construction Management Fee
Under the property management agreements between the Company and Glenborough, in connection with coordinating and facilitating all construction, including all maintenance, repairs, capital improvements, common area refurbishments and tenant improvements, on a project-by-project basis, Glenborough is entitled to receive a construction management fee equal to 5.0% of the hard costs for the project in question.
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Related-Party Fees Paid by the Unconsolidated Joint Ventures
The unconsolidated joint ventures are party to certain agreements with Glenborough for services related to the investment of funds and management of the joint ventures’ investments, as well as the day-to-day management, operation and maintenance of the properties owned by the joint ventures. The joint ventures pay fees to Glenborough for these services. The SGO Joint Venture recognized related-party fees and reimbursements of approximately $356,000 for the year ended December 31, 2015. The SGO MN Joint Venture recognized related-party fees and reimbursements of approximately $226,000 for the year ended December 31, 2015. The related-party amounts consist of property management, asset management, leasing commission, legal leasing, construction management fees and salary reimbursements.
14. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
Legal Matters
The following disclosure summarizes material pending legal proceedings to which we are a party, as well as material legal proceedings that terminated during the three months ended December 31, 2015.
Securities Litigation
On or about September 23, 2013, a civil action captioned Stephen Drews v. TNP Strategic Retail Trust, Inc., et al., SA-CV-13-1488-PA-DFMx, was commenced in the United States District Court for the Central District of California. The named defendants were the Company, various of its present or former officers and directors, including Anthony W. Thompson, and several entities controlled by Mr. Thompson. The plaintiff alleged that he invested in connection with the Offering and purported to represent a class consisting of all persons who invested in connection with the Offering between September 23, 2010 and February 7, 2013. The plaintiff alleged that the Company and all of the individual defendants violated Section 11 of the Securities Act of 1933, as amended (the “Securities Act”) because the offering materials used in connection with the Offering allegedly failed to disclose financial difficulties that Mr. Thompson and the entities controlled by him were experiencing. Additional claims under the Securities Act were asserted against Mr. Thompson, the entities controlled by Mr. Thompson and the other individual defendants who were employees of Mr. Thompson. The complaint sought a class-wide award of damages in an unspecified amount. On October 22, 2013, the plaintiff filed a notice of voluntary dismissal without prejudice. On October 23, 2013, a virtually identical complaint was filed in the United States District Court for the Northern District of California, asserting the same claims against the same defendants. The only material difference was that an additional plaintiff was added. Like the original plaintiff, the additional plaintiff alleged that he invested in connection with the Offering. The new action was captioned Lewis Booth, et al. v. Strategic Realty Trust, Inc., et al., CV-13-4921-JST. On January 27, 2014, the Court entered an order appointing lead plaintiffs and lead plaintiffs’ counsel. On March 13, 2014, the plaintiffs filed an amended complaint. The amended complaint contained the same claims as the original complaint and added additional common law claims, including claims that the Company’s directors breached their fiduciary duties, and that the Company and its directors had been unjustly enriched. On April 28, 2014, the Company and the individual defendants other than Mr. Thompson or employees of Mr. Thompson moved to dismiss the amended complaint. On July 29, 2014, the Court granted the motion in part and denied the motion in part. Specifically, the Court dismissed the claim for breach of fiduciary duty with leave to amend and dismissed the claim for unjust enrichment with prejudice. On July 31, 2014, the plaintiffs advised the Court that they did not intend to amend their pleading to re-assert the claim for breach of fiduciary duty. On January 16, 2015, the parties reached an agreement to settle the case on a class-wide basis, subject to approval by the Court, with the settlement to be funded entirely by the Company’s insurers. On October 15, 2015, the Court approved the settlement. On February 12, 2016, the distribution of the settlement proceeds to the members of the class commenced.
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15. SUBSEQUENT EVENTS
Distributions
On January 30, 2016, the Company paid a fourth quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of December 31, 2015, totaling $684,000.
Gelson’s Development Joint Venture
On January 7, 2016, the Company (which may be referred to herein as the “Registrant,” “we,” “our” or “us”), through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture Agreement”) to form a joint venture with Sunset & Gardner LA, LLC (“S&G LA” and together with us the “Gelson’s Members”), a subsidiary of Cadence Capital Investments, LLC (“Cadence”). Cadence is a real estate development and investment firm focused on commercial properties. They offer high-quality, market-driven developments, and have expertise in market planning and site selection build to suit and small center developments, redevelopment and repositioning of existing properties.
