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EX-32.2 - Hartman Short Term Income Properties XX, Inc.f322.htm
EX-32.1 - Hartman Short Term Income Properties XX, Inc.f321.htm
EX-31.2 - Hartman Short Term Income Properties XX, Inc.f312.htm
EX-31.1 - Hartman Short Term Income Properties XX, Inc.f311.htm

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, 2017


 ¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934


Commission File Number 000-53912

__________


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
(Exact name of registrant as specified in its charter)


 

 

Maryland

26-3455189

(State of Organization)

(I.R.S. Employer Identification Number)


2909 Hillcroft, Suite 420 Houston, Texas


77057

(Address of principal executive offices)

(Zip Code)

_______________


(713) 467-2222
(Registrant’s telephone number, including area code)


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


Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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   Smaller reporting company


Emerging Growth Company


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

As of May 8, 2017, there were 18,116,952 shares of the Registrants common stock issued and outstanding, 19,000 of which were held by an affiliate of the Registrant.






Hartman Short Term Income Properties XX, Inc. and Subsidiaries

Table of Contents



 

 

 

 

 

PART I   FINANCIAL INFORMATION

 

Item 1.

Financial Statements

2

Item 2.     

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.   

Controls and Procedures

39

 

 

 

PART II  OTHER INFORMATION

 

Item 1.    

Legal Proceedings

40

Item 1A.   

Risk Factors

40

Item 2.    

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3.     

Defaults Upon Senior Securities

42

Item 4.     

Mine Safety Disclosures

42

Item 5.     

Other Information

42

Item 6.

Exhibits

42

 

SIGNATURES

43






























1






PART I

FINANCIAL INFORMATION


Item 1. Financial Statements


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

March 31, 2017

 

December 31, 2016

ASSETS

 

 Unaudited

 

 

 

 

 

 

 

Real estate assets, at cost

 

 $                         255,094

 

 $                         253,099

Accumulated depreciation and amortization

 

                            (56,030)

 

                            (49,872)

Real estate assets, net

 

                            199,064

 

                            203,227

 

 

 

 

 

Cash and cash equivalents

 

                                     -   

 

                                3,254

Restricted cash

 

                                2,371

 

                                2,371

Accrued rent and accounts receivable, net

 

                                6,113

 

                                5,266

Notes receivable - related party

 

                              11,431

 

                              11,431

Deferred leasing commission costs, net

 

                                5,329

 

                                4,775

Goodwill

 

                                   250

 

                                   250

Prepaid expenses and other assets

 

                                2,376

 

                                1,662

Real estate held for disposition

 

                                     -   

 

                                7,050

Investment in affiliate

 

                                8,978

 

                                8,978

Total assets

 

 $                         235,912

 

 $                         248,264

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

Notes payable, net

 

 $                         114,967

 

 $                         114,151

Note payable - real estate held for disposition, net

 

                                     -   

 

                                3,458

Accounts payable and accrued expenses

 

                                8,509

 

                              12,057

Due to related parties

 

                                   403

 

                                   343

Tenants' security deposits

 

                                1,843

 

                                1,824

Total liabilities

 

                            125,722

 

                            131,833

 

 

 

 

 

 Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

Preferred stock, $0.001 par value, 200,000,000 convertible, non-voting shares authorized, 1,000 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

                                     -   

 

                                     -   

Common stock, $0.001 par value, 750,000,000 authorized, 18,170,878 shares and 18,164,878 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

                                     18

 

                                     18

Additional paid-in capital

 

                            169,485

 

                            169,406

Accumulated distributions and net loss

 

                            (64,572)

 

                            (59,674)

Total stockholders' equity

 

                            104,931

 

                            109,750

Noncontrolling interests in subsidiary

 

                                5,259

 

                                6,681

Total equity

 

                            110,190

 

                            116,431

Total liabilities and equity

 

 $                         235,912

 

 $                         248,264

 

 

 

 

 

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





2







HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 (Unaudited, in thousands, except per share data)

 

Three Months Ended March 31,

 

2017

 

2016

Revenues

 

 

 

Rental revenues

 $                          9,685

 

 $                              7,935

Tenant reimbursements and other revenues

                             1,537

 

                                 1,315

Total revenues

                           11,222

 

                                 9,250

 

 

 

 

Expenses (income)

 

 

 

Property operating expenses

                             3,199

 

                                 3,226

Asset management and acquisition fees

                                440

 

                                    333

Organization and offering costs

                                   -   

 

                                   (250)

Real estate taxes and insurance

                             1,504

 

                                 1,187

Depreciation and amortization

                             6,158

 

                                 5,302

General and administrative

                                577

 

                                    575

Interest expense

                             1,383

 

                                    868

Interest and dividend income

                               (352)

 

                                     (22)

Total expenses, net

                           12,909

 

                               11,219

Loss from continuing operations

                            (1,687)

 

                                (1,969)

Loss from discontinued operations, net

                                   (8)

 

                                       -   

Net loss

                            (1,695)

 

                                (1,969)

Net income attributable to noncontrolling interests

64

 

                                       -   

Net loss attributable to common stockholders

 $                         (1,759)

 

 $                             (1,969)

 

 

 

 

Net loss attributable to common stockholders per share

 $                           (0.10)

 

 $                               (0.13)

Weighted average number of common shares outstanding, basic and diluted

                     18,166

 

                         15,089

 

 

 

 

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






3









HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(in thousands)

 

Preferred Stock

Common Stock

 

 

 

 

 

 

Shares

Amount

Shares

Amount

Additional Paid-In

Capital

Accumulated

Distributions

and Net Loss

Total Stockholders’ Equity

Non-controlling

Interest


 Total Equity

Balance, December 31, 2016

               1

$-

            18,165

$18

$169,406

($59,674)

$109,750

$ 6,681

$116,431

Issuance of common shares

                       -

                      -

6

-

79               

                                 -

79

-

79

Deconsolidation of Village Pointe

                       -

                      -

                -

-

               -

                                 -

-

(1,350)

(1,350)

Distributions (cash)

-

-

-

-

-

(3,139)

(3,139)

(136)

(3,275)

Net (loss) income

                       -

                      -

                             -

                               -

-

            (1,759)

(1,759)

64

(1,695)

Balance, March 31, 2017

               1

$-

            18,171

$18

$169,485

($64,572)

$104,931

$5,259

$110,190

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





4









HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 Three Months Ended March 31,

 

2017

 

2016

Cash flows from operating activities:

 

 

 

Net loss

 $            (1,695)

 

 $            (1,969)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

Stock based compensation

                     19

 

                     35

Depreciation and amortization

                6,158

 

                5,302

Deferred loan and lease commission costs amortization

                   394

 

                   224

Bad debt provision

                   151

 

                   218

Loss on real estate held for disposition

                     27

 

                     -   

Changes in operating assets and liabilities:

 

 

 

Accrued rent and accounts receivable

                 (998)

 

                 (968)

Deferred leasing commissions

                 (821)

 

                 (367)

Prepaid expenses and other assets

                 (734)

 

                 (506)

Accounts payable and accrued expenses

               (3,947)

 

               (3,178)

Due to/from related parties

                     60

 

               (5,731)

Tenants' security deposits

                     19

 

                     14

Net cash used in operating activities

               (1,367)

 

               (6,926)

Cash flows from investing activities:

 

 

 

Acquisition deposits

                     20

 

               (1,500)

Proceeds received - disposition of joint venture real estate held for disposition

                2,214

 

                     -   

Investment in affiliate

                     -   

 

               (8,959)

Additions to real estate

               (1,995)

 

                 (936)

Net cash provided by (used in) investing activities

                   239

 

             (11,395)

Cash flows from financing activities:

 

 

 

Distributions to common stockholders and non-controlling interest

               (3,265)

 

               (1,269)

Payment of selling commissions

                     -   

 

               (1,353)

Repayment under insurance premium finance note

                 (112)

 

                   (84)

Borrowings under insurance premium finance note

                   562

 

                   421

Repayments under term loan notes

                 (311)

 

                 (295)

Borrowings under revolving credit facility

                1,000

 

              11,500

Repayments under revolving credit facility

                     -   

 

             (15,438)

Proceeds from issuance of common stock, net of redemptions

                     -   

 

              26,421

Net cash (used in) provided by financing activities

               (2,126)

 

              19,903

Net change in cash and cash equivalents

               (3,254)

 

                1,582

Cash and cash equivalents at the beginning of period

                3,254

 

                1,380

Cash and cash equivalents at the end of period

 $                  -   

 

 $             2,962

 

 

 

 

Supplemental cash flow information:

 

 

 

Cash paid for interest

                1,260

 

                   876

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

Increase in distribution payable

                    5   

 

                     24

Distributions made to common stockholders through common stock issuances pursuant to the distribution reinvestment plan

                     -   

 

                1,209

 

 

 

 

Village Pointe Assets/Liabilities – disposed:

 

 

 

Real estate

$         (7,050)

 

$                           -

Note payable, net

$            3,460

 

$                           -

Net other assets and liabilities

     $            (217)

 

$                           -

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




5




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1 — Organization and Business


Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009.  The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2011.


Effective March 31, 2016, the Company terminated the offer and sale of its common stock to the public in its follow-on offering.  The sale of shares of the Company’s common stock to its stockholders pursuant to the Company’s distribution reinvestment plan terminated July 16, 2016.


As of March 31, 2017, the Company had issued 18,574,461 shares of its common stock in its initial and follow-on offerings, including 1,216,240 shares of common stock pursuant to its distribution reinvestment plan, resulting in aggregate gross offering proceeds of $181,336,480.  Total shares issued and outstanding as of March 31, 2017 include 58,875 shares of common stock issued as non-employee compensation to members of the Company’s board of directors and certain executives of the Property Manager (defined below).


The Company was originally a majority owned subsidiary of Hartman XX Holdings, Inc.  Hartman XX Holdings, Inc. is a Texas corporation wholly owned by Allen R. Hartman.  The Company sold 19,000 shares to Hartman XX Holdings, Inc. at a price of $10.00 per share.  The Company has also issued 1,000 shares of convertible preferred stock to its advisor, Hartman Advisors LLC (“Advisor”), at a price of $10.00 per share.   The Advisor is owned 70% by Allen R. Hartman, the Company’s Chief Executive Officer and Chairman of the Board of Directors and 30% by Hartman Income REIT Management, Inc. (the “Property Manager”). The Property Manager is a wholly owned subsidiary of Hartman Income REIT, Inc. of which Allen R. Hartman owns approximately 16% of the voting common stock.


