UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x

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

 

For the quarterly period ended March 31, 2016

 

OR

 

¨

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

 

For the transition period from              to             

 

Commission file number 000-54376

STRATEGIC REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland	90-0413866
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
400 South El Camino Real, Suite 1100 San Mateo, California, 94402	(650) 343-9300
(Address of Principal Executive Offices; Zip Code)	(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

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

 

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

 

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

 

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

 

As of May 6, 2016 there were 11,007,227 shares of the Registrant’s common stock issued and outstanding.

 

 

 

STRATEGIC REALTY TRUST, INC.

 

INDEX

 

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	2
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015	3
	Condensed Consolidated Statement of Equity for the three months ended March 31, 2016	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
Signatures		41

 

EX-10-1

 

EX-10.2

 

EX-31.1

 

EX-31.2

 

EX-32.1

 

EX-32.2

 

 

PART I

 

FINANCIAL INFORMATION

 

The accompanying unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2016, have been prepared by Strategic Realty Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2015, as filed with the SEC on March 30, 2016 (the “2015 Annual Report on Form 10-K”). The condensed consolidated financial statements herein should also be read in conjunction with the Notes to Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.

 

 

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		March 31, 2016				December 31, 2015
ASSETS
Investments in real estate
Land		$	15,981,000			$	15,981,000
Building and improvements			56,158,000				56,158,000
Tenant improvements			3,577,000				3,676,000
			75,716,000				75,815,000
Accumulated depreciation			(10,612,000	)			(10,068,000	)
Investments in real estate, net			65,104,000				65,747,000
Properties under development and development costs
Land			25,851,000				-
Buildings			613,000				-
Development costs			901,000				-
Properties under development and development costs			27,365,000				-
Cash and cash equivalents			3,414,000				8,793,000
Restricted cash			6,025,000				2,693,000
Prepaid expenses and other assets, net			558,000				731,000
Tenant receivables, net			1,212,000				1,664,000
Investments in unconsolidated joint ventures			6,645,000				6,902,000
Lease intangibles, net			4,081,000				4,290,000
Assets held for sale			9,752,000				9,769,000
Deferred financing costs, net			487,000				579,000
TOTAL ASSETS		$	124,643,000			$	101,168,000
LIABILITIES AND EQUITY
LIABILITIES
Notes payable, net		$	58,509,000			$	34,052,000
Accounts payable and accrued expenses			1,145,000				1,486,000
Amounts due to affiliates			184,000				49,000
Other liabilities			1,090,000				1,479,000
Liabilities related to assets held for sale			6,859,000				6,909,000
Below market lease intangibles, net			3,231,000				3,303,000
Deferred gain on sale of properties to unconsolidated joint venture			1,227,000				1,225,000
TOTAL LIABILITIES			72,245,000				48,503,000
Commitments and contingencies (Note 13)
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; 11,007,227 and 11,037,948 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively			111,000				111,000
Additional paid-in capital			96,482,000				96,684,000
Accumulated deficit			(46,187,000	)			(46,124,000	)
Total stockholders' equity			50,406,000				50,671,000
Non-controlling interests			1,992,000				1,994,000
TOTAL EQUITY			52,398,000				52,665,000
TOTAL LIABILITIES AND EQUITY		$	124,643,000			$	101,168,000

 

See accompanying notes to condensed consolidated financial statements.

 

 

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended March 31,
		2016				2015
Revenue:
Rental and reimbursements		$	2,708,000			$	4,804,000
Expense:
Operating and maintenance			937,000				1,775,000
General and administrative			396,000				766,000
Depreciation and amortization			870,000				1,868,000
Transaction expense			4,000				-
Interest expense			600,000				1,694,000
			2,807,000				6,103,000
Operating loss			(99,000	)			(1,299,000	)
Other income (loss):
Equity in income (losses) of unconsolidated joint ventures			26,000				(129,000	)
Gain on disposal of real estate			9,000				4,783,000
Loss on extinguishment of debt			(1,000	)			(233,000	)
Net income (loss)			(65,000	)			3,122,000
Net income (loss)			(65,000	)			3,122,000
Net income (loss) attributable to non-controlling interests			(2,000	)			261,000
Net income (loss) attributable to common stockholders		$	(63,000	)		$	2,861,000
Earnings (loss) per common share  ̶  basic and diluted		$	(0.01	)		$	0.26
Weighted average shares outstanding used to calculate earnings (loss) per common share - basic and diluted			11,037,189				10,969,714

  

See accompanying notes to condensed consolidated financial statements.

 

 

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

																		Total
		Number of								Additional				Accumulated				Stockholders'				Non-controlling				Total
		Shares				Par Value				Paid-in Capital				Deficit				Equity				Interests				Equity
BALANCE — December 31, 2015			11,037,948			$	111,000			$	96,684,000			$	(46,124,000	)		$	50,671,000			$	1,994,000			$	52,665,000
Redemption of common shares			(30,721	)			-				(202,000	)			-				(202,000	)			-				(202,000	)
Net loss			-				-				-				(63,000	)			(63,000	)			(2,000	)			(65,000	)
BALANCE — March 31, 2016			11,007,227			$	111,000			$	96,482,000			$	(46,187,000	)		$	50,406,000			$	1,992,000			$	52,398,000

 

See accompanying notes to condensed consolidated financial statements.

 

 

