The following discussion and analysis should be read in conjunction with our
accompanying consolidated financial statements and the notes thereto.
As used herein, the terms "we," "our," "us," and "Company" refer to
Strategic Realty Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., a Delawarelimited partnership, which we refer to as our "operating partnership" or "OP", and to their respective subsidiaries. References to "shares" and "our common stock" refer to the shares of our common stock. 21
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Special Note Regarding Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as "may," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology. The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements: •The adverse effect of the public health crisis of the novel coronavirus disease (COVID-19) pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market, in particular with respect to retail commercial properties and the global economy and financial markets. •Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor's compensation arrangements with us and conflicts in allocating time among us and other programs and business activities. •We are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected. •We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders. •All our assets are concentrated in one state and in urban retail properties, any adverse economic, real estate or business conditions in this geographic area or in the urban retail market, including with respect to the current economic slowdown, the rising interest rate environment and inflation could affect our operating results and our ability to pay distributions to our stockholders. •Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders. •Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2021(the "2021 Annual Report on Form 10-K"). Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result 22
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of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of the 2021 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.
We are a
Marylandcorporation that was formed on September 18, 2008, to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development, one of which was substantially completed during the year ended December 31, 2020. We have elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we have operated and intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership. Since our inception, our business has been managed by an external advisor. We do not have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delawarelimited liability company (the "Advisor") pursuant to an advisory agreement with the Advisor (the "Advisory Agreement") initially executed on August 10, 2013, and subsequently renewed every year through 2022. The current term of the Advisory Agreement terminates on August 9, 2023. The Advisor is an affiliate of PUR Management LLC, which is an affiliate of L3 Capital, LLC. L3 Capital, LLCis a real estate investment firm focused on institutional quality, value-add, prime urban retail and mixed-use investment within first tier U.S.metropolitan markets.
Impact of COVID-19 and Market Outlook
Given the ongoing workforce shortages, global supply chain bottlenecks and shortages, recent macroeconomic trends, including inflation and rising interest rates, we continue to monitor and address risks related to the COVID-19 pandemic and the general state of the economy on our portfolio and retail tenants. As of
September 30, 2022, all of our tenants have resumed paying rent and while we believe that the COVID-19 pandemic has and could continue to negatively impact our financial condition and results of operations, including but not limited to, declines in real estate rental revenues, the inability to sell certain properties at a favorable price, and a decrease in construction and leasing activity, we believe that the initial impacts from the pandemic to our portfolio and tenants have started to subside. During the nine months ended September 30, 2022, inflation in the United Stateshas accelerated and is currently expected to continue at an elevated level in the near-term. Rising inflation could have an adverse impact on our variable rate debt or the refinancing of our fixed rate debt, as well as general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue. In addition, our retail tenants may experience decreased revenue as a result of rising inflation and reduced consumer spending. The Federal Reservehas recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022. As a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate swaps or other protection agreements, such increases may result in higher debt service costs, which will adversely affect our cash flows. We believe that the actions we have taken to improve our financial position and maximize our liquidity, as described further in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K, will continue to mitigate the impact to our cash flow caused by the current macroeconomic trends. 23
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September 30, 2022, our wholly-owned property portfolio included six retail properties, excluding a land parcel, which we refer to as "our properties" or "our portfolio," comprising an aggregate of approximately 27,000 square feet of multi-tenant, commercial retail space located in one state. We purchased our properties for an aggregate purchase price of approximately $35.3 million. As of September 30, 2022approximately 88% of our wholly-owned real estate investments were leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 6.0 years. As of December 31, 2021, approximately 86% of our wholly-owned real estate investments were leased (based on rentable square footage as of December 31, 2021), with a weighted-average remaining lease term of approximately 6.3 years. (dollars in thousands) Effective Original Rentable Square Percent Rent (3) Date Purchase Property Name (1) Location Feet Leased (2) (per Sq. Foot) Acquired Price Debt (4)
Wholly-owned Real Estate Investments
400 Grove Street San Francisco, CA 2,000 100 %
$ 48.006/14/2016 $ 2,890 $ 1,4508 Octavia Street San Francisco, CA 3,640 47 % 65.31 6/14/2016 2,740 1,500 Fulton Shops San Francisco, CA 3,758 66 % 58.43 7/27/2016 4,595 2,200 450 Hayes San Francisco, CA 3,724 100 % 98.78 12/22/2016 7,567 3,650 388 Fulton San Francisco, CA 3,110 100 % 61.96 1/4/2017 4,195 2,300 Silver Lake Los Angeles, CA 10,497 100 % 84.25 1/11/2017 13,300 6,900 26,729 35,287 18,000
Real Estate Investments owned through Joint Ventures Held for Sale
3032 Wilshire Joint
Santa Monica, CA 12,208 42 % 96.39 3/8/2016 13,500 12,711 38,937
$ 48,787 $ 30,711
(1)List of properties does not include a residual parcel at
(2)Percentage is based on leased rentable square feet of each property as of
(3)Effective rent per square foot is calculated by dividing the annualized
September 30, 2022contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries.