On April 11, 2014, the Company formed Hartman XX Limited Partnership, a Texas limited partnership (the “Operating Partnership”).  On March 7, 2014, the Company formed Hartman XX REIT GP LLC, a Texas limited liability company, to serve as the sole general partner of the Operating Partnership.  The Company is the sole limited partner of the Operating Partnership.  The Company’s single member interests in its limited liability company subsidiaries are owned by the Operating Partnership or its wholly owned subsidiaries.


Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company pursuant to an advisory agreement (the “Advisory Agreement”) by and among the Company and Advisor. Management of the Company’s properties is through the Property Manager.  D.H. Hill Securities, LLLP was the dealer manager for the Company’s public offerings.  These parties receive compensation and fees for services related to the investment, management and disposition of the Company’s assets.


       As of March 31, 2017, the Company owned or held a majority ownership interest in 17 commercial properties comprising approximately 2,928,441 square feet plus three pad sites, all located in Texas.  As of March 31, 2017, the Company owned nine properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas.  As of March 31, 2016, the Company owned 15 commercial properties comprising approximately 2,395,910 square feet plus three pad sites, all located in Texas.  As of March 31, 2016, the Company owned seven properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas.  


Note 2 — Summary of Significant Accounting Policies


Basis of Presentation


The accompanying consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2016 are derived from our audited consolidated




6




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



financial statements as of that date.  The unaudited consolidated financial statements as of March 31, 2017 have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X, on a basis consistent with the annual audited consolidated financial statements. The consolidated financial statements presented herein reflect all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the financial position of the Company as of March 31, 2017, and the results of consolidated operations for the three months ended March 31, 2017 and 2016, the consolidated statement of equity for the three months ended March 31, 2017 and the consolidated statements of cash flows for the three months ended March 31, 2017 and 2016.  The results of the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.


The consolidated financial statements herein are condensed and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.


        These unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries.  All significant intercompany balances and transactions have been eliminated.


Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.


Reclassifications


The Company has reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation.  These reclassifications had no effect on the previously reported working capital or results of operations.


Cash and Cash Equivalents

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  Cash and cash equivalents as of March 31, 2017 and December 31, 2016 consisted of demand deposits at commercial banks.


Restricted Cash


Restricted cash represents cash for which the use of funds is restricted by certain loan documents.  As of March 31, 2017, and December 31, 2016, the Company had a restricted cash balance of $2,371,000, respectively, which represents amounts set aside as impounds to be disbursed to the Company upon achieving incremental occupancy and gross income thresholds at the Richardson Heights Property and the Bent Tree Green Property.  


Pursuant to a reserve agreement among the Company and the lender, the Company’s right to draw upon restricted funds expired on December 31, 2016.  The lender has the right to draw any of the remaining funds and apply the same to the outstanding loans at the lenders sole discretion.  No action was taken by the lender as of March 31, 2017.  As of May 3, 2017, the lender has offered and the Company has agreed to an 18-month extension of the Company’s right to draw upon the restricted funds until June 30, 2018 subject to the draw provisions of the original loan agreements.





7




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Financial Instruments


       The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accrued rent and accounts receivable, accounts payable and accrued expenses, notes payable and due from (to) related parties.  The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.  Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its notes payable approximates fair value.


Revenue Recognition


The Company’s leases are accounted for as operating leases.  Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases.  Revenue is recognized on a straight-line basis over the terms of the individual leases.  Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space.  When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in accrued rent and accounts receivable, net.  In accordance with Accounting Standards Codification (“ASC”) 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement and other revenues in the period the related costs are incurred.


Real Estate


Allocation of Purchase Price of Acquired Assets


       Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).


The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.


The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in real estate assets in the consolidated balance sheets and are being amortized to expense over the remaining term of the respective leases.




8




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net loss.


Depreciation and amortization


       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. In-place leases are amortized using the straight-line method over the weighted average years calculated on terms of all of the leases in-place when acquired.


Impairment


       The Company reviews its real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  The Company determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of March 31, 2017 and December 31, 2016.


Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.


Fair Value Measurement

Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as quoted prices in active markets.

Level 2:

Directly or indirectly observable inputs, other than quoted prices in active markets.

Level 3:

Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:

Market Approach:

Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Cost Approach:

Amount required to replace the service capacity of an asset (replacement cost).

Income Approach:

Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).





9




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The Company’s estimates of fair value were determined using available market information and appropriate valuation methods.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.  The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

Accrued Rent and Accounts Receivable


       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rent and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.

 

Deferred Leasing Commission Costs


       Leasing commissions are amortized using the straight-line method over the term of the related lease agreements.  


Goodwill


       GAAP requires the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired.  The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount.  If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test.  In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. No goodwill impairment has been recognized in the accompanying consolidated financial statements.


Organization and Offering Costs


The Company incurred certain organization and offering expenses in connection with the organization of the Company and the offering of the Company’s shares of common stock in the Company’s public offering. These costs principally relate to professional and filing fees. For the three months ended March 31, 2017 and 2016, such costs totaled $0 and ($250,000), respectively, which have been expensed as incurred.


Organization and offering expenses of the Company are paid directly by the Company or incurred by Advisor on behalf of the Company and reimbursed by the Company to the Advisor (subject to certain limitations). Pursuant to the Advisory Agreement, organization and offering expenses will be reimbursed by the Advisor to the Company following the completion of a public offering of the Company to the extent that total organization and offering expenses incurred by the Company in connection with such public offerings (excluding selling commissions and dealer manager fees) exceed 1.5% of gross offering proceeds from the completed public offerings.  As of March 31, 2017, and December 31, 2016, respectively, the amount of offering and organizational expenses incurred in excess of 1.5% of gross offering proceeds was cumulatively $858,000 for the Company’s initial and follow-on public offerings, respectively. The Company terminated the offer and sale of its common stock to the public in its follow-on offering on March 31, 2016.  The Company continued to process subscriptions dated on or before March 31, 2016 through June 30, 2016.  The Company has recorded a receivable from the Advisor and recorded a contra expense of $786,000 resulting in a net credit for organization and offering expenses of $250,000 for the three months ended March 31, 2016.  The Company had a balance due to Advisor of $319,000 and $243,000 as of March 31, 2017 and December 31, 2016, respectively.





10




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Selling commissions in connection with the Company’s public offering were recorded and charged to additional paid-in capital.

 

Real Estate Held for Disposition and Discontinued Operations


The Company considers a commercial property to be held for sale when it meets all of the criteria established under ASC 205, “Presentation of Financial Statements.”  For commercial properties classified as held for sale, assets and liabilities are presented separately for all periods presented.


In accordance with ASC 205, a discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component of an entity or group of components of an entity is classified as held for sale, disposed of by sale or disposed of other than by sale, respectively. In addition, ASC 205 requires us to provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not meet the criteria for a discontinued operation.


Noncontrolling Interests


Noncontrolling interests is the portion of equity in a subsidiary not attributable to a parent.  The ownership interests not held by the parent are considered noncontrolling interests.  Accordingly, the Company has reported noncontrolling interests in equity on the consolidated balance sheets but separate from the Company's equity.  On the consolidated statements of operations, subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests.  The consolidated statement of changes in equity is included for quarterly financial statements, including beginning balances, activity for the period and ending balances for shareholders' equity, noncontrolling interests and total equity.


Stock-Based Compensation


The Company follows ASC 718, Compensation-Stock Compensation (ASC 718) with regard to issuance of stock in payment of services.  ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements.  The compensation cost is measured based on the fair value of the equity or liability instruments issued.  Stock-based compensation expense is included in general and administrative expense in the accompanying consolidated statements of operations.


Advertising


       The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses in the accompanying consolidated statements of operations.  Advertising costs totaled $55,000 and $50,000 for the three months ended March 31, 2017 and 2016, respectively.


Income Taxes


The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2011. 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




11




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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 will operate in such a manner as to qualify for treatment as a REIT. 


For the three months ended March 31, 2017 and 2016, the Company incurred a net loss of $1,695,000 and $1,969,000 respectively.  The Company formed one taxable REIT subsidiary which may generate future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded considering the net loss carry forward would be properly offset by an equal valuation allowance in that no material current or future taxable income is expected.  Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the consolidated financial statements.


The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination.  Accordingly, the Company has not recognized a liability related to uncertain tax positions.

 

Loss Per Share

 

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.  The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock.  As of March 31, 2017 and 2016, there were no shares issuable in connection with these potentially dilutive securities.  These potentially dilutive securities were excluded from the computations of diluted net loss per share for the three months ended March 31, 2017 and 2016 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive.


Concentration of Risk


The Company maintains cash accounts in two U.S. financial institutions.  The terms of these deposits are on demand to minimize risk.  The balances of these accounts may exceed the federally insured limits.  No losses have been incurred in connection with these deposits.


The geographic concentration of the Company’s real estate assets makes it susceptible to adverse economic developments in the State of Texas. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders


Major tenants are defined as those tenants which individually comprise more than 10% of the Company’s total rental revenues.  No tenant represents more than 10% of total rental revenues for three months ended March 31, 2017 and 2016, respectively.


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We have begun




12




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



to evaluate each of our revenue streams under the new model. Based on preliminary assessments, we do not expect the adoption of ASU No. 2014-09 to have a material effect on our consolidated financial position or our consolidated results of operations.

 

ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. We have adopted this guidance for all periods presented.


In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Liabilities,” which enhances the reporting requirements surrounding the measurement of financial instruments and requires equity securities to be measured at fair value with changes in the fair value recognized through net income for the period. ASU No. 2016-01 is effective for our fiscal year commencing on January 1, 2018. Based on preliminary assessments, we do not expect the adoption of ASU No. 2016-01 to have a material effect on our consolidated financial position or our consolidated results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which changes lessee accounting to reflect the financial liability and right-of-use asset that are inherent to leasing an asset on the balance sheet. ASU No. 2016-02 is effective for our fiscal year commencing on January 1, 2019, but early adoption is permitted.  Based on preliminary assessments, we do not expect the adoption of ASU No. 2016-02 to have a material effect on our consolidated financial position or our consolidated results of operations.