The Gelson’s Joint Venture Agreement provides for the ownership and operation of certain real property by Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture”), in which the Company owns a 100% capital interest and a 50% profits interest. In exchange for ownership in the Gelson’s Joint Venture, the Company has agreed to contribute cash in an amount up to $7 million in initial capital contributions and $700,000 in subsequent capital contribution to the Gelson’s Joint Venture. S&G LA contributed its rights to acquire the real property, its interest under a 20 year lease with Gelson’s Markets (the “Gelson’s Lease”) and agreed to provide certain management and development services.
On January 28, 2016, the Gelson’s Joint Venture used the capital contributions of the Company, together with the proceeds of a loan from Buchanan Mortgage Holdings, LLC in the amount of $10,700,000, to certain real property located at the corner of Sunset Boulevard and Gardner in Hollywood, California (the “Gelson’s Property”) from a third party seller, for a total purchase price of $12,950,000. The Gelson’s Joint Venture intends to proceed with obtaining all required governmental approvals and entitlements to replace the existing improvements on the property with a build to suit grocery store for Gelson’s Markets with an expected size of approximately 38,000 square feet. Gelson’s Markets was founded in 1951 and is recognized as one of the nation’s premier supermarket chains. Gelson’s Markets currently has 18 locations throughout Southern California.
Pursuant to the Gelson’s Joint Venture Agreement, S&G LA will manage and conduct the day-to-day operations and affairs of the Gelson’s Joint Venture, subject to certain major decisions set forth in the Gelson’s Joint Venture Agreement that require the consent of all the Gelson’s Members. Income, losses and distributions will generally be allocated based on the Gelson’s Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Gelson’s Joint Venture Agreement, the Company may be required to make additional capital contributions to the Joint Venture, in proportion to the Gelson’s Members’ respective ownership interests. Until the Company has received back its capital contribution all distributions go to the Company; thereafter, the Gelson’s Joint Venture will distribute the profits 50% to the Company and 50% to S&G LA.
The Company is currently evaluating the appropriate accounting treatment for the Gelson’s Joint Venture.
3032 Wilshire Joint Venture
On March 7, 2015, the Company contributed $5,700,000 to the Wilshire Joint Venture in order to fund the acquisition of certain property commonly known as 3032 Wilshire Boulevard and 1210 Berkeley Street in Santa Monica, California (the “Wilshire Property”). The Wilshire Joint Venture Agreement provides for the ownership and operation of certain real property by 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture”), in which the Company owns a 100% capital interest and a 50% profits interest.
On March 8, 2016, the Wilshire Joint Venture used the capital contributions of the Company, together with the proceeds of a loan from Buchanan Mortgage Holdings, LLC in the amount of $8,500,000, to acquire the Wilshire Property from a third party seller, for a total purchase price of $13,500,000. The Wilshire Joint Venture intends to reposition and re-lease the existing improvements on the property.
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Pursuant to the Wilshire Joint Venture Agreement, 3032 Wilshire SM will manage and conduct the day-to-day operations and affairs of the Wilshire Joint Venture, subject to certain major decisions set forth in the Wilshire Joint Venture Agreement that require the consent of all the Wilshire Members. Income, losses and distributions will generally be allocated based on the Wilshire Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Wilshire Joint Venture Agreement, the Company may be required to make additional capital contributions to the Wilshire Joint Venture, in proportion to the Wilshire Members’ respective ownership interests. Until the Company has received back its capital contribution all distributions go to the Company; thereafter, the Wilshire Joint Venture will distribute the profits 50% to the Company and 50% to 3032 Wilshire SM.
The Company is currently evaluating the appropriate accounting treatment for the Wilshire Joint Venture.