(4) Debt represents the outstanding balance as of
excludes reclassification of approximately
costs, net, as a contra-liability. For more information on our financing, refer
to Note 7. “Notes Payable, Net” to our condensed consolidated financial
statements included in this Quarterly Report.
September 30, 2022, we had one property under development in Hollywood, California. This development project is still in the planning phase and construction has not commenced. During the third quarter of 2022 we expensed approximately $280 thousandin costs included in the condensed consolidated statement of operations. 24
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Results of Operations
Comparison of the three and nine months ended
three and nine months ended
The following table provides summary information about our results of operations for the three and nine months ended
September 30, 2022and 2021 (amounts in thousands): Three Months Ended September 30, 2022 2021 $ Change % Change
Rental revenue and reimbursements
Operating and maintenance expenses 273 469
(196) (41.8) %
General and administrative expenses 290 373
(83) (22.3) %
Depreciation and amortization expenses 254 351
(97) (27.6) %
Interest expense 852 319
533 167.1 %
Loss on early lease termination - 624
(624) (100.0) %
Loss on impairment of real estate 152 5,628
(5,476) (97.3) % Operating loss (1,087) (7,247) 6,160 (85.0) % Net loss
$ (1,087) $ (6,976) $ 6,160(88.3) % Nine Months Ended September 30, 2022 2021 $ Change % Change
Rental revenue and reimbursements
Operating and maintenance expenses 1,323 1,747
(424) (24.3) %
General and administrative expenses 1,238 1,184
54 4.6 %
Depreciation and amortization expenses 846 1,068
(222) (20.8) %
Interest expense 1,484 947
537 56.7 %
Loss on early lease termination 190 624
(434) (69.6) %
Loss on impairment of real estate 6,035 5,628
407 7.2 % Operating loss (8,927) (9,328) 401 (4.3) % Other income, net - 422 (422) (100.0) % Net loss
$ (8,927) $ (8,906) $ (21)0.2 %
Our results of operations for the three and nine months
not necessarily indicative of those expected in future periods.
The increase in revenue during the three and nine months ended
September 30, 2022, compared to the same periods in 2021, was primarily due to the receipt of key money from a new tenant as part of new lease agreement at the 388 Fulton property and new tenants paying rent at the Silverlake and Wilshire Joint Venture properties.
Operating and maintenance expenses
Operating and maintenance expenses decreased during the three and nine months ended
September 30, 2022, compared to the same periods in 2021, primarily due to lower bad debt reserves, write-off of uncollectible rents and lower consulting fees related to Wilshire Joint Venture Property development. Increase partially offset by higher security costs and tenant legal costs.
General and administrative expenses
General and administrative expenses decreased during the three months ended
audit and other professional fees and lower asset management fees.
General and administrative expenses increased during the nine months ended
legal fees with the increase partially offset by lower asset management fees.
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Depreciation and amortization expenses
Depreciation and amortization expenses decreased during the three and nine months ended
September 30, 2022, compared to the same periods in 2021, primarily due to the impairment charge incurred during the year ended December 31, 2021at the Wilshire Joint Venture Property and the suspension of depreciation at the Wilshire Joint Venture Property due to the classification of the property as held for sale in the consolidated balance sheets as of June 30, 2022.
Interest expense remained increased during the three and nine months ended
September 30, 2022, compared to the same period in 2021, primarily due to draw downs on the Unsecured loan from PUR Holdings Lender, LLC, an affiliate of the Advisor. Additional increase due to increase in the Secured Overnight Financing Rate resulting in a higher interest rate on the SRT Loan.