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
		2016				2015
Cash flows from operating activities:
Net income (loss)		$	(65,000	)		$	3,122,000
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net gain on disposal of real estate			(9,000	)			(4,783,000	)
Loss on extinguishment of debt			1,000				233,000
Equity in (income) loss of unconsolidated joint ventures			(26,000	)			129,000
Straight-line rent			(26,000	)			(30,000	)
Amortization of deferred costs and notes payable premium/discount			120,000				127,000
Depreciation and amortization			870,000				1,868,000
Amortization of above and below-market leases			(47,000	)			(15,000	)
Bad debt expense			3,000				11,000
Changes in operating assets and liabilities:
Prepaid expenses and other assets			189,000				83,000
Tenant receivables			476,000				(227,000	)
Accounts payable and accrued expenses			347,000				(635,000	)
Amounts due to affiliates			135,000				62,000
Other liabilities			(389,000	)			216,000
Net change in restricted cash for operational expenditures			166,000				(849,000	)
Net cash provided by (used in) operating activities			1,745,000				(688,000	)
Cash flows from investing activities:
Net proceeds from the sale of real estate			9,000				53,136,000
Investment in properties under development and costs of development			(27,280,000	)			-
Improvements, capital expenditures, and leasing costs			(42,000	)			(480,000	)
Investments in unconsolidated joint ventures			-				(4,555,000	)
Issuance of note receivable			-				(7,000,000	)
Distributions from unconsolidated joint ventures			283,000				-
Net change in restricted cash from investments in consolidated variable interest entities			(3,458,000	)			-
Net change in restricted cash for capital expenditures			(40,000	)			(147,000	)
Net cash provided by (used in) investing activities			(30,528,000	)			40,954,000
Cash flows from financing activities:
Redemption of member interests			-				(2,102,000	)
Redemption of common shares			(202,000	)			-
Quartertly distributions			(688,000	)			(747,000	)
Proceeds from notes and loan  payable			25,200,000				-
Payment of loan fees and financing costs			(712,000	)			-
Repayment of notes payable			(194,000	)			(36,663,000	)
Net cash provided by (used in) financing activities			23,404,000				(39,512,000	)
Net increase (decrease) in cash and cash equivalents			(5,379,000	)			754,000
Cash and cash equivalents – beginning of period			8,793,000				3,211,000
Cash and cash equivalents – end of period		$	3,414,000			$	3,965,000
Supplemental disclosure of non-cash investing and financing activities:
Distributions declared but not paid		$	-			$	685,000
Cash paid for interest, net of amounts capitalized		$	490,000			$	2,426,000

 

See accompanying notes to condensed consolidated financial statements.

 

 

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND BUSINESS

 

Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008 as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations. The Company was initially capitalized by the sale of shares of common stock to Thompson National Properties, LLC (“TNP LLC”) on October 16, 2008.

 

On November 4, 2008, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 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 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. The Company also granted 50,000 shares of restricted stock and issued 273,729 common shares to pay a portion of a special distribution made to stockholders in 2015 to preserve REIT status based on underreporting of federal taxable income in 2011 (the “Special Distribution”). Cumulatively, through March 31, 2016, the Company has redeemed 396,624 shares of common stock sold in the Offering for $3,197,000.

 

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, and 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 March 31, 2016 and December 31, 2015, 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. In the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development.

 

 

On January 7, 2016, the Company invested in a joint venture with Sunset & Gardner Investors, LLC, a subsidiary of Cadence Capital Investments, LLC (the “Gelson’s Joint Venture”). The Gelson’s Joint Venture acquired property located at the corner of Sunset Boulevard and Gardner in Hollywood, California (the “Gelson’s Property”) for a build to suit grocery store for Gelson’s Market. On March 7, 2016, the Company invested in a joint venture with 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture”) to fund the acquisition of certain property located in 3032 Wilshire Boulevard and 1210 Berkeley Street in Santa Monica, California (the “Wilshire Property”). The Wilshire Joint Venture intends to redevelop, reposition and re-lease the Wilshire Property. Together, the Gelson’s Property and Wilshire Property are referred to as “Properties Under Development.”

 

On September 30, 2015, the Company, through wholly-owned subsidiaries, formed a joint venture (the “SGO MN Joint Venture”) with MN Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree Real Estate Opportunities Fund V.I. L.P. (“Oaktree”) and GLB SGO MN, LLC, a wholly-owned subsidiary of Glenborough Property Partners, LLC (“GPP”). GPP is an affiliate of the Advisor and the Company’s property manager. On March 11, 2015, the Company, through a wholly-owned subsidiary, formed a joint venture (the “SGO Joint Venture”) with Grocery Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree, and GLB SGO, LLC, a wholly-owned subsidiary of GPP. These joint ventures own property types similar to properties that are directly owned by the Company.

 

As of March 31, 2016, the Company’s portfolio of properties 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 March 31, 2016, the rentable space at the Company’s retail properties, including the property held for sale, which was 89% leased.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation and Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Regulation S-X.

 

The unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included.

 

The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of March 31, 2016, the Company held ownership interests in two unconsolidated joint ventures. As of March 31, 2016, the Company held variable interests in the Gelson’s Joint Venture and Wilshire Joint Venture, and consolidated those entities (see Note 5. “Variable Interest Entities” 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 condensed 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 condensed consolidated statement of operations. Acquisitions or dispositions of non-controlling interests that do not result in a change of control are accounted for as equity transactions. In addition, ASC 810 requires that a parent company recognize a gain or loss in 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 condensed consolidated balance sheets. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as liabilities or temporary equity. All non-controlling interests at March 31, 2016 and December 31, 2015 qualified as permanent equity.

 

 

Use of Estimates

 

The preparation of the Company’s condensed consolidated financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in the Company’s condensed consolidated financial statements, and actual results could differ from the estimates or assumptions used by management. Additionally, other companies may utilize different estimates that may impact the comparability of the Company’s condensed consolidated results of operations to those of companies in similar businesses. The Company considers significant estimates to include the carrying amounts and recoverability of investments in real estate, impairments, real estate acquisition purchase price allocations, allowance for doubtful accounts, estimated useful lives to determine depreciation and amortization and fair value determinations, among others.

 

Cash and Cash Equivalents

 

Cash and cash equivalents represent 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 (not including receivables on property held for sale), which is included in tenant receivables, net, on the condensed consolidated balance sheets, was $618,000 and $592,000 at March 31, 2016 and December 31, 2015, 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 March 31, 2016, deferred gain on the sale of properties to the SGO Joint Venture was $1.2 million.

 

Valuation of Accounts Receivables

 

The Company makes estimates of the collectability of its tenant receivables related to base rents, including deferred rents receivable, expense reimbursements and other revenue or income.

 

The Company analyzes tenant receivables, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

 

Concentration of Credit Risk

 

A concentration of credit risk arises in the Company’s business when a nationally or regionally-based tenant occupies a substantial amount of space in multiple properties owned by the Company. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to the Company, exposing the Company to potential losses in rental revenue, expense recoveries, and percentage rent. Generally, the Company does not obtain security 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 March 31, 2016, excluding property classified as held for sale, Ralph’s Grocery accounted for 10% of the Company’s annual minimum rent. As of March 31, 2016, there was no outstanding receivable from Ralph’s Grocery.

 

 

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. Costs incurred in pursuit of targeted properties for acquisitions not yet closed or those determined to no longer be viable and costs incurred which are expected to result in future period disposals of property not currently classified as held for sale properties have been expensed and are also classified in the condensed consolidated 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.

 

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 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.

 

Properties Under Development

 

The initial cost of properties under development includes the acquisition cost of the property, direct development costs and borrowing costs directly attributable to the development. Borrowing costs associated with direct expenditures on properties under development are capitalized. The amount of capitalized borrowing costs is determined by reference to borrowings specific to the project, where relevant. Borrowing costs are capitalized from the commencement of the development until the date of practical completion where the property is substantially ready for its intended use. Capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. Practical completion is when the property is capable of operating in the manner intended by management.

 

Interest on projects during periods of development is capitalized until the project is ready for its intended use based on interest rates in place during the development period. The amount of interest capitalized during the three months ended March 31, 2016, was $328,000.

 

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 continually monitors its properties under development for impairment. Estimates of future cash flows used to test the recoverability of properties under development are based on their expected service potential when development is substantially complete. Those estimates include cash flows associated with all future expenditures necessary to develop the properties under development, including interest payments that will be capitalized as part of the cost of the properties under development.

 

The Company did not record any impairment losses for the three months ended March 31, 2016 and 2015.

 

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).

 

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.

 

The Company presents deferred financing costs, net of accumulated amortization, as a contra-liability that reduces the carrying amount of the associated note payable, rather than as a deferred asset. Deferred financing costs related to a line-of-credit arrangement are presented on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end.

 

Accounting for Investments in Unconsolidated Joint Ventures

 

The Company accounts for its current investments in unconsolidated 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. No impairment indicators were identified and no impairment losses were recorded during the three months ended March, 31, 2016.

 

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 condensed consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, the Company may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.

 

When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.

 

The Company’s tax returns remain subject to examination and consequently, the taxability of the distributions is subject to change.

 

In 2015, the Company estimated it could owe alternative minimum state/federal taxes totaling approximately $200,000 and this amount was accrued and included in expense as of December 31, 2015. During the three months ended March 31, 2016, the Company finalized its calculation of taxes owed for 2015, which was less than the recorded accrual, resulting in a reversal of $111,000 and payment of $89,000. The amount of over accrual was immaterial.

 

 

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.

 

Reclassifications

 

Assets sold or held for sale and related liabilities have been reclassified on the condensed 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 condensed consolidated statements of operations. For operating properties sold on or after May 1, 2014, the related operating results remain in continuing operations on the condensed 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.

 

As of March 31, 2016, in respect to the Company’s adoption of ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-03”), the Company reclassified $938,000 of deferred financing costs, net of accumulated amortization, as a contra-liability to notes payable on the condensed consolidated balance sheet, and $127,000 of deferred financing costs related to property held for sale, net of accumulated amortization, as a contra-liability to liabilities held for sale on the condensed consolidated balance sheet. ASU 2015-03 requires retrospective application, wherein the balance sheet of each period presented should be adjusted to reflect the effects of the new guidance. Accordingly, for comparative purposes herein, the Company reclassified the December 31, 2015 balance of $339,000 of deferred financing costs, net of accumulated amortization, as a contra-liability to notes payable in the condensed consolidated balance sheet, and $127,000 of deferred financing costs, net of accumulated amortization, as a contra-liability to liabilities held for sale on the condensed consolidated balance sheet.

 

Newly Adopted Accounting Pronouncements

 

The Company adopted ASU No. 2015-03 on a retrospective basis, effective for the quarter ended March 31, 2016. 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. 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 condensed consolidated balance sheets. ASU No. 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 No. 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. Effective January 2016, the Company presents deferred financing costs, net, as a contra-liability in periods when there is an associated debt liability on the balance sheet, rather than as a deferred asset. If no associated debt liability is recorded on the balance sheet, deferred financing costs will be presented as a deferred asset. The adoption of ASU 2015-03 did not have a material impact on the Company’s consolidated financial statements.

 

The Company adopted ASU No. 2015-16, (Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustment (“ASU 2015-16”), effective for the quarter ended March 31, 2016. The amendments in ASU 2015-16 require 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 should be applied prospectively and early adoption is permitted. The adoption of ASU 2015-16 had no impact on the Company’s condensed consolidated financial statements.

 

 

Recent Accounting Pronouncements

  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 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. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amended the principal versus agent guidance in the new revenue standard and is intended to result in more consistent application and reduce the cost and complexity of applying the new standard. Additionally, in April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), which amended the guidance to clarify accounting for licenses of intellectual property and to clarify the guidance on performance obligations. The Company is currently evaluating the transition methods and the impact of the guidance on its condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). ASU 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 condensed consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 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 condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 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 condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). The purpose of the amendment is to eliminate the requirement that when an investment uses the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. For public entities, the amendments in ASU 2016-07 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company does not anticipate that the adoption of this guidance will have an impact on the Company's condensed consolidated financial statements.

 

 

3. REAL ESTATE INVESTMENTS

 

Acquisition of Properties

 

The Company did not have any property acquisitions for the three months ended March 31, 2016 and 2015. For property acquisitions of the Company’s consolidated variable interests, refer to Note. 5 “Variable Interest Entities.”

 

2016 Sale of Properties

 

The Company did not sell any properties for the three months ended March 31, 2016.

 

2015 Sale of Properties

 

On March 11, 2015, the Company sold the following three properties for the aggregate gross sales price of $53.6 million:

 

Property		Location		Acquisition Date		Gross Sales Price				Original Purchase Price (1)
Osceola Village		Kissimmee, Florida		10/11/2011		$	22,000,000			$	21,800,000	(2)
Constitution Trail		Normal, Illinois		10/21/2011			23,100,000				18,000,000
Aurora Commons		Aurora, Ohio		3/20/2012			8,500,000				7,000,000
Total						$	53,600,000			$	46,800,000

 

(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 the three 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 three months ended March 31, 2015. The Company’s condensed consolidated statement of operations includes net operating losses of $289,000 for the three months ended March 31, 2015, relating to the results of operations for the three sold properties.

 

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. 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

 

Assets Held for Sale and Liabilities Related to Assets Held for Sale

 

At March 31, 2016 and December 31, 2015, Bloomingdale Hills, located in Riverside, Florida, was classified as held for sale in the condensed 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. See Note. 14 “Subsequent Events” for the sale of Bloomingdale Hills after quarter-end. The Company’s condensed consolidated statements of operations include net operating income of $83,000 and net operating loss of $15,000 for the three months ended March 31, 2016 and 2015, respectively, related to the assets held for sale.

 

 

The major classes of assets and liabilities related to assets held for sale included in the condensed consolidated balance sheets at March 31, 2016 and December 31, 2015 were as follows:

 

		March 31, 2016				December 31, 2015
ASSETS
Investments in real estate
Land		$	4,718,000			$	4,718,000
Building and improvements			4,697,000				4,697,000
Tenant improvements			499,000				499,000
			9,914,000				9,914,000
Accumulated depreciation			(891,000	)			(891,000	)
Investments in real estate, net			9,023,000				9,023,000
Lease intangibles, net			694,000				694,000
Tenant receivables, net			35,000				36,000
Prepaid expenses			-				16,000
Assets held for sale		$	9,752,000			$	9,769,000
LIABILITIES
Notes payable, net (1)			5,218,000				5,268,000
Below market lease intangibles, net			1,625,000				1,625,000
Other liabilities			16,000				16,000
Liabilities related to assets held for sale		$	6,859,000			$	6,909,000

 

(1)

Includes $127,000 reclassification of deferred financing costs, net of accumulated amortization, as a contra-liability to notes payable, as of March 31, 2016 and December 31, 2015.

 

Amounts above were presented at their carrying values which the Company believed to be lower than their estimated fair value less costs to sell.

 

4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

The following table summarizes the Company’s investments in unconsolidated joint ventures as of March 31, 2016 and December 31, 2015:

 

				Ownership Interest								Investment at
Joint Venture		Date of Investment		March 31, 2016				December 31, 2015				March 31, 2016				December 31, 2015
SGO Retail Acquisitions Venture, LLC		3/11/2015			19	%			19	%		$	3,967,000			$	4,098,000
SGO MN Retail Acquisitions Venture, LLC		9/30/2015			10	%			10	%			2,678,000				2,804,000
Total												$	6,645,000			$	6,902,000

 

The Company’s off-balance sheet arrangements consist primarily of investments in the joint ventures as set forth in the table 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 March 31, 2016, 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. VARIABLE INTEREST ENTITIES

 

The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in the Gelson’s Joint Venture and the Wilshire Joint Venture. The Company has consolidated the accounts of these variable interest entities. For further information, refer to Note 2. “Summary of Significant Accounting Policies,” under “Principles of Consolidation and Basis of Presentation.”

 

Gelson’s Joint Venture

 

On January 7, 2016, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture Agreement”) to form the Gelson’s Joint Venture with Sunset & Gardner LA, LLC (“S&G LA” and together with the Company 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 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 contributions 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 purchase 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 and specified preferred returns, 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.

 

3032 Wilshire Joint Venture

 

On December 21, 2015, the Company, through wholly owned subsidiaries, entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture Agreement”) to form the Wilshire Joint Venture with 3032 Wilshire SM, LLC, a subsidiary of Cadence (together with the Company, the “Wilshire Members”).

 

On December 14, 2015 and January 5, 2016, the Company paid deposits in the amounts of $500,000 and $100,000, respectively, toward the acquisition of the Wilshire Property. On March 7, 2016, the Company contributed $5,700,000 to the Wilshire Joint Venture. The Wilshire Joint Venture Agreement provides for the ownership and operation of certain real property by 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 deposits and capital contribution 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.

 

 

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 and specified preferred returns, 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 following reflects the assets and liabilities of the Gelson’s Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of March 31, 2016:

 

		March 31, 2016
ASSETS
Properties under development and development costs:
Land		$	25,851,000
Building			613,000
Development costs			901,000
Properties under development and development costs			27,365,000
Loan reserves			3,458,000
Cash and cash equivalents			67,000
Prepaid expenses and deposits			36,000
Accounts receivable			11,000
TOTAL ASSETS (1)		$	30,937,000
LIABILITIES
Notes payable, net (2)		$	18,573,000
Accrued liabilities			331,000
Security deposits			40,000
TOTAL LIABILITIES		$	18,944,000

 

(1)

The assets of the Gelson’s Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.

 

(2)

Includes $627,000 reclassification of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the consolidated joint ventures are not guaranteed by the Company.

  

6. FUTURE MINIMUM RENTAL INCOME

 

Operating Leases

 

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2016, 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 condensed consolidated balance sheets and totaled $171,000 and $175,000 as of March 31, 2016 and December 31, 2015, respectively.

 

 

As of March 31, 2016, the future minimum rental income from the Company’s properties under non-cancelable operating leases, excluding properties held for sale, was as follows:

 

April 1 through remainder of 2016		$	5,374,000
2017			6,346,000
2018			5,266,000
2019			4,664,000
2020			3,887,000
Thereafter			7,739,000
Total		$	33,276,000

 

7. ACQUIRED LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES

 

As of March 31, 2016 and December 31, 2015, the Company’s acquired lease intangibles and below-market lease liabilities were as follows:

 

		Lease Intangibles								Below-Market Lease Liabilities
		March 31, 2016				December 31, 2015				March 31, 2016				December 31, 2015
Cost		$	7,775,000			$	8,089,000			$	(4,346,000	)		$	(4,463,000	)
Accumulated amortization			(3,694,000	)			(3,799,000	)			1,115,000				1,160,000
Total		$	4,081,000			$	4,290,000			$	(3,231,000	)		$	(3,303,000	)

 

The Company’s amortization of lease intangibles and below-market lease liabilities for the three months ended March 31, 2016 and 2015, were as follows:

 

		Lease Intangibles								Below-Market Lease Liabilities
		Three Months Ended March 31,								Three Months Ended March 31,
		2016				2015				2016				2015
Amortization		$	(251,000	)		$	(593,000	)		$	72,000			$	117,000

 

8. NOTES PAYABLE, NET

 

As of March 31, 2016 and December 31, 2015, the Company’s notes payable, excluding long-term debt associated with assets which are classified as held for sale, consisted of the following:

 

		Principal Balance								Interest Rates At
		March 31, 2016				December 31, 2015				March 31, 2016
KeyBank credit facility (1)		$	6,000,000			$	-				2.94%
Secured term loans			24,595,000				24,701,000				5.10%
Mortgage loans			9,652,000				9,690,000				5.63%
Mortgage loans secured by properties under development (2)			19,200,000				-				9.5% - 10.0%
Deferred financing costs, net (3)			(938,000	)			(339,000	)			n/a
		$	58,509,000			$	34,052,000

 

(1)

The KeyBank credit facility is a revolving credit facility with an initial maximum aggregate commitment of $30,000,000 (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 KeyBank credit facility matures on August 4, 2017. 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 KeyBank credit facility is greater than 50% of the Facility Amount. The Company is providing a guaranty of all of its obligations under the KeyBank credit facility and all other loan documents in connection with the KeyBank credit facility. As of March 31, 2016, the KeyBank credit facility was secured by Pinehurst Square and Topaz Marketplace. For information regarding recent draws under the Amended and Restated Credit Facility, see “– Recent Financing Transactions - KeyBank Credit Facility.”

 

 

(2)

Comprised of $10,700,000 and $8,500,000 associated with the Company’s investment in Gelson’s Joint Venture and Wilshire Joint Venture, respectively.

 

(3)

Reclassification of deferred financing costs, net of accumulated depreciation, as a contra-liability in accordance with ASU 2015-03.

 

During the three months ended March 31, 2016 and 2015, the Company incurred and expensed $600,000 and $1,694,000, respectively, of interest costs, which included the amortization and write-off of deferred financing costs of $121,000 and $162,000, respectively. Also during the three months ended March 31, 2016, the Company incurred and capitalized $328,000 of interest expense related to the variable interest entities, which included the amortization of deferred financing costs of $86,000.

 

As of March 31, 2016 and December 31, 2015, interest expense payable was $337,000 and $199,000, respectively, including an amount related to the variable interest entities of $149,000 as of March 31, 2016.

 

The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of March 31, 2016:

 

		Amount
April 1 through remainder of 2016		$	434,000
2017			35,185,000
2018			473,000
2019			23,355,000
Total (1)		$	59,447,000

 

(1)

Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $938,000 deferred financing costs, net.

 

Recent Financing Transactions

 

KeyBank Credit Facility

 

On March 7, 2016, the Company drew $6.0 million under the Amended and Restated Credit Facility and used the proceeds to invest in the Wilshire Joint Venture.

 

Mortgage Loans Secured by Properties Under Development

 

In connection with the Company’s investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property, the Company has consolidated borrowings of $8,500,000 (the “Wilshire Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and 3032 Wilshire Investors, LLC (as the borrower). The Wilshire Loan bears interest at a rate of 10.0% per annum, payable monthly commencing on April 1, 2016. The loan matures on March 7, 2017, with an option for an additional six-month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.

 

In connection with the Company’s investment in the Gelson’s Joint Venture and the acquisition of the Gelson’s Property, the Company has consolidated borrowings of $10,700,000 (the “Gelson’s Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and Sunset and Gardner Investors, LLC (as the borrower). The Gelson’s Loan bears interest at a rate of 9.50% per annum, payable monthly commencing on April 1, 2016. The loan matures on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Gelson’s development project and other joint venture collateral as defined in the loan agreement.

 

 

9. FAIR VALUE DISCLOSURES

 

The Company believes the total carrying values reflected on its condensed consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and amounts due to affiliates due to their short-term nature, except for the Company’s notes payable, which are disclosed below.

 

The fair value of the Company’s notes payable is estimated using a present value technique based on contractual cash flows and management’s observations of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. The Company significantly reduces the amount of judgment and subjectivity in its fair value determination through the use of cash flow inputs that are based on contractual obligations. Discount rates are determined by observing interest rates published by independent market participants for comparable instruments. The Company classifies these inputs as Level 2 inputs.

 

The following table provides the carrying values and fair values of the Company’s notes payable related to continuing operations as of March 31, 2016 and December 31, 2015:

 

March 31, 2016		Carrying Value (1)				Fair Value (2)
Notes Payable		$	58,509,000			$	59,163,000

 

December 31, 2015		Carrying Value (1)				Fair Value (2)
Notes Payable		$	34,052,000			$	34,760,000

 

(1)

The carrying value of the Company’s notes payable represents the outstanding principal as of March 31, 2016 and December 31, 2015. The carrying values and fair values of the notes payable include the reclassification of deferred financing costs, net, of $938,000 and $339,000, as a contra-liability, as of March 31, 2016 and December 31, 2015, respectively.

 

(2)

The estimated fair value of the notes payable is based upon the indicative market prices of the Company’s notes payable based on prevailing market interest rates.

 

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 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 offering proceeds of $104,700,000, sold 391,182 shares 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 March 31, 2016, the Company has redeemed 396,624 shares sold in the Offering for $3,197,000.

 

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.

 

Member Interests

 

On July 9, 2013, SRT Manager made a cash investment of approximately $1.9 million in Secured Holdings pursuant to a Membership Interest Purchase Agreement by and among the Company, SRT Manager, Secured Holdings, and the OP, which resulted in SRT Manager owning a 12% membership interest in Secured Holdings and the OP owning the remaining 88% membership interest in Secured 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 a 91.67% membership interest in Secured Holdings and SRT Manager owned an 8.33% membership interest in Secured Holdings. In connection with the sale of Secured Holding’s two properties to the SGO Joint Venture, Secured Holdings paid SRT Manager approximately $2.1 million in full redemption of the then current value of its remaining 8.33% membership interest in Secured Holdings.

 

Preferred Stock

 

The Charter authorizes the Company to issue 50,000,000 shares of $0.01 par value preferred stock. As of March 31, 2016 and December 31, 2015, 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 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 the 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 three months ended March 31, 2016, the Company redeemed 30,721 shares of common stock for $202,000 under the SRP. The Company did not redeem any shares during the three months ended March 31, 2015.

 

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 tables set forth the quarterly distributions declared to the Company’s common stockholders and Common Unit holders for the year ended December 31, 2015. Distributions to its common stockholders and common unit holders for the three months ended March 31, 2016 were declared subsequent to March 31, 2016, as described in Note 14. “Subsequent Events.”

 

		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		10/31/2015		$	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
Total										$	2,627,000			$	103,000			$	2,730,000

 

 

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 March 31, 2016. 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.

 

The following table sets forth the computation of the Company’s basic and diluted earnings (loss) per share for the three months ended March 31, 2016 and 2015:

 

		For the Three Months Ended March 31,
		2016				2015
Numerator - basic and diluted
Net income (loss) from continuing operations		$	(65,000	)		$	3,122,000
Net income (loss) attributable to non-controlling interests			(2,000	)			261,000
Net income (loss) attributable to common shares		$	(63,000	)		$	2,861,000
Denominator - basic and diluted
Basic weighted average common shares			11,037,189				10,969,714
Effect of dilutive securities			-				-
Common Units (1)			-				-
Diluted weighted average common shares			11,037,189				10,969,714
Earnings (loss) per common share - basic and diluted
Net earnings (loss) attributable to common shares		$	(0.01	)		$	0.26

 

(1)

The effect of 431,896 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement Form S-11 have not been included as they would not be dilutive.

 

 

12. 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 Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC to form the SGO 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 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.”

 

Summary of Related Party Fees

 

Summarized separately below are the Advisor related party costs incurred and payable by the Company for the periods presented:

 

Advisor Fees

 

		Incurred								Payable as of
		Three Months Ended March 31,								March 31,				December 31,
Expensed		2016				2015				2016				2015
Acquisition fees		$	2,000			$	-			$	-			$	-
Asset management fees			217,000				320,000				-				19,000
Reimbursement of operating expenses			50,000				-				8,000				27,000
Property management fees			124,000				201,000				37,000				3,000
Disposition fees			-				525,000				-				-
Guaranty fees (1)			-				1,000				-				-
Total		$	393,000			$	1,047,000			$	45,000			$	49,000
Capitalized
Acquisition fees		$	273,000			$	-			$	139,000			$	-
Leasing fees			10,000				27,000				-				-
Legal leasing fees			12,000				38,000				-				-
Construction management fees			1,000				5,000				-				-
Total		$	296,000			$	70,000			$	139,000			$	-

  

(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. An acquisition fee is capitalized by the Company when the related transaction does not quality as a business combination.

 

 

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.

 

Reimbursement of Operating Expenses

 

The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described below) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Charter); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). 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 that the independent directors do not approve. 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. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors.

 

For the three months ended March 31, 2016 and 2015, 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 property management fees calculated at a maximum of up 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, if the Advisor or its affiliates provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, the Advisor or its affiliates may be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold.

 

 

Guaranty Fees

 

In connection with certain acquisition financings, the Company’s former chairman and former co-chief executive officer and/or TNP LLC had executed certain guaranty agreements to the respective lenders. As consideration for such guaranty, the Company entered into a reimbursement and fee agreement to provide for an upfront payment and an annual guaranty fee payment for the duration of the guarantee period. In March 2015, the Company retired the outstanding notes payable related to Osceola Village resulting in the expiration of the remaining guaranty agreement.

 

Leasing Fee

 

Under the property management agreements, Glenborough is entitled to receive a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.

 

Legal Leasing Fee

 

Under the property management agreements, Glenborough is entitled to receive a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.

 

Construction Management Fee

 

In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and is entitled to receive a fee equal to 5% of the hard costs for the project in question.

 

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 and the SGO MN Joint Venture recognized related-party fees and reimbursements of approximately $150,000 and $234,000, respectively, for the three months ended March 31, 2016. The related-party amounts consist of property management, asset management, leasing commission, legal leasing, construction management fees and salary reimbursements.

 

13. 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.

 

 

14. SUBSEQUENT EVENTS

 

First Quarter Distribution

 

On April 6, 2016, the Company declared a first quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of March 31, 2016, totaling $686,000. The distribution was paid on April 29, 2016.

 

Sale of Held for Sale Property and Payment of Mortgage Loan

 

On April 4, 2016, the Company consummated the disposition of Bloomingdale Hills for a sales price of approximately $9.2 million in cash, a portion of which was used to pay off the related $5.3 million mortgage loan and $3 million of which was used to pay down the line of credit.

 

Entry into a Material Definitive Agreement

 

On May 4, 2016, the Company, through an indirect subsidiary, entered into three separate purchase agreements to acquire three retail properties located in San Francisco, California (the “San Francisco Properties”) from each of Octavia Gateway Holdings, LLC, Grove Street Hayes Valley, LLC and Hayes Street Hayes Valley LLC, each a Delaware limited liability company and each a subsidiary of DDG Partners LLC. The sellers are not affiliated with the Company or its external advisor. The San Francisco Properties encompass an aggregate of six retail condominiums with an aggregate of 9,121 square feet of retail space. The aggregate purchase price of the San Francisco Properties is approximately $13.7 million plus closing costs.

 

Pursuant to the agreements, the Company made aggregate earnest money deposits of $425,000 to the sellers on May 6, 2016. There can be no assurance that the Company will complete the acquisition of any or all of the San Francisco Properties. In some circumstances, if the Company fails to complete the acquisitions, it may forfeit up to $425,000 of earnest money.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, or SEC, on March 30, 2016, which we refer to herein as our “2015 Annual Report on Form 10-K.” As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

 

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

 

·

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 our 2015 Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 2015 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.

 

Overview

 

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”) (collectively, the “Offering”). 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. Cumulatively, through March 31, 2016, we have redeemed 396,624 shares of common stock sold in the Offering for $3,197,000. 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 made to stockholders in 2015 to preserve REIT status based on underreporting of federal taxable income in 2011 (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 2, “Unregistered Sales of Equity Securities and Use of Proceeds – Share Redemption Program.” Cumulatively, through March 31, 2016, we have redeemed 396,624 shares of common stock sold in the Offering for $3,197,000.

 

 

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.

 

Property Portfolio

 

As of March 31, 2016, our property 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 March 31, 2016 and December 31, 2015, there was $39,592,000 and $39,786,000 of indebtedness on our properties, respectively, including indebtedness on our held for sale property. As of March 31, 2016 and December 31, 2015, approximately 89% and 90% of our portfolio was leased (based on rentable square footage), respectively, with weighted-average remaining lease terms of approximately 5 years as of both period ends.

 

				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				1,506,000
Topaz Marketplace		Hesperia, CA			50,699				62	%		$	24.49			n/a		9/23/11			13,500,000				-
Morningside Marketplace		Fontana, CA			76,923				96	%		$	15.66			Ralphs		1/9/12			18,050,000				8,592,000
Woodland West Marketplace		Arlington, TX			175,258				70	%		$	9.46			Randall's		2/3/12			13,950,000				9,652,000
Ensenada Square		Arlington, TX			62,628				100	%		$	7.28			Kroger		2/27/12			5,025,000				2,980,000
Shops at Turkey Creek		Knoxville, TN			16,324				100	%		$	27.20			n/a		3/12/12			4,300,000				2,696,000
Florissant Marketplace		Florissant, MO			146,257				100	%		$	9.70			Gold's Gym		5/16/12			15,250,000				8,821,000
					688,008																87,660,000				34,247,000
Property Held for Sale
Bloomingdale Hills		Riverside, FL			78,442				94	%		$	8.50			Walmart		6/18/12			9,300,000				5,345,000	(6)
					766,450															$	96,960,000			$	39,592,000

 

(1)

Square feet includes improvements made on ground leases at the property.

 

(2)

Percentage is based on leased rentable square feet of each property as of March 31, 2016.

 

(3)

Effective rent per square foot is calculated by dividing the annualized March 2016 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 March 31, 2016, and excludes reclassification of $311,000 deferred financing costs, net, as a contra-liability. For more information on our financing, see Note 8. “Notes Payable” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

(6)

Debt of Bloomingdale Hills excludes reclassification of $127,000 deferred financing costs, net, as a contra-liability.

 

Properties Under Development

 

As of March 31, 2016, we had 2 properties under development. The properties are identified in the following table:

 

				Estimated
		Estimated		Expected
Properties Under Development		Completion Date		Square Feet				Debt (1)
3032 Wilshire and 1210 Berkeley Street, Santa Monica, California		November, 2017			9,400			$	8,500,000
Sunset Boulevard and Gardner, Hollywood, California		March, 2018			38,000				10,700,000
Total					47,400			$	19,200,000

 

(1)

Debt excludes reclassification of $627,000 deferred financing costs, net, as a contra-liability.

 

Results of Operations

 

Comparison of the three months ended March 31, 2016, versus the three months ended March 31, 2015

 

The following table provides summary information about our results of operations for the three months ended March 31, 2016 and 2015:

 

		Three Months Ended March 31,								Increase				Percentage
		2016				2015				(Decrease)				Change
Rental revenue and reimbursements		$	2,708,000			$	4,804,000			$	(2,096,000	)			(43.6	)%
Operating and maintenance expenses			(937,000	)			(1,775,000	)			(838,000	)			(47.2	)%
General and administrative expenses			(396,000	)			(766,000	)			(370,000	)			(48.3	)%
Depreciation and amortization expenses			(870,000	)			(1,868,000	)			(998,000	)			(53.4	)%
Transaction expense			(4,000	)			-				4,000				100.0	%
Interest expense			(600,000	)			(1,694,000	)			(1,094,000	)			(64.6	)%
Operating loss			(99,000	)			(1,299,000	)			(1,200,000	)			(92.4	)%
Other income, net			34,000				4,421,000				(4,387,000	)			(99.2	)%
Net income (loss)		$	(65,000	)		$	3,122,000			$	3,187,000				(102.1	)%

 

Our results of operations for the three months ended March 31, 2016, are not necessarily indicative of those expected in future periods.

 

Revenue

 

The decrease in revenue was primarily due to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, and Northgate Plaza, Moreno Marketplace and Summit Point in October 2015. The sale of the three properties in March 2015 was completed in connection with the formation of the SGO Joint Venture (as defined in Note 1. “Organization and Business” and further described in Note 4. “Investments in Unconsolidated Joint Ventures” to the condensed consolidated financial statements contained within this Quarterly Report on From 10-Q).

 

Operating and maintenance expenses

 

The decrease in operating and maintenance expenses was primarily attributed to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, and the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015.

 

 

General and administrative expenses

 

The decrease in general and administrative expenses was primarily due to lower asset management fees in 2016 due to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March 2015 and the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015, and a decrease in legal expenses with the resolution of the class action lawsuit in 2015.

 

Depreciation and amortization expenses

 

The decrease in depreciation and amortization expenses was attributed to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, and the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015.

 

Transaction expense

 

Transaction expense represents acquisition fees for our additional investment in the SGO MN Joint Venture, as described in Note 4. “Investments in Unconsolidated Joint Ventures” to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

Interest expense

 

The decrease in interest expense was primarily due to loan pay-offs using the proceeds from the sales of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, and the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015.

 

 Other income

 

Other income of $4,421,000 for the period ended March 31, 2015, primarily consisted of the gain resulting from the sale of properties in March 2015. The $34,000 in other income for the period ended March 31, 2016, primarily represents the equity in losses of unconsolidated joint ventures.

 

Liquidity and Capital Resources

 

Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our DRIP. 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 three months ended March 31, 2016, we utilized the net proceeds from the fourth quarter 2015 disposition of our properties (remaining after paydown of debt) to invest in the Gelson’s Joint Venture and the Wilshire Joint Venture.

 

As of March 31, 2016, our cash and cash equivalents were $3,414,000 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 $6,025,000. For properties with such lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.

 

Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of March 31, 2016 and December 31, 2015, our borrowings were approximately 111.7% and 65.3%, respectively, of the carrying value of our net assets. 

 

The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows:

 

		Three Months Ended March 31,								Increase
		2016				2015				(Decrease)
Net cash provided by (used in):
Operating activities		$	1,745,000			$	(688,000	)		$	2,433,000
Investing activities			(30,528,000	)			40,954,000				(71,482,000	)
Financing activities			23,404,000				(39,512,000	)			62,916,000
Net increase (decrease) in cash and cash equivalents		$	(5,379,000	)		$	754,000

 

Cash Flows from Operating Activities

 

The increase in net cash provided by operating activities was primarily due to changes in operating asset and liability balances of $2,100,000 involving collection of tenant receivables and disbursement by lenders of restricted cash.

 

Cash Flows from Investing Activities

 

The increase in net cash used in investing activities was primarily due to our investments in the Wilshire and Gelson’s Joint Ventures, consisting of land and building under development and development costs, totaling $27,280,000 during the three months ended March 31, 2016, compared to net proceeds of $53,066,000 in the three months ended March 31, 2015, before the pay down of debt, from the sale of Aurora Commons, Constitution trail and Osceola Village.

 

Cash Flows from Financing Activities

 

The increase in net cash provided by financing activities was primarily due to loan proceeds during the three months ended March 31, 2016, totaling $25,200,000 in connection with our investments in the Wilshire and Gelson’s Joint Ventures, compared to the paydown of debt in the amount of $36,370,000 in the three months ended March 31, 2015 resulting from the sales of Aurora Commons, Constitution Trail and Osceola Village.

 

Short-term Liquidity and Capital Resources

 

Our principal short-term demand for funds is for the payment of operating expenses, the payment of principal and interest on our outstanding indebtedness, and distributions. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties and the sale of shares of our common stock. 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.

 

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 Note 8. “Notes Payable” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness.

 

 

Recent Financing Transactions

 

KeyBank Credit Facility

 

On March 7, 2016, we drew $6.0 million under the Amended and Restated Credit Facility and used the proceeds to invest in the Wilshire Joint Venture.

 

Mortgage Loans Secured by Properties Under Development

 

In connection with our investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property, the Company has consolidated borrowings of $8,500,000 (the “Wilshire Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and 3032 Wilshire Investors, LLC (as the borrower). The Wilshire Loan bears interest at a rate of 10.0% per annum, payable monthly commencing on April 1, 2016. The loan matures on March 7, 2017, with an option for an additional six-month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.

 

In connection with our investment in the Gelson’s Joint Venture and the acquisition of the Gelson’s Property, the Company has consolidated borrowings of $10,700,000 (the “Gelson’s Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and Sunset and Gardner Investors, LLC (as the borrower). The Gelson’s Loan bears interest at a rate of 9.50% per annum, payable monthly commencing on April 1, 2016. The loan matures on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Gelson’s development project and other collateral as defined in the loan agreement.

 

Interim Financial Information

 

The financial information as of and for the period ended March 31, 2016, included in this Quarterly Report on Form 10-Q is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three months ended March 31, 2016. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete consolidated financial statements. Interim results of operations are not necessarily indicative of the results to be expected for the full year; and such results may be less favorable. Our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2015 Annual Report on Form 10-K.

 

Guidelines on Total Operating Expenses

 

We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three months ended March 31, 2016, our total operating expenses did not exceed the 2%/25% Guidelines.

 

Inflation

 

The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.

 

REIT Compliance

 

To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS 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. In 2015, we made the Special Distribution to stockholders to preserve our REIT status based on underreporting of federal taxable income in 2011.

 

 

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.

 

The following tables set forth the quarterly distributions declared to our common stockholders and common unit holders for the year ended December 31, 2015. Distributions to our common stockholders and common unit holders for the three months ended March 31, 2016 were declared subsequent to March 31, 2016.

 

		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
Total										$	2,627,000			$	103,000			$	2,730,000

 

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.

 

 

Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows:

 

FFO		2016				2015
Net income (loss) (1)		$	(65,000	)		$	3,122,000
Adjustments (2):
Net income related to membership interest			-				(93,000	)
Gain on disposal of assets			(9,000	)			(4,685,000	)
Adjustment to reflect FFO of unconsolidated joint ventures			204,000				18,000
Depreciation of real estate			644,000				1,345,000
Amortization of in-place leases and other intangibles			226,000				504,000
FFO attributable to common shares and Common Units		$	1,000,000			$	211,000
FFO per share/Common Unit		$	0.09			$	0.02
Weighted average common shares outstanding - basic			11,469,085				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.

 

Related Party Transactions and Agreements

 

We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 12. “Related Party Transactions” to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.

 

Off-Balance Sheet Arrangements

 

Our off-balance sheet arrangements consist primarily of our investments in joint ventures and are described in Note 4. “Investments in Unconsolidated Joint Ventures” in the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. 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 partners, and do not represent a liability of the partners other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of March 31 2016, 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 partners.

 

Critical Accounting Policies

 

Our condensed consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2015 Annual Report on Form 10-K.

 

 

Subsequent Events

 

Quarterly Distributions

 

On April 6, 2016, we declared a first quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of March 31, 2016, totaling $686,000. The distribution was paid on April 29, 2016.

 

Sale of Held for Sale Property and Payment of Mortgage Loan

 

On April 4, 2016, we consummated the disposition of Bloomingdale Hills for a sales price of approximately $9.2 million in cash, a portion of which was used to pay off the related $5.3 million mortgage loan and $3 million of which was used to pay down the line of credit.

  

Entry into a Material Definitive Agreement

 

On May 4, 2016, we, through an indirect subsidiary, entered into three separate purchase agreements to acquire three retail properties located in San Francisco, California (the “San Francisco Properties”) from each of Octavia Gateway Holdings, LLC, Grove Street Hayes Valley, LLC and Hayes Street Hayes Valley LLC, each a Delaware limited liability company and each a subsidiary of DDG Partners LLC. The sellers are not affiliated with us or our external advisor. The San Francisco Properties encompass an aggregate of six retail condominiums with an aggregate of 9,121 square feet of retail space. The aggregate purchase price of the San Francisco Properties is approximately $13.7 million plus closing costs.

 

Pursuant to the agreements, we made aggregate earnest money deposits of $425,000 to the sellers on May 6, 2016. There can be no assurance that we will complete the acquisition of any or all of the San Francisco Properties. In some circumstances, if we fail to complete the acquisitions, we may forfeit up to $425,000 of earnest money.

  

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Omitted as permitted under rules applicable to smaller reporting companies.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the first quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.

RISK FACTORS

 

Omitted as permitted under rules applicable to smaller reporting companies.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the period covered by this Quarterly Report on Form 10-Q, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended.

 

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.

 

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 three months ended March 31, 2016, we redeemed shares as follows:

 

										Total Number of Shares
										Purchased as Part of a				Approximate Dollar Value of
		Total Number of				Average Price				Publicly Announced Plan				Shares That May Yet be
Period		Shares Redeemed (1)				Paid per Share				or Program (2)				Redeemed Under the Program (3)
January 2016			-			$	-				-			$	1,617,866
February 2016			-			$	-				-			$	1,617,866
March 2016			30,721			$	6.56				30,721			$	1,416,420
Total			30,721								30,721

 

(1)

All of our purchases of equity securities during the three months ended March 31, 2016, 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 of directors in April 2015. For additional information regarding the SRP, see the disclosure above.

(3)

We currently limit the dollar value and number of shares that may yet be repurchased under the

SRP as described above.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

As of the three months ended March 31, 2016, all items required to be disclosed under Form 8-K were reported under Form 8-K.

 

ITEM 6.

EXHIBITS

 

The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 13, 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)

 

 

 

EXHIBIT INDEX

 

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the three months ended March 31, 2016 (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		Operating Agreement by and among the Members and Manager of Sunset & Gardner Investors LLC, dated January 7, 2016.
10.2		Loan Agreement between Buchanan Mortgage Holdings, LLC and Sunset & Gardner Investors LLC, dated January 26, 2016.
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		Strategic Realty Trust, Inc. Amended and Restated Share Redemption Program Adopted April 1, 2015 (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on April 9, 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