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Strategic Realty Trust, Inc. and Subsidiaries
SCHEDULE III — REAL ESTATE OPERATING PROPERTIES AND ACCUMULATED
DEPRECIATION
December 31, 2015
| Initial Cost to Company | Cost Capitalized | Gross Amount at Which Carried at Close of Period | Life on which Depreciation in Latest Statement of Operations | |||||||||||||||||||||||||||||||||
| Encumbrances | Land | Building & Improvements | Subsequent to Acquisition (1) | Land | Building & Improvements | Total (2) | Accumulated Depreciation | Acquisition Date | is Computed (3) | |||||||||||||||||||||||||||
| Pinehurst Square East | $ | - | $ | 3,270,000 | $ | 10,450,000 | $ | 320,000 | $ | 3,270,000 | $ | 10,770,000 | $ | 14,040,000 | (1,743,000 | ) | 5/26/2011 | 5 - 30 | ||||||||||||||||||
| Cochran Bypass | 1,513,000 | 776,000 | 1,480,000 | 30,000 | 776,000 | 1,510,000 | 2,286,000 | (372,000 | ) | 7/14/2011 | 5 - 30 | |||||||||||||||||||||||||
| Topaz Marketplace | - | 2,120,000 | 10,724,000 | (1,553,000 | ) | 1,900,000 | 9,391,000 | 11,291,000 | (1,133,000 | ) | 9/23/2011 | 5 - 30 | ||||||||||||||||||||||||
| Morningside Marketplace | 8,629,000 | 6,515,000 | 9,936,000 | (5,403,000 | ) | 2,339,000 | 8,709,000 | 11,048,000 | (1,399,000 | ) | 1/9/2012 | 5 - 30 | ||||||||||||||||||||||||
| Woodland West Marketplace | 9,690,000 | 2,376,000 | 10,494,000 | 463,000 | 2,448,000 | 10,885,000 | 13,333,000 | (1,903,000 | ) | 2/3/2012 | 5 - 30 | |||||||||||||||||||||||||
| Ensenada Square | 2,992,000 | 1,015,000 | 3,822,000 | 235,000 | 1,015,000 | 4,057,000 | 5,072,000 | (741,000 | ) | 2/27/2012 | 5 - 30 | |||||||||||||||||||||||||
| Shops at Turkey Creek | 2,708,000 | 1,416,000 | 2,398,000 | (132,000 | ) | 1,416,000 | 2,266,000 | 3,682,000 | (296,000 | ) | 3/12/2012 | 5 - 30 | ||||||||||||||||||||||||
| Florissant Marketplace | 8,859,000 | 2,817,000 | 12,273,000 | (27,000 | ) | 2,817,000 | 12,246,000 | 15,063,000 | (2,481,000 | ) | 5/16/2012 | 5 - 30 | ||||||||||||||||||||||||
| Total | $ | 34,391,000 | $ | 20,305,000 | $ | 61,577,000 | $ | (6,067,000 | ) | $ | 15,981,000 | $ | 59,834,000 | $ | 75,815,000 | $ | (10,068,000 | ) | ||||||||||||||||||
| (1) | The cost capitalized subsequent to acquisition may include negative balances resulting from the write-off and impairment of real estate assets, and parcel sales. |
| (2) | The aggregate net tax basis of land and buildings for federal income tax purposes is $68,374,665. |
| (3) | Buildings and building improvements are depreciated over their useful lives as shown. Tenant improvements are amortized over the life of the related lease, which with our current portfolio can vary from 1 year to over 30 years. |
See accompanying report of independent registered public accounting firm.
| S-1 |
| For the Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Real Estate: | ||||||||
| Balance at the beginning of the year | $ | 166,005,000 | $ | 174,135,000 | ||||
| Acquisitions | - | - | ||||||
| Improvements | 472,000 | 1,356,000 | ||||||
| Dispositions | (80,754,000 | ) | (22,613,000 | ) | ||||
| Impairment | - | (3,900,000 | ) | |||||
| Balances associated with changes in reporting presentation (1) | (9,908,000 | ) | 17,027,000 | |||||
| Balance at the end of the year | $ | 75,815,000 | $ | 166,005,000 | ||||
| Accumulated Depreciation: | ||||||||
| Balance at the beginning of the year | $ | 16,717,000 | $ | 12,009,000 | ||||
| Depreciation expense | 3,502,000 | 5,546,000 | ||||||
| Dispositions | (9,260,000 | ) | (839,000 | ) | ||||
| Balances associated with changes in reporting presentation (1) | (891,000 | ) | 1,000 | |||||
| Balance at the end of the year | $ | 10,068,000 | $ | 16,717,000 | ||||
| (1) | The balances associated with changes in reporting presentation represent real estate and accumulated depreciation reclassified as assets held for sale. |
See accompanying report of independent registered public accounting firm.