Loss on early lease termination
Loss on early lease termination during the three and nine months ended
September 30, 2022related to the disposal of assets due to the termination of a tenant lease at the 388 Fulton property.
Loss on early lease termination during the three and nine months ended
September, 2021 related to the disposal of assets due to the termination of
tenant leases at the 400 Grove, 450 Hayes, and Wilshire properties.
Loss on impairment of real estate
Loss on impairment of real estate during the three months ended
September 30, 2022, related to the Wilshire Joint Venture of approximately $0.2 million. Loss on impairment of real estate during the nine months ended September 30, 2022, related to the Wilshire Joint Venture and Sunset & Gardner Joint Venture of approximately $2.6 millionand $3.5 million, respectively.
Loss on impairment of real estate during the three and nine months ended
Other income, net
Other income, net for the three and nine months ended
consisted of a gain on sale of Shops at
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. Prior to the termination of our initial public offering in
February 2013we used offering proceeds to fund our acquisition activities and our other cash needs. Currently we have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs. As of September 30, 2022, our cash and cash equivalents were approximately $0.5 millionand we had $0.6 millionof restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs). Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our "charter," we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of September 30, 2022and December 31, 2021, our borrowings were approximately 173.8% and 120.2%, respectively, of the value of our net assets. 26
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The following table summarizes, for the periods indicated, selected items in our
condensed consolidated statements of cash flows (amounts in thousands):
Nine Months Ended September 30, 2022 2021 $ Change Net cash provided by (used in): Operating activities
$ (1,784) $ (1,775) $ (9)Investing activities (1,517) 1,838 (3,355) Financing activities 1,970 (38) 2,008
Net (decrease) increase in cash, cash equivalents and
Cash Flows from Operating Activities
The change in cash flows from operating activities was primarily due to lower provisions for losses on tenant receivables, lower depreciation and amortization expense and lower losses on early lease terminations due to fewer tenants terminating leases during the nine months ended
September 30, 2022as compared to the same period in 2021.
Cash Flows from Investing Activities
Cash flows used by investing activities during the nine months ended
September 30, 2022, primarily consisted of $0.9 millionof additional investment in the Sunset and Gardner Joint Venture and $0.4 millionadditional investment in tenant and building improvements at the Wilshire and Silverlake properties.
Cash flows provided by investing activities during the nine months ended
proceeds from the sale of
additional investment in the Sunset and Gardner Joint Venture.
Cash Flows from Financing Activities
Cash flows provided by financing activities during the nine months ended
September 30, 2022, primarily consisted of proceeds of $2.0 millionfrom a draw down on the Unsecured Loan from PUR Holdings Lender, LLC, an affiliate of the Advisor. Additional cash was provided by construction loan proceeds of approximately $0.2 million. The increase was partially offset by payment of financing costs related to the extensions of the Sunset & Gardner and Wilshire Joint Venture loans. Cash flows used in financing activities during the nine months ended September 30, 2021, primarily consisted of payment of financing costs related to the extension of the Sunset & Gardner loan, partially offset by construction loan proceeds
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses and the payment on our outstanding indebtedness. To date, our cash needs for operations have been funded by cash provided by property operations, the sales of properties, debt refinancing, and the sale of shares of our common stock. We may fund our short-term operating cash needs from operations, from the sales of properties and from debt. On
December 30, 2021, in order to fund our short-term liquidity needs we obtained a $4.0 millionUnsecured Loan from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. On March 15, 2022, we and PUR Holdings Lender, LLC, amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, from December 30, 2022to June 30, 2023, if we provide PUR Holdings Lender, LLC, with notice, pay an extension fee, and no event of default has occurred. On August 2, 2022, PUR Holdings Lender, LLCagreed to an additional six month extension at the option of the Company to extend the maturity date until December 31, 2023. The Unsecured Loan is guaranteed by us. On August 10, 2022, the due diligence period expired under a Purchase and Sale Agreement we entered with an unrelated third-party for the sale of the Wilshire Joint Venture Property located in Santa Monica, Californiafor a sale price of $16.5 million. On October 11, 2022, we consummated the disposition of the Wilshire Joint Venture Property for $16.5 millionin cash, before customary closing and transaction costs, resulting in net cash proceeds of approximately $2.2 million. In connection with the disposition of the Wilshire Joint Venture Property, we repaid the Wilshire Construction