In October 2016, the FASB issued ASU No. 2016-17, “Interest Held Through Related Parties That Are Under Common Control,” which amends the accounting guidance when determining the treatment of certain VIE’s to include the interest of related parties under common control in a VIE when considering whether or not the reporting entity is the primary beneficiary of the VIE when considering consolidation. We have adopted this guidance for all periods presented.  Adoption of this guidance has no material effect on our consolidated financial position or our consolidated results of operations.

 

In November 2016, the FASB issued ASU No. 2016-18, “Classification of Restricted Cash,” which addresses the Statement of Cash Flow classification and presentation of restricted cash transactions. ASU No. 2016-18 is effective for our fiscal year commencing on January 1, 2018. The effect of this amendment is to be applied retrospectively and early adoption is permitted. We expect to adopt ASU No. 2016-18 for our fiscal year commencing on January 1, 2018. Based on preliminary assessments, we do not expect the adoption of ASU No. 2016-18 to have a material effect on our consolidated financial position or our consolidated results of operations.

 

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as an acquisition of assets or a business.  Based on preliminary assessments, we do not expect the adoption of ASU No. 2017-01 to have a material effect on our consolidated financial position or our consolidated results of operations.





13




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 3 — Real Estate


   The Company’s real estate assets consisted of the following, in thousands:


 

March 31, 2017

December 31, 2016

Land

$62,320

$62,320

Buildings and improvements

129,201

127,206

In-place lease value intangible

63,573

63,573

 

255,094

253,099

Less accumulated depreciation and amortization

(56,030)

(49,872)

Total real estate assets

$199,064

$203,227


       Depreciation expense for the three months ended March 31, 2017 and 2016 was $1,811,000 and $1,459,000, respectively. Amortization expense of in-place lease value intangible was $4,347,000 and $3,843,000 for the three months ended March 31, 2017 and 2016, respectively.

       

       No acquisition fees were paid to Advisor for the three months ended March 31, 2017 and 2016, respectively. Asset management fees due to Advisor were $440,000 and $333,000 for the three months ended March 31, 2017 and 2016, respectively.  Asset management and acquisition fees are captioned as such in the accompanying consolidated statements of operations for the three months ended March 31, 2017 and 2016, respectively.


As of March 31, 2017, the Company owned or held a majority ownership interest in 17 commercial properties comprising approximately 2,928,441 square feet plus three pad sites, all located in Texas. As of March 31, 2017, the Company owned nine properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas.  As of March 31, 2016, the Company owned 15 commercial properties comprising approximately 2,295,910 square feet plus three pad sites, all located in Texas. As of March 31, 2016, the Company owned seven properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two property located in San Antonio, Texas.


The Company identifies and records the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms.  With respect to all properties owned by the Company, we consider all of the in-place leases to be market rate leases.


The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows, in thousands:


 

 

 

 

March 31, 2017

December 31, 2016

In-place lease value intangible

$               63,573

$                63,573

In-place leases – accumulated amortization

(38,982)

(34,635)

 Acquired lease intangible assets, net

$               24,591

$                28,938







14




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 4 — Accrued Rent and Accounts Receivable, net


Accrued rent and accounts receivable, net, consisted of the following, in thousands:


 

March 31, 2017

December 31, 2016

Tenant receivables

$                3,265

$                  2,889

Accrued rent

4,205

3,583

Allowance for doubtful accounts

(1,357)

(1,206)

Accrued Rents and Accounts Receivable, net

$                6,113

$                 5,266


As of March 31, 2017, and December 31, 2016, the Company had an allowance for uncollectible accounts of $1,357,000 and $1,206,000, respectively.  For the three months ended March 31, 2017 and 2016, the Company recorded bad debt expense in the amount of $151,000 and $218,000, respectively, related to tenant receivables that we have specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness.  For the three months ended March 31, 2017 and 2016, the Company recorded write-offs of $0 and $42,000, respectively.  Bad debt expense and any related recoveries are included in property operating expenses in the accompanying consolidated statements of operations.


Note 5 — Deferred Leasing Commission Costs, net


Costs which have been deferred consist of the following, in thousands:

 

 

 

 

March 31, 2017

December 31, 2016

Deferred leasing commissions

$                      6,937

$                   6,116

Less: accumulated amortization

(1,608)

(1,341)

 Deferred leasing commission cost, net

$                      5,329

$                   4,775


Note 6 — Notes Payable, net


The Company is a party to a $30.0 million revolving credit agreement (the “TCB Credit Facility”) with Texas Capital Bank.  The TCB Credit Facility is secured by the Gulf Plaza, Timbercreek, Copperfield and One Technology Center properties.  The borrowing base based on the collateral properties is $20.925 million.  The TCB Credit Facility note, bears interest at the greater of 4.25% per annum or the bank’s prime rate plus 1% per annum.  The interest rate was 5.00% and 4.75% per annum as of March 31, 2017 and December 31, 2016. All borrowings under the TCB Credit Facility matured on May 9, 2017.  The Company and the bank have agreed to a one-year extension and modification of the TCB Credit Facility.  As modified the TCB Credit Facility will mature on May 9, 2018.

The outstanding balance under the TCB Credit Facility was $8,800,000 as of March 31, 2017 and $7,800,000 as of December 31, 2016, respectively.  As of March 31, 2017 the amount available to be borrowed is $12,125,000.  As of March 31, 2017, the Company was in compliance with all loan covenants under the TCB Credit Facility.

The Company is a party to a $15.52 million revolving credit agreement (the “EWB Credit Facility”) with East West Bank.  The borrowing base of the EWB Credit Facility may be adjusted from time to time subject to the lender’s underwriting with respect to real property collateral.    The EWB Credit Facility is secured by the Commerce Plaza Hillcrest, Corporate Park Place and 400 North Belt properties.  The EWB Credit Facility note bears interest at the greater of 3.75% per annum or the bank’s prime rate plus 0.50%.  The interest rate was 4.50% and 4.25% per annum as of March 31, 2017 and as of December 31, 2016, respectively.  All loans under the EWB Credit Facility mature on August 24, 2017.




15




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On October 8, 2015, the Company entered into a second revolving credit agreement with East West Bank (the “EWB II Credit Facility”).  The borrowing base of the EWB II Credit Facility is $9.9 million and may be adjusted from time to time subject to the lender’s underwriting with respect to the real property collateral.    The EWB II Credit Facility is secured by the Ashford Crossing and Skymark Tower properties.  The EWB II Credit Facility note bears interest at the greater of 3.75% per annum or the bank’s prime rate plus 0.50%.  The interest rate was 4.50% and 4.25% per annum as of March 31, 2017 and as of December 31, 2016, respectively.  All loans under the EWB II Credit Facility mature on August 24, 2017.

The aggregate outstanding balance under the EWB Credit Facility and EWB II Credit Facility was $21,900,000 as of March 31, 2017 and December 31, 2016, respectively.  As of March 31, 2017, the aggregate amount available to be borrowed under the EWB Credit Facility and EWB II Credit Facility is $3,525,000.  As of March 31, 2017, the Company was in compliance with all loan covenants under the EWB Credit Facility and EWB II Credit Facility.

Loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method.  Costs which have been deferred consist of the following, in thousands:

 

March 31, 2017

 

December 31, 2016

Deferred loan costs

$                 2,160

 

$                   2,160

Less:  deferred loan cost accumulated amortization

(820)

 

(693)

  Total cost, net of accumulated amortization

$                 1,340

 

$                   1,467


      The following is a summary of the Company’s notes payable as of March 31, 2017, in thousands:

 

 

 

 

 

 

Property/Facility

Payment (1)

Maturity Date

Rate

March 31, 2017

December 31, 2016

Richardson Heights (2)(3)

P&I

July 1, 2041

4.61%

$          19,094            19,094

$           19,200

Cooper Street (2)

P&I

July 1, 2041

4.61%

7,940

7,984

Bent Tree Green (2)(3)

P&I

July 1, 2041

4.61%

7,940

7,984

Mitchelldale (2)

P&I

July 1, 2041

4.61%

12,028

12,096

Energy Plaza I & II

P&I

June 10, 2021

5.30%

9,958

10,007

Westway One

IO

June 1, 2019

3.29%

10,819

10,819

Three Forest Plaza

IO

December 31, 2019

3.59%

17,828

17,828

TCB Credit Facility

IO

May 9, 2018

5.00%

8,800

7,800

EWB Credit Facility

IO

August 24, 2017

4.50%

12,000

12,000

EWB II Credit Facility

IO

August 24, 2017

4.50%

9,900

9,900

 

 

 

 

$        116,307

$        115,618

Less unamortized deferred loan costs

 

 

(1,340)

(1,467)

 

 

 

 

$        114,967

$        114,151


(1)

Principal and interest (P&I) or interest only (IO).  


(2)

Each promissory note contains a call option wherein the holder of the promissory note may declare the outstanding balance due and payable on either July 1, 2024, July 1, 2029, July 1, 2034, or July 1, 2039.  





16




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



(3)

In connection with the loans secured by the Richardson Heights Property and the Bent Tree Green Property, the Company entered into a reserve agreement with the lender which requires that loan proceeds of $6,500,000, be deposited with the loan servicer.  The escrowed loan proceeds will be released to us upon satisfactory showing of increased annualized rental income from new lease agreements as set forth in the reserve agreement. Under the terms of the reserve agreement, the Company may draw upon the escrow reserve funds until December 31, 2016.  As of December 31, 2016, the Company has drawn $4,129,000 of the escrowed loan proceeds and there remains a balance of $2,371,000 as of December 31, 2016.  The lender has the right to draw any remaining escrow reserve funds and apply such funds to one or more of the loans as the lender may determine in its sole discretion.  See Note 2 – Restricted Cash.  Loan proceeds held pursuant to the reserve agreement are recorded as restricted cash in the accompanying consolidated balance sheets.


        Annual maturities of notes payable as of March 31, 2017 are as follows, in thousands:

 

 

Year ending December 31,

Amount Due

2017

$                          31,648

2018

1,320

2019

30,031

2020

1,450

2021

10,451

Thereafter

41,407

Total

$                       116,307


Interest expense incurred for the three months ended March 31, 2017 and 2016 was $1,383,000 and $846,000, respectively.  Interest expense of $220,000 and $224,000 was payable as of March 31, 2017 and December 31, 2016, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.


Note 7 — Loss Per Share

        

       Basic loss per share is computed using net loss attributable to common stockholders and the weighted average number of common shares outstanding.  Diluted earnings per share reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings (loss) per share.

 

 

 

 

 

Three months ended March 31,

 

2017

 

2016

Numerator:

 

 

 

 Net loss attributable to common stockholders

$             (1,759,000)

 

$             (1,969,000)

 

 

 

 

Denominator:

 

 

 

 Basic and diluted weighted average shares outstanding

18,165,831

 

15,088,950

 Basic and diluted loss per common share:

 

 

 

 Net loss attributable to common stockholders

$                      (0.10)

 

$                      (0.13)









17




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 8 — Income Taxes


       Federal income taxes are not provided for because we qualify as a REIT under the provisions of the Internal Revenue Code and because we have distributed and intend to continue to distribute all of our taxable income to our stockholders. Our stockholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our stockholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational 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 tax rates.


For the three months ended March 31, 2017 and 2016, the Company incurred a net loss of $1,695,000 and $1,969,000 respectively.  The Company formed one taxable REIT subsidiary which may generate future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded considering the net loss carry forward would be properly offset by an equal valuation allowance in that no material current or future taxable income is expected.  Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the consolidated financial statements.


The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination.  Accordingly, the Company has not recognized a liability related to uncertain tax positions.


Taxable income (loss) differs from net income (loss) for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.

 

Note 9 — Related Party Transactions


The Advisor is a Texas limited liability company owned 70% by Allen R. Hartman individually and 30% by the Property Manager.  The Advisor is a variable interest entity which consolidates for financial reporting purposes with Hartman Income REIT, Inc. and subsidiaries, of which Allen R. Hartman, our Chief Executive Officer and Chairman of the Board of Directors, owns approximately 16% of the voting common stock.


For the three months ended March 31, 2017 and 2016 the Company incurred $440,000 and $333,000, respectively, for asset management fees payable to the Advisor.  Acquisition fees paid to Advisor were $0 for the three months ended March 31, 2017 and 2016.


Property operating expenses include property management fees due to the Property Manager of $379,000 and $327,000 for the three months ended March 31, 2017 and 2016, respectively.  For the three months ended March 31, 2017 and 2016, respectively, the Company incurred $821,000 and $367,000 for leasing commissions and $88,000 and $52,000 for construction management fees due to the Property Manager.  Leasing commissions and construction management fees are included in deferred leasing commission costs and real estate assets, respectively, in the consolidated balance sheets.


       As of March 31, 2017, and December 31, 2016, respectively, the Company had a net balance due to the Property Manager of $434,000 and $518,000.


The Company had a balance due from an affiliate, Hartman Short Term Income Properties XIX, Inc. (“Hartman XIX”), of $4,470,000 and $4,474,000 as of March 31, 2017 and December 31, 2016, respectively.  The




18




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



balance due from Hartman XIX includes a loan from the Company to Hartman XIX in the original amount of $4,500,000, which is not evidenced by a promissory note.  Interest has been accrued on the loan amount at an annual rate of 6%. The amount was advanced to Hartman XIX in connection with the affiliate stock purchase described below in this note.  The $270,000 and $274,000 balance due from Hartman XIX as of March 31, 2017 and December 31, 2016, respectively, is included in Due to related parties, and the principal balance of the affiliate loan of $4,200,000 and is included in Notes receivable – related party, in the accompanying consolidated balance sheets.  The Company recognized interest income on the affiliate note in the amount of $68,000 and $0 for the three months ended March 31, 2017 and 2016, respectively, which is included in interest and dividend income in the accompanying consolidated statements of operations.


The Company owed the Advisor $319,000 and $243,000 for asset management fees as of March 31, 2017 and December 31, 2016, respectively.  These fees are monthly fees equal to one-twelfth of 0.75% of the sum of the higher of the cost or value of each asset. The asset management fee will be based only on the portion of the cost or value attributable to the Company’s investment in an asset, if the Company do not own all or a majority of an asset.


On January 26, 2016, the Company’s board of directors approved the acquisition by the Company of up to $13.0 million in shares of common stock of Hartman Income REIT, Inc. (“HIREIT”), an affiliate of the Company, in connection with a tender offer by Hartman XIX to acquire for its account up to $2.0 million in shares of HIREIT common stock.  On February 5, 2016, the Company advanced $5,250,000 to Hartman XIX in connection with the contemplated acquisition of HIREIT shares.  The Company acquired 1,561,523 shares of the common stock of HIREIT for $8,978,000.  The shares were acquired by the Company in connection with a tender offer for shares of the common stock of HIREIT by Hartman XIX.  The Company’s investment in the affiliate is accounted for under the cost method, ownership interest at 11% in HIREIT is less than a controlling stake, and is reflected as “Investment in Affiliate” on the accompanying consolidated balance sheets.  The Company received dividend distributions from HIREIT of $106,000 and $0 for the three months ended March 31, 2017 and 2016, respectively, which is included in interest and dividend income in the accompanying consolidated statements of operations.


On May 17, 2016, the Company, through its taxable REIT subsidiary, Hartman TRS, Inc. (“TRS”), loaned $7,231,000 pursuant to a promissory note in the face amount of up to $8,820,000 to Hartman Retail II Holdings Company, Inc. (“Retail II Holdings”), an affiliate of the Advisor and the Property Manager, in connection with the acquisition of a retail shopping center by Hartman Retail II DST, a Delaware statutory trust sponsored by the Property Manager.  Pursuant to the terms of the promissory note, TRS will receive a two percent (2%) origination fee of amounts advanced under the promissory note, and interest at ten percent (10%) per annum on the outstanding principal balance.  The outstanding principal balance of the promissory note will be repaid as investor funds are raised by Hartman Retail II DST.  The maturity date of the promissory note is May 17, 2019.  For the three months ended March 31, 2017 and 2016, respectively, interest and dividend income in the accompanying consolidated statements of operations, includes $178,000 and $0 of interest income.  As of March 31, 2017 and December 31, 2016, respectively, the balance due to TRS by Retail II Holdings is $144,000.


Variable interest entities (“VIEs”) are defined as entities with a level of invested equity that is not sufficient to fund future operations on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest.  For identified VIEs, an assessment must be made to determine which party to the VIE, if any, has both the power to direct the activities of the VIE that most significantly impacts the performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.


The Company is not deemed to be the primary beneficiary of Retail II Holdings, which qualifies as a VIE.  Accordingly, the assets and liabilities and revenues and expenses of Retail II Holdings have not been included in the accompanying consolidated financial statements.


As of March 31, 2017, the Company had a net balance due to Hartman Village Pointe, LLC of $64,000.





19




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 10 – Real Estate Held for Disposition


On November 14, 2016, the Operating Partnership contributed $3,675,000 cash to Hartman Village Pointe, LLC, in exchange for a 97.35% membership in a joint venture investment among the Operating Partnership and Hartman vREIT XXI, Inc.  Hartman vREIT XXI contributed $100,000 to Hartman Village Pointe, LLC in exchange for a 2.65% membership interest in the joint venture.  On November 14, 2016, Hartman Village Pointe, LLC acquired a retail shopping center comprising approximately 54,246 square feet located in San Antonio, Texas, commonly known as Village Pointe, for $7,050,000, exclusive of closing costs and liabilities assumed.  The Village Pointe property was approximately 93% occupied at the acquisition date.  The Operating Partnership made a mortgage loan of $3,525,000, secured by the Village Pointe Property, to Hartman Village Pointe LLC in connection with the property acquisition.  On December 14, 2016, the acquisition financing provided by the Operating Partnership was refinanced with a $3,525,000 mortgage loan from a bank.  The Company and the Operating Partnership are guarantors of the bank loan.


An acquisition fee of $142,500 was earned by the Advisor in connection with the purchase of the of the Operating Partnership’s interest as of December 31, 2016 in the Village Pointe property.


Pursuant to the terms of a membership unit purchase agreement between the Operating Partnership and Hartman vREIT XXI, Hartman vREIT XXI had the option to acquire from time to time up to all of the membership interest of the Operating Partnership in Hartman Village Pointe at a price equal to the Operating Partnership’s investment cost.


As of February 8, 2017, the Operating Partnership sold all its interest in the joint venture for $3,675,000, of which $2,425,000 was received during the three months ended March 31, 2017.


The Company’s investment in the Village Pointe property joint venture is presented as real estate held for disposition in the accompanying consolidated balance sheets.  The Company’s share of operations for the three months ended March 31, 2017 is presented as loss from discontinued operations in the accompanying consolidated statements of operations.


Loss from discontinued operations with respect to the Village Pointe Property is as follows, in thousands:


 

Three months ended March 31,

 

2017

2016

Total revenues

$                    44

$                      -

 

 

 

Property operating expenses

6

-

Real estate taxes and insurance

8

-

Asset management fees

3

-

General and administrative

1

-

Interest expense

7

-

Total expenses

25

-

 

 

 

Loss on disposition

(27)

-

 

 

 

Net loss from discontinued operations

$                   (8)

$                      -              


Property operating expenses include $2,000 in property management fees and reimbursements earned by the Property Manager.  Asset management fees were earned by Advisor.






20




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 11 – Stockholders’ Equity


Common Stock


       Shares of common stock entitle the holders to one vote per share on all matters which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law.  The common stock has no preferences or preemptive, conversion or exchange rights.


       Under the Company’s articles of incorporation, the Company has authority to issue 750,000,000 shares of common stock, $0.001 par value per share, and 200,000,000 shares of preferred stock, $0.001 par value per share.

       

       As of March 31, 2017, the Company had accepted subscriptions for, and issued 18,574,461 shares of the Company’s common stock in the Company’s initial public offering and the Company’s follow-on offering, including 1,216,240 shares of the Company’s common stock issued pursuant to the Company’s distribution reinvestment plan, resulting in aggregate offering proceeds of $181,336,480.


Preferred Stock


       Under the Company’s articles of incorporation, the Company’s board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors shall have the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares.  As of March 31, 2017, and December 31, 2016, respectively, the Company has issued 1,000 shares of convertible preferred stock to the Advisor at a price of $10.00 per share.


Common Stock Issuable Upon Conversion of Convertible Preferred Stock


The convertible preferred stock issued to the Advisor will convert to shares of the Company’s common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of the Company’s common stock plus the aggregate market value of the Company’s common stock (based on the 30-day average closing meets the same 6% performance threshold,                                                                  or  (3)  the Company’s advisory agreement with the Advisor expires without renewal or is terminated (other than because of a material breach by the Advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the stockholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.


Stock-Based Compensation


  The Company awards shares of restricted common stock to non-employee directors as compensation in part for their service as members of the board of directors of the Company.  These shares are fully vested when granted.  These shares may not be sold while an independent director is serving on the board of directors.  For the three months ended March 31, 2017 and 2016, respectively, the Company granted 1,500 and 1,500 shares of restricted common stock to independent directors as compensation for services. The Company recognized $19,000 and $15,000 as stock-based compensation expense for the three months ended March 31, 2017 and 2016,




21




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



respectively, based upon the estimated fair value per share.  Stock-based compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations.


Distributions


         The following table reflects the total distributions the Company has paid, including the total amount paid and amount paid per common share, in each indicated quarter:


 

 

 

 

Quarter Paid

Distributions per Common Share

 


Total Distributions

2017

 

 

 

 1st Quarter

$                       0.175

 

$                       3,134

 

 

 

 

2016

 

 

 

 4th Quarter

$                       0.175

 

$                       3,173

 3rd Quarter

0.175

 

3,213

 2nd Quarter

0.175

 

3,042

 1st Quarter

0.175

 

2,478

Total

$                       0.700

 

$                     11,906


Note 12 –Incentive Award Plan

The Company has adopted an incentive plan (the “Omnibus Stock Incentive Plan” or the “Incentive Plan”) that provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards within the meaning of Internal Revenue Code Section 422, or any combination of the foregoing. The Company has initially reserved 5,000,000 shares of the Company’s common stock for the issuance of awards under the Company’s stock incentive plan, but in no event more than ten (10%) percent of the Company’s issued and outstanding shares. The number of shares reserved under the Company’s stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. Generally, shares that are forfeited or canceled from awards under the Company’s stock incentive plan also will be available for future awards.  The Compensation Committee of the Board of Directors approved awards of 1,000 shares of restricted common stock that were for each of two executives of Hartman Income REIT Management, the Property Manager for the Company, for the quarter ended March 31, 2016. The Company recognized stock-based compensation expense of $0 and $20,000, respectively, for the three months ended March 31, 2017 and 2016, based on the issue price of $10.00 per share.


Note 13– Commitments and Contingencies


Economic Dependency


       The Company is dependent on the Property Manager and the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities.  In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other providers.


Litigation


The Company is subject to various claims and legal actions that arise in the ordinary course of business.  Management of the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position of the Company.




22




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




Note 14– Subsequent Events


Three Forest Plaza Joint Venture


On April 11, 2017, the Operating Partnership entered into a membership interest purchase agreement with Hartman vREIT XXI, Inc. (“vREIT XXI”), a related party, pursuant to which vREIT XXI may acquire up to $10,000,000 of the Operating Partnership’s ownership interest in Hartman Three Forest Plaza LLC.  On April 11, 2017, pursuant to the membership interest purchase agreement, vREIT XXI acquired 160,000 membership units of Hartman Three Forest Plaza LLC, representing an approximately 9.0% interest in the members’ equity of Hartman Three Forest Plaza LLC, from the Operating Partnership for $1,600,000.  On May 18, 2017, vREIT XXI acquired an additional 130,000 membership units of Hartman Three Forest Plaza LLC, representing an additional approximately 7.3% interest in the members’ equity of Hartman Three Forest Plaza LLC, from the Operating Partnership for $1,300,000.





23






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


       Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us” or “our” are to Hartman Short Term Income Properties XX, Inc.

 

Forward-Looking Statements

 

          Certain statements included in this quarterly report on Form 10-Q (this “Quarterly Report”) that are not historical facts (including 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 and Exchange Act of 1934, as amended.  These statements are only predictions.  We caution that forward-looking statements are not guarantees.  Actual events on 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.

 

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

 

 

 

  

our ability to effectively deploy the remaining net proceeds raised in our public offering, which terminated effective March 31, 2016;

 

 

 

  

the fact that we have had a net loss for each annual period since our inception;

 

 

 

  

the imposition of federal taxes if we fail to qualify as a REIT in any taxable year or forego an opportunity to ensure REIT status;

  

  

  

  

uncertainties related to the national economy, the real estate industry in general and in our specific markets;

  

  

  

  

legislative or regulatory changes, including changes to laws governing REITS;

  

  

  

  

construction costs that may exceed estimates or construction delays;

  

  

  

  

increases in interest rates;

  

  

  

  

availability of credit or significant disruption in the credit markets;

  

  

  

  

litigation risks;

  

  

  

  

risks inherent to the real estate business, including tenant defaults, potential liability related to environmental matters and the lack of liquidity of real estate investments;

  

  

  

  

inability to obtain new tenants upon the expiration of existing leases at our properties;

  

  

  




24









  

inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws;

  

  

  

  

the potential need to fund tenant improvements or other capital expenditures out of operating cash flow;

 

 

 

 

the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arms length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us;

 

our ability to generate sufficient cash flows to pay distributions to our stockholders;

 

our ability to retain our executive officers and other key personnel of our advisor and other affiliates of our advisor; and

 

changes to generally accepted accounting principles, or GAAP.

 

 

 


          The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on April 11, 2017.


The following discussion and analysis should be read in conjunction with the accompanying interim consolidated financial information.


Overview


We were formed as a Maryland corporation on February 5, 2009 to invest in and operate real estate and real estate-related assets on an opportunistic basis.  We may acquire a wide variety of commercial properties, including office, industrial, retail, and other real properties.  These properties may be existing, income-producing properties, newly constructed properties or properties under development or construction. In particular, we will focus on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning or those located in markets with high growth potential.  We also may invest in real estate-related securities and, to the extent that our advisor determines that it is advantageous, we may invest in mortgage loans.  We expect to make our investments in real estate assets located in the United States and other countries.  


On February 9, 2010, we commenced our initial public offering to sell a maximum of $250,000,000 in shares of our common stock to the public in our initial public offering at a price of $10 per share and up to $23,750,000 in shares of common stock to our stockholders pursuant to our distribution reinvestment plan at a price of $9.50 per share.  On April 25, 2013, we terminated our initial public offering.  As of the termination of our initial public offering on April 25, 2013, we had accepted subscriptions for and issued 4,455,678 shares of our common stock, including 162,561 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $43,943,731.


On July 16, 2013, we commenced our follow-on public offering, or our “follow-on offering,” of up to $200,000,000 in shares of our common stock to the public at a price of $10.00 per share and up to $19,000,000 in shares of our common stock to our stockholders pursuant to our distribution reinvestment plan at a price of $9.50 per share. Effective March 31, 2016, we terminated the offer and sale of our common shares to the public in our follow-on offering. Effective July 16, 2016, we terminated the sale of additional shares of our common stock to our stockholders pursuant to our distribution reinvestment plan. As of December 31, 2016, we had accepted subscriptions for, and issued 14,118,783 shares of our common stock in our follow-on offering, including 1,053,679 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross proceeds of $137,392,749.  As of December 31, 2016, we had accepted subscriptions for, and issued an aggregate of




25






18,574,461 shares of our common stock in our initial public offering and follow-on offering, including 1,216,240 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross proceeds from both offerings of $181,336,480.


We intend to invest the remaining net proceeds of our public offerings in commercial real estate properties and other real estate-related investments.  As of March 31, 2017, we owned or held a majority ownership interest in 17 commercial real properties comprising approximately 2,928,441 square feet.  


We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders.  We are externally managed by Hartman Advisors, LLC, which we refer to as our “advisor,” pursuant to an advisory agreement by and among us and our advisor, which we refer to as the “Advisory Agreement.”  Subject to certain restrictions and limitations, our advisor manages our day-to-day operations and our portfolio of properties and real estate related assets.  Our advisor sources and presents investment opportunities to our board of directors.  Our advisor also provides investment management, marketing, investor relations and other administrative services on our behalf.  The key personnel of our advisor are involved in the selection, acquisition, financing and disposition of our properties, and raising the capital to purchase.  The key personnel of our advisor have extensive experience in selecting and operating commercial real estate and in operating investment entities that acquire commercial real estate.  Our affiliated property manager is Hartman Income REIT Management, Inc. which we refer to as our “property manager,” which is responsible for operating, leasing and maintaining our properties.  Our property manager is the wholly owned subsidiary of Hartman Income REIT, Inc. which we refer to as “HIREIT,” a real estate investment trust that has investment objectives that are similar to those that we employ.


Investment Objectives and Strategy: Hartman Advantage


Our primary investment objectives are to:


  

·

realize growth in the value of our investments;

  

·

preserve, protect and return stockholders capital contributions; and

 

·

grow net cash from operations and pay regular cash distributions to our stockholders.

 We cannot assure our stockholders that we will achieve these objectives.


The cornerstone of our investment strategy is our advisor’s discipline in acquiring a portfolio of real estate properties, specifically properties that are located in Texas, that offer a blend of current and potential income based on in place occupancy plus relatively significant potential for growth in income and value from re-tenanting; repositioning or redevelopment.  We refer to this strategy as “value add” or the “Hartman Advantage.”


We rely upon the value add or Hartman Advantage strategy to evaluate potential commercial real estate acquisition and investment opportunities per completed acquisition or investment.


Effective March 31, 2016, we terminated our follow-on offering. Our board of directors continues to evaluate potential liquidity events to maximize the total potential return to our stockholders, including, but not limited to, merging our company with its affiliates followed by a listing of our shares of common stock on a national securities exchange.  Management currently estimates the possible timing for such a liquidity event to be during 2018. However, our board of directors has not made a decision to pursue any specific liquidity event, and there can be no assurance that we will complete any liquidity event on the terms described above, or at all.


We do not anticipate that there will be any market for our shares of common stock unless they are listed on a national securities exchange.  In the event that our shares of common stock are not listed or traded on an established securities exchange prior to the tenth anniversary of the completion or termination of our initial public offering, our charter requires that the board of directors must seek the approval of our stockholders of a plan to liquidate our




26






assets, unless the board of directors has obtained the approval of our stockholders (1) to defer the liquidation of our assets or (2) of an alternate strategy.


We believe that we have resources available that are sufficient to meet our existing debt service and other operating obligations for the next year and that we have adequate resources to fund our cash needs. However, our operations are subject to a variety of risks, including, but not limited to, changes in national economic conditions, the restricted availability of financing, changes in demographic trends and interest rates and declining real estate valuations. As a result of these uncertainties, there can be no assurance that we will meet our investment objectives or that the risks described above will not have an adverse effect on our properties or results of operations.

 

We elected under Section 856(c) of the Internal Revenue Code to be taxed as a REIT beginning with the taxable year ending December 31, 2011.  As a REIT we generally are not subject to federal income tax on income that we distribute to our stockholders.  If we fail to qualify as a REIT in any taxable year after the year in which we initially elected to be treated as a REIT, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income. However, we believe that we are organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.


Our Real Estate Portfolio


As of March 31, 2017, we owned or held a majority ownership interest in 17 commercial real estate properties listed below:

Property Name

Location

 Gross Leasable Area SF

Percent Occupied

Annualized Base Rental Revenue, in thousands

Average Base Rental Revenue / Occupied SF

Average Net Effective Annual Base Rent per Occupied SF

Retail:

 

 

 

 

 

Richardson Heights

Dallas

       201,433

74%

 $         2,775

 $        18.53

 $                  20.05

Cooper Street

Dallas

       127,696

100%

1,496

 $        11.72

 $                  11.63

Total - Retail

 

       329,129

84%

 $         4,271

 $        15.39

 $                  16.17

Office:

 

 

 

 

 

 

Bent Tree Green

Dallas

       139,609

88%

 $         1,836

 $        14.99

 $                  15.40

Parkway Plaza I&II

Dallas

       136,506

67%

1,532

 $        16.66

 $                  18.14

Hillcrest

Dallas

       203,688

72%

1,892

 $        12.96

 $                  13.69

Skymark

Dallas

       115,700

79%

1,710

 $        18.82

 $                  19.89

Corporate Park Place

Dallas

       113,429

75%

1,215

 $        14.26

 $                  15.14

Westway One (1)

Dallas

       165,982

100%

3,021

 $        18.20

 $                  20.22

Three Forest Plaza (2)

Dallas

       366,549

76%

4,869

 $        17.37

 $                  17.42

Gulf Plaza

Houston

       120,651

100%

2,402

 $        19.93

 $                  19.87

Timbercreek Atrium

Houston

         51,035

86%

711

 $        16.12

 $                  16.69

Copperfield

Houston

         42,621

83%

648

 $        18.30

 $                  19.00

400 N. Belt

Houston

       230,872

56%

1,170

 $          9.12

 $                    9.58

Ashford Crossing

Houston

       158,451

53%

 1,503

 $        18.05

 $                  19.04

Energy Plaza

San Antonio

       180,119

87%

 3,287

 $        21.07

 $                  21.52

One Technology Center

San Antonio

       196,348

95%

3,759

 $        20.20

 $                  21.06

Total - office

 

    2,221,560

78%

 $        29,555

 $        17.02

 $                  17.73

Flex/Industrial

 

 

 

 

 

 

Mitchelldale

Houston

       377,752

88%

 $          2,090

 $          6.31

 $                    6.47

Total - Flex/Industrial

 

       377,752

88%

2,090

 $          6.31

 $                    6.47

Grand Total

 

    2,928,441

80%

 $        35,916

 $        15.32

 $                  15.96




27










(1)

The Westway One property is owned by Hartman Westway LLC.  On June 17, 2016, we sold a 45.67% minority interest in Westway One LLC to an unrelated investor for $5,500,000.  As of March 31, 2017, we own a 54.33% membership interest in the Westway One joint venture.

(2)

On April 11, 2017, the Operating Partnership entered into a membership interest purchase agreement with Hartman vREIT XXI, Inc. (“vREIT XXI”), a related party, pursuant to which vREIT XXI may acquire up to $10,000,000 of the Operating Partnership’s ownership interest in Hartman Three Forest Plaza LLC.  On April 11, 2017, pursuant to the membership interest purchase agreement, vREIT XXI acquired 160,000 membership units of Hartman Three Forest Plaza LLC, representing an approximately 9% membership interest in Hartman Three Forest Plaza LLC, from the Operating Partnership for $1,600,000.  On May 18, 2017, vREIT XXI acquired an additional 130,000 membership units of Hartman Three Forest Plaza LLC, representing an additional approximately 7.3% interest in the members’ equity of Hartman Three Forest Plaza LLC, from the Operating Partnership for $1,300,000.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related notes, require us to make estimates and assumptions that are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors related to the ongoing viability of our customers.  With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements.  A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2016, under "Management's Discussion and Analysis of Financial Condition and Results of Operations."  There have been no significant changes to these policies during the three months ended March 31, 2017.  See also Note 2 to our consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of our significant accounting policies.


RESULTS OF CONTINUING OPERATIONS


Comparison of the three months ended March 31, 2017 versus March 31, 2016.

 

       As of March 31, 2017, we owned or held a majority ownership interest in 17 commercial properties comprising approximately 2,928,441 square feet plus three pad sites, all located in Texas.  As of March 31, 2017, we owned nine properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas.  As of March 31, 2016, we owned 15 commercial properties comprising approximately 2,395,910 square feet plus three pad sites, all located in Texas.  As of March 31, 2016, we owned seven properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas.    


We define same store (“Same Store”) properties as those properties which we owned for the entirety of the three months ended March 31, 2017 and March 31, 2016.  For purposes of the following discussion, Same Store properties refer to Richardson Heights, Cooper Street, Bent Tree Green, Parkway, Gulf Plaza, Mitchelldale, Energy Plaza, Timbercreek, Copperfield, Commerce Plaza Hillcrest, 400 North Belt, Ashford Crossing, Corporate Park Place, Skymark Tower and One Technology Center.  New store (“New Store”) properties refer to Westway One and Three Forest Plaza.  


Net operating income (property revenues minus property expenses), or “NOI,” is the measure used by management to assess property performance. NOI is not a measure of operating income or cash flows from operating activities as measured by accounting principles generally accepted in the United States, or “GAAP,” and is not indicative of cash available to fund cash needs. As a result, NOI should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate NOI in the same manner. We consider NOI to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the operating results of our real estate.    





28







 (in thousands)

Three months ended March 31,

 

 

2017

2016

Change

Same Store:

 

 

 

 Revenue

$                8,909

$            9,250

$             (341)

 Property operating expenses

2,515

3,226

(711)

 Real estate taxes and insurance

1,157

1,187

(30)

 Asset management fees

333

333

-

 General and administrative

158

575

(417)

Same Store NOI

$                4,746

$            3,929

$               817

 

 

 

 

New Store:

 

 

 

 Revenue

$                2,313

$                   -

$            2,313

 Property operating expenses

684

-

684

 Real estate taxes and insurance

347

-

347

 Asset management fees

107

-

107

 General and administrative

419

-

419

New Store NOI

$                   756

$                   -

$               756

Property NOI

$                5,502

$           3,929

$            1,573

 

 

 

 

 

 

 

 

Reconciliation of Net loss to Property NOI

 

 

 

 

 

 

 

Net loss

$             (1,695)

$         (1,969)

$               747

 Asset acquisition fees

-

-

-

 Organization and offering costs

-

(250)

250

 Depreciation and amortization

6,158

5,302

383

 Interest expense

1,383

868

515

 Interest and dividend income

(352)

(22)

(330)

 Loss from discontinued operations

8

-

8

Property NOI

$                5,502

$            3,929

$            1,573


Revenues – The primary source of our revenue is rental revenues and tenant reimbursements.  For three months ended March 31, 2017 and 2016 we had total rental revenues and tenant reimbursements of $11,222,000 and $9,250,000, respectively. The $1,972,000 increase in total rental revenues and tenant reimbursements was primarily due to the fact that we owned or held a majority ownership interest in 17 properties as of March 31, 2017, as compared to the 15 properties we owned as of March 31, 2016. Same Store property revenues decreased by $341,000, or approximately 3.7%, for three months ended March 31, 2017 compared to three months ended March 31, 2016.  Net revenues at the 400 North Belt property decreased $412,000 as a result of non-renewing tenants.  The non-renewal of the tenants was known at the time of the acquisition of the 400 North Belt property.


Operating expensesOperating expenses consist of property operating expenses (contract services, repairs and maintenance, utilities and management fees); real estate taxes and insurance; asset management fees and some general and administrative expenses.  For three months ended March 31, 2017 and March 31, 2016 we had operating




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expenses of $5,720,000 and $5,321,000, respectively.  Same Store operating expenses decreased $1,158,000 for the three months ended March 31, 2017 over the three months ended March 31, 2016 due to insurance reimbursement for costs previously expensed with respect to fire damage remediation at the Commerce Plaza Hillcrest property which are included in property operating expenses on the accompanying consolidated statements of operations.


 Fees to affiliatesWe pay acquisition fees and asset management fees to our advisor in connection with the acquisition of properties and management of our company.  Asset management fees to our advisor were $440,000 and $333,000 for three months ended March 31, 2017 and March 31, 2016, respectively.  Acquisition costs related to the acquisition of our properties were $0 for three months ended March 31, 2017 and March 31, 2016. The increase in acquisition and asset management fees is attributable to the two properties we acquired between June and December in 2016, and the fact that we owned or held a majority ownership interest in 17 properties as of March 31, 2017, as compared to the 15 properties we owned as of March 31, 2016. We pay property management and leasing commissions to our Property Manager in connection with the management and leasing of our properties.  For three months ended March 31, 2017 and March 31, 2016 we were charged by our Property Manager $1,003,000 and $795,000, respectively, for property management fees expense reimbursements and $821,000 and $367,000, respectively, for leasing commissions. The increase in property management fees we were charged by our Property Manager from three months ended March 31, 2016 to three months ended March 31, 2017 was primarily due to the increase in revenues attributable to the two properties acquired between June to December in 2016.


Real estate taxes and insurance – Real estate taxes and insurance were $1,504,000 and $1,187,000 for three months ended March 31, 2017 and 2016, respectively. The increase in real estate taxes and insurance from three months ended March 31, 2016 to three months ended March 31, 2017 was primarily due to the fact that we owned or held a majority ownership interest in 17 properties as of March 31, 2017, as compared to the 15 properties we owned as of March 31, 2016.

 

Depreciation and amortization – Depreciation and amortization were $6,158,000 and $5,302,000 for three months ended March 31, 2017 and 2016, respectively.  Depreciation and amortization increased from three months ended March 31, 2016 to three months ended March 31, 2017 was primarily due to the fact that we owned or held a majority ownership interest in 17 properties as of March 31, 2017, as compared to the 15 properties we owned as of March 31, 2016.


General and administrative expenses - General and administrative expenses were $577,000 and $575,000 for three months ended March 31, 2017 and 2016, respectively.  General and administrative expenses consist primarily of transfer agent fees, other professional fees, and independent director compensation. The increase in general and administrative expenses is due to increased professional fees and certain recoverable and non-recoverable property operating expenses.


Organizational and offering costs - We have incurred certain expenses in connection with our organization and the sale of our shares of common stock.  These costs principally relate to professional and filing fees.  As of March 31, 2017, such costs totaled $3,020,000 and have been expensed as incurred since February 5, 2009, the date of our inception.  For three months ended March 31, 2017 and March 31, 2016, organization and offering costs (credit) were $0 and ($250,000), respectively.


Net loss – We incurred net losses of $1,695,000 and $1,969,000 for three months ended March 31, 2017 and 2016, respectively.  The net loss for three months ended March 31, 2017 is primarily attributable to depreciation and amortization expense attributable to real estate assets.


Funds From Operations and Modified Funds From Operations


 Funds From Operations, or FFO, is a non-GAAP financial measure defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, which we believe is an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT in conjunction with net




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income.  FFO is used by the REIT industry as a supplemental performance measure.  FFO is not equivalent to our net income or loss as determined under GAAP.


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


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


Historical accounting for real estate involves the use of GAAP.  Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP.  Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of the our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.  However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance.  The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.


Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.  Management believes these fees and expenses do not affect our overall long-term operating performance.  Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation.  While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We intend to use the




31






remaining net proceeds raised in our follow-on offering to continue to acquire properties, and intend to begin the process of achieving a liquidity event (i.e., the listing of our common stock on a national exchange, a merger or sale or our company or another similar transaction) within ten years of the completion of our initial public offering.  The Investment Program Association, or “IPA,” an industry trade group, has standardized a measure known as Modified Funds From Operations, or “MFFO,” which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above.  MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended.  We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (i.e., the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place.  By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our public offering has been completed and our properties have been acquired.  We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.  Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our public offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our public offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.


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


Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses.  We do not currently exclude amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests.  Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income.  These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors.  All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.  Accordingly, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired.  MFFO




32






that excludes such costs and expenses would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics to us.  Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities.  In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.  The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in our public offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.


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


Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders.  FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.    MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed.  FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.


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


The table below summarizes our calculation of FFO and MFFO for the three months ended March 31, 2017 and 2016, respectively, and a reconciliation of such non-GAAP financial performance measures to our net loss.








33









 

Three Months Ended March 31,

 

2017

2016

Net loss

             ($1,695)

($1,969)

Depreciation and amortization of real estate assets

                 6,158

5,302

Funds from operations (FFO)

               4,463

3,333

 

 

 

Acquisition related expenses

-                                -   

                     -   

Modified funds from operations (MFFO)

                   $4,463

$3,333


Distributions


The following table summarizes the distributions we paid in cash and pursuant to our distribution reinvestment plan for the period from January 2011 (the month we first paid distributions) through March 31, 2017:


Period

Cash (1)

DRIP (2)(3)

Total

Period from inception to December 31, 2010 (2) 

First Quarter 2011

$21

$20

$41

Second Quarter 2011

45

51

96

Third Quarter 2011

70

70

140

Fourth Quarter 2011

119

101

220

First Quarter 2012

175

150

325

Second Quarter 2012

209

194

403

Third Quarter 2012

236

246

482

Fourth Quarter 2012

271

279

550

First Quarter 2013

316

311

627

Second Quarter 2013

373

388

761

Third Quarter 2013

442

412

854

Fourth Quarter 2013

550

483

1,033

First Quarter 2014

568

535

1,103

Second Quarter 2014

614

577

1,191

Third Quarter 2014

632

605

1,237

Fourth Quarter 2014

665

641

1,306

First Quarter 2015

703

714

1,417

Second Quarter 2015

803

876

1,679

Third Quarter 2015

927

1,020

1,947

Fourth Quarter 2015

1,042

1,108

2,150




34









First Quarter 2016

1,269

1,209

2,478

Second Quarter 2016

1,707

1,335

3,042

Third Quarter 2016

2,769

444

3,213

Fourth Quarter 2016 (4)

3,173

-

3,173

First Quarter 2017 (4)

3,134

-

3,134

Total

$20,833

$11,769

$32,602



(1)

Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid    approximately 20 days following the end of such month.

(2)

Distributions accrued for the period from December 27, 2010 through December 31, 2010 were paid on January 20, 2011, the date we first paid a distribution.

(3)

Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan. Effective July 16, 2016, we terminated the sale of additional shares of our common stock to our stockholders pursuant to our distribution reinvestment plan.

(4)

Distributions to non-controlling interests were $208,000 for the year ended December 31, 2016.  Distributions to non-controlling interests were $136,000 for the three months ended March 31, 2017.


For three months ended March 31, 2017, we paid aggregate distributions of $3,134,000 in cash to common stockholders. During the same period, cash used in operating activities was $1,367,000 and our FFO was $4,463,000. For three months ended March 31, 2017, 100% of distributions were paid from cash provided by debt proceeds.   For three months ended March 31, 2016, we paid aggregate distributions of $2,478,000, including distributions paid in shares of common stock pursuant to our distribution reinvestment plan.  During the same period, cash used in operating activities was $6,926,000 and our FFO was $3,333,000. For three months ended March 31, 2016, 100% of distributions were paid from cash provided by offering proceeds.   


For the period from inception (January 20, 2011 was the date we first paid distributions) to March 31, 2017, we paid aggregate distributions of $32,602,000.  During the period from our inception to March 31, 2017, our cash provided by operating activities was $20,966,000, our net loss was $30,717,000 and our FFO was $25,108,000. Of the $32,602,000 in aggregate distributions paid to our stockholders from inception to March 31, 2017, approximately 65% was paid from net cash provided by operating activities and approximately 35% was funded from offering proceeds.   For a discussion of how we calculate FFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds From Operations and Modified Funds From Operations.”


Liquidity and Capital Resources


 As of March 31, 2017, we had issued 18,574,461 shares of our common stock in our initial and follow-on public offerings, including 1,216,240 shares of our common stock pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $181,336,480. Effective March 31, 2016, we terminated the offer and sale of our common shares to the public in our follow-on offering. The sale of shares of our common stock to our stockholders pursuant to our distribution reinvestment plan will continue until as late as July 16, 2016.


Our principal demands for funds will be for the payment of operating expenses, for the payment of interest on our outstanding indebtedness, and for the payment of distributions. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations; provided, that some or all of our distributions have been and may continue to be paid from sources other than cash from operations (as discussed below).  We expect to meet cash needs for acquisitions from the remaining net proceeds of our follow-on offering and from financings.

 

Some or all of our distributions have been and may continue to be paid from sources other than cash flow from operations, including proceeds of our public offerings, cash advances to us by our advisor, cash resulting from a




35






waiver of asset management fees and borrowings secured by our assets in anticipation of future operating cash flow.  We may have little, if any, cash flow from operations available for distribution until we make substantial investments and those investments stabilize.  In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.

 

We use, and intend to use in the future, secured and unsecured debt to acquire properties and make other investments.  As of March 31, 2017, our outstanding secured debt is $116,307,000. There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment.  Under our charter, we are prohibited from borrowing in excess of 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors and if such excess is disclosed to the stockholders in the next quarterly report along with the explanation for such excess borrowings.  In addition, our board of directors has adopted a policy to limit our aggregate borrowings to approximately 50% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.

 

Our advisor may, but is not required to, establish capital reserves from remaining gross offering proceeds, out of cash flow generated by operating properties and other investments or out of non-liquidating net sale proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures. Alternatively, a lender may require its own formula for escrow of capital reserves.

 

Potential future sources of capital include proceeds from additional private or public offerings of our securities, secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations.  If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.


Cash Flows from Operating Activities


As of March 31, 2017, we had continuing operations from 17 commercial real estate properties versus 15 properties as of March 31, 2016.  During three months ended March 31, 2017, net cash used in operating activities was $1,367,000 versus $6,926,000 net cash used in operating activities for three months ended March 31, 2016.  The increase in cash flow from operating activities is primarily attributable to the increase in amounts due from affiliates and the number of operating properties we owned.  We expect cash flows from operating activities to increase in future periods as a result of increased occupancy.


Cash Flows from Investing Activities


During three months ended March 31, 2017, net cash provided by and (used in) investing activities was $239,000 versus ($11,395,000) for three months ended March 31, 2016 and consisted primarily of cash provided by disposition of Village Pointe.  We had no acquisitions during the three months ended March 31, 2017 compared to the approximately $9.0 million investment in the common stock of an affiliate, Hartman Income REIT, Inc., during the three months ended March 31, 2016.


Cash Flows from Financing Activities


Cash flows from financing activities consisted primarily of proceeds from our ongoing public offering and distributions paid to our common stockholders.  Net cash (used in) and provided by financing activities for three months ended March 31, 2017 and 2016, respectively, was $(2,126,000) and $19,903,000 and consisted of the following:





36






·

$0 and $26,421,000, respectively of cash provided by offering proceeds, net of redemptions related to our public offering, net of payments of commissions on sales of common stock and related dealer manager fees of $0 and $1,353,000, respectively;


·

$1,139,000 and $3,896,000, respectively of net cash borrowings net of term loan repayments; and,


·

$3,265,000 and $1,269,000, respectively of net cash distributions, after giving effect to distributions reinvested by stockholders of $0 and $1,209,000, respectively.

 

Discontinued Operations


         On November 14, 2016, we acquired an interest in the Village Pointe property through an investment in Hartman Village Pointe, a joint venture between our operating partnership and our affiliate, Hartman vREIT XXI, Inc.  The Village Pointe property was approximately 92% occupied at the acquisition date.  Our operating partnership contributed $3,675,000 to Hartman Village Pointe in exchange for a 97.35% membership interest in Hartman Village Pointe and Hartman vREIT XXI, Inc. contributed $100,000 to Hartman Village Pointe in exchange for a 2.65% membership interest in Hartman Village Pointe. Our operating partnership also made a mortgage loan of $3,525,000, secured by the Village Pointe property, to Hartman Village Pointe.  On December 14, 2016, Hartman Village Pointe refinanced the Village Pointe property with a bank mortgage.  The affiliate mortgage loan was paid in full on that date.


As of February 8, 2017, Hartman vREIT XXI, Inc. acquired all our ownership interests in Hartman Village Pointe.


Contractual Commitments and Contingencies

 

We use, and intend to use in the future, secured and unsecured debt, as a means of providing additional funds for the acquisition of our properties and our real estate-related assets. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. Under our charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets. We may borrow in excess of this amount if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with a justification for such excess. In such event, we will monitor our debt levels and take action to reduce any such excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of March 31, 2017, our borrowings were not in excess of 300% of the value of our net assets.


In addition to using our capital resources for investing purposes and meeting our debt obligations, we expect to use our capital resources to make certain payments to our advisor. We expect to make payments to our advisor or its affiliates in connection with the selection and origination or purchase of real estate and real estate-related investments, the management of our assets, the management of the development or improvement of our assets and costs incurred by our advisor in providing services to us.


As of March 31, 2017, we had notes payable totaling an aggregate principal amount of $116,307,000. For more information on our outstanding indebtedness, see Note 6 (Notes Payable, net) to the consolidated financial statements included in this report.





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The following is a summary of our contractual obligations as of March 31, 2017, in thousands:


Contractual Obligations

Total

2017

2018-2019

2020-2021

Thereafter

Long-term debt obligations (1)

$      116,307

$       31,648

$      31,351

$       11,901

$       41,407

Interest payments on outstanding debt obligations (2)

36,103

2,057

5,318

5,065

23,663

Purchase obligations (3)

-

-

-

-

-

Total

$      152,410

$       33,705

$      36,669

$       16,966

$       65,070


(1)

Amounts include principal payments only.

(2)

Projected interest payments are based on the outstanding principal amounts and weighted-average interest rates at March 31, 2017.

(3)

Purchase obligations were excluded from contractual obligations as there were no binding purchase obligations as of March 31, 2017.


Off-Balance Sheet Arrangements


     As of March 31, 2017 and December 31, 2016, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Recent Accounting Pronouncements


Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements. See Note 2 to the notes to the accompanying consolidated financial statements.


Related-Party Transactions and Agreements

 

We have entered into agreements with our advisor and its affiliates whereby we have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, our advisor and its affiliates. See Item 13, “Certain Relationships and Related Transactions and Director Independence” in our Annual Report on Form 10-K for the year ended December 31, 2016 and Note 9 (Related Party Transactions) to the consolidated financial statements included in this Quarterly Report for a discussion of the various related-party transactions, agreements and fees.


Review of our Investment Policies

 

Our board of directors, including our independent directors, has reviewed our investment policies as described in this Report and determined that such policies are in the best interests of our stockholders based on the following factors: (1) such policies increase the likelihood that we will be able to acquire a diversified portfolio of income producing properties, thereby reducing risk in our portfolio; (2) our executive officers and directors and the affiliates of our advisor have expertise with the type of real estate investments we seek; (3) there are sufficient property acquisition opportunities with the attributes that we seek; and (4) borrowings should enable us to purchase assets and earn income more quickly, thereby increasing the likelihood of generating income for our stockholders and preserving stockholder capital.


Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in




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some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.


Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this Form 10-Q, as of March 31, 2017, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of 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). In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2017, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported as and when required.


Changes in Internal Control over Financial Reporting


There have been no changes during the quarter ended March 31, 2017, in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financing reporting.





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PART II

OTHER INFORMATION


Item 1.  Legal Proceedings


None.


Item 1A. Risk Factors


None.


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


During the three months ended March 31, 2017, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.


During the three months ended March 31, 2017, we did not fulfill redemption requests nor redeem shares of our common stock pursuant to our share redemption program.



 

 

 

 

 

 



Total Number of

Shares Requested to

be Redeemed (1)




Total Number of

Shares Redeemed




Average Price

Paid per Share (2)

Approximate

Dollar Value of

Shares Available

That May Yet Be

Redeemed Under

the Program

January 2017

-

-

-

(3)

February 2017

-

-

-

(3)

March 2017

-

-

-

(3)

 

-

-

-

 


(1) We generally redeem shares in the month following the end of the fiscal quarter in which requests were received.


(2) Pursuant to the share redemption program, we currently redeem shares at prices determined as follows:


a.

For shares that have been held at least one year, the lesser of 90.0% of the price paid to acquire the shares or 90.0% of the offering price of shares in our most recent offering;

b.

For shares that have been held at least two years, the lesser of 92.5% of the price paid to acquire the shares or 92.5% of the offering price of shares in our most recent offering;

c.

For shares that have been held at least three years, the lesser of 95.0% of the price paid to acquire the shares or 95.0% of the offering price of shares in our most recent offering;

d.

For shares that have been held at least four years, the lesser of 97.5% of the price paid to acquire the shares or 97.5% of the offering price of shares in our most recent offering;

e.

Thereafter, the lesser of 100.0% of the price paid to acquire the shares or 90.0% of the net asset value per share, as determined by the board of directors.


Notwithstanding the foregoing, the redemption price for redemptions sought upon a stockholder’s death or disability or upon confinement to a long-term care facility, is available only for stockholders who purchased their shares directly from us or the persons specifically set forth in the share redemption program.





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(3) The number of shares that may be redeemed pursuant to our share redemption program will not exceed (i) 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of the redemption and (ii) those share redemptions that can be funded with proceeds from our distribution reinvestment plan plus, if we had positive net operating cash flow for the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.


On February 9, 2010, our Registration Statement on Form S-11 (File No. 333-154750), registering a public offering of up to $250,000,000 in shares of our common stock to the public in our primary offering at a price of $10.00 per share and up to $23,750,000 in shares of common stock to our stockholders pursuant to our distribution reinvestment plan at $9.50 per share, was declared effective by the SEC and we commenced our initial public offering. We terminated our initial public offering on April 25, 2013. As of the termination our initial public offering on April 25, 2013, we had accepted subscriptions for and issued 4,455,678 shares of our common stock, including 162,561 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in offering proceeds of $43,943,731. On July 16, 2013, our Registration Statement on Form S-11 (File No. 333-185336) registering our follow-on public offering of up to $200,000,000 in shares of our common stock to the public at $10.00 per share and up to $19,000,000 in shares of our common stock to our stockholders pursuant to our distribution reinvestment plan at $9.50 per share, was declared effective by the SEC and we commenced our follow-on offering.

 

Effective March 31, 2016, we terminated the offer and sale of shares of our common stock to the public in our follow-on offering. The sale of shares of our common stock to our stockholders pursuant to our distribution reinvestment plan terminated effective as of July 16, 2016. As of March 31, 2017, we had accepted subscriptions for, and issued, 18,574,461 shares of our common stock in our initial public offering and our follow-on offering, including 1,216,240 shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $181,336,480.


As of March 31, 2017, we had incurred selling commissions, dealer manager fees and organization and other offering costs in our initial public offering and our follow-on offering in the amounts set forth in the tables below (all figures in thousands). D.H. Hill Securities, LLLP, the dealer manager for our public offerings, reallowed all of the selling commissions and a portion of the dealer manager fees to participating broker-dealers.


Initial Public Offering:

Type of Expense

Amount

Estimated/Actual

Selling commissions and dealer manager fees

$          2,942

Actual

Finders’ fees

-

Expenses paid to or for underwriters

-

Other organization and offering costs

472

Actual

Total expenses

$           3,414

 


Follow-On Offering:

Type of Expense

Amount

Estimated/Actual

Selling commissions and dealer manager fees

$          10,248

Actual

Finders’ fees

-

Expenses paid to or for underwriters

-

Other organization and offering costs

2,548

Actual

Total expenses

$          12,796

 


As of March 31, 2017, the net offering proceeds to us from our initial public offering and our follow-on offering, after deducting the total expenses incurred as described above, were $153,572,000, excluding $11,554,000 in offering proceeds from shares of our common stock issued pursuant to our distribution reinvestment plan.

 

We intend to use substantially all of the remaining net proceeds from our public offerings to continue to invest in a portfolio of real properties. As of March 31, 2017, we had used $128,264,000 of the net proceeds from our




41






public offerings, plus debt financing, to purchase our 18 investments in commercial properties. As of March 31, 2017, we had paid $6,013,000 of acquisition fees to our advisor.

 

As of March 31, 2017, we owned 1,561,523 share of the common stock of Hartman Income REIT, Inc., an affiliate of the Company for $8,978,000.


Item 3. Defaults Upon Senior Securities


None.


Item 4.  Mine Safety Disclosures


Not applicable.


Item 5. Other Information


None.


Item 6.  Exhibits


 

 

 

Exhibit

 

Description

3.1

 

First Articles of Amendment to Third Amended and Restated Articles of Incorporation of Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K filed on April 12, 2012)

3.2

 

Third Amended and Restated Articles of Incorporation of Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 1 to the Company’s registration statement on Form 8-A (SEC File No. 000-53912) filed on March 22, 2010)

3.3

 

Bylaws of Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 2 to the Company’s registration statement on Form 8-A (SEC File No. 000-53912) filed on March 22, 2010)

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)


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





42






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.

 

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

 

Date: May 22, 2017                                                        

              By: /s/ Allen R. Hartman

Allen R. Hartman,

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)


Date: May 22, 2017                                               

              By: /s/ Louis T. Fox, III

Louis T. Fox, III,

Chief Financial Officer,

(Principal Financial and Principal Accounting Officer)





43