| S-2 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2016.
| Strategic Realty Trust, Inc. | ||
| By: | /s/ Andrew Batinovich | |
| Andrew Batinovich | ||
| Chief Executive Officer, Corporate Secretary and Director | ||
| (Principal Executive Officer) | ||
| By: | /s/ Terri Garnick | |
| Terri Garnick | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title(s) | Date | ||
| /s/ Todd A. Spitzer | Chairman of the Board | March 30, 2016 | ||
| Todd A. Spitzer | ||||
| /s/ Andrew Batinovich | Chief Executive Officer, Corporate Secretary | March 30, 2016 | ||
| Andrew Batinovich | and Director | |||
| (Principal Executive Officer) | ||||
| /s/ Terri Garnick | Chief Financial Officer | |||
| Terri Garnick | (Principal Financial and Accounting Officer) | March 30, 2016 | ||
| /s/ Phillip I. Levin | Director | March 30, 2016 | ||
| Phillip I. Levin | ||||
| /s/ Jeffrey S. Rogers | Director | March 30, 2016 | ||
| Jeffrey S. Rogers |
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).
| Exhibit No. | Description | |
| 3.1.1 | Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc. (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-154975)) | |
| 3.1.2 | Articles of Amendment, dated August 22, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 26, 2013) | |
| 3.1.3 | Articles Supplementary, dated November 1, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 4, 2013) | |
| 3.1.4 | Articles Supplementary, dated January 22, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 28, 2014) | |
| 3.2 | Third Amended and Restated Bylaws of Strategic Realty Trust, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 28, 2014) | |
| 10.1 | Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC, dated March 11, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 14, 2015) | |
| 10.2 | Purchase and Sale Agreement by and among TNP SRT Osceola Village, LLC, SRT Constitution Trail, LLC, TNP SRT Aurora Commons, LLC, and SGO Retail Acquisitions Venture, LLC, dated March 11, 2015 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 14, 2015) | |
| 10.3 | Property Management Agreement among SGO Constitution Trail, LLC, SGO Aurora Commons, LLC, SGO Osceola Village, LLC, and Glenborough, LLC, dated March 11, 2015 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 14, 2015) | |
| 10.4 | Second Amendment to the Advisory Agreement, dated August 3, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 4, 2015) | |
| 10.5 | Purchase and Sale Agreement, dated September 16, 2015, by and between TNP SRT Portfolio I, LLC and The Phillips Edison Group LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 2, 2015) | |
| 10.6 | First Amendment to Purchase and Sale Agreement, dated October 15, 2015, by and between TNP SRT Portfolio I, LLC and The Phillips Edison Group LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 2, 2015) | |
| 10.7 | Purchase and Sale Agreement, dated September 25, 2015, by and between TNP SRT Summit Point, LLC and New Market Properties, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 2, 2015) | |
| 10.8 | First Amendment to Purchase and Sale Agreement, dated October 7, 2015, by and between TNP SRT Summit Point, LLC and New Market Properties, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 2, 2015) | |
| 10.9 | Second Amendment to Purchase and Sale Agreement, dated October 19, 2015, by and between TNP SRT Summit Point, LLC and New Market-Summit Point, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on November 2, 2015) | |
| 10.10 | Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC, dated September 30, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015) | |
| 10.11 | Property Management Agreement among SGO MN Buffalo Mall, LLC, et al., and Glenborough, LLC, dated September 30, 2015 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015) | |
| 10.12 | Property Management Agreement among SGO MN West Village, LLC, et al. and Glenborough, LLC, dated September 30, 2015 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015) | |
| 10.13 | Limited Liability Company Agreement between SRTCC Wilshire, LLC and 3032 Wilshire SM, LLC dated December 21, 2015 | |
| 21 | Subsidiaries of the Company | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 99.1 | Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on April 9, 2015) | |
| 99.2 | Second Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on August 25, 2015) | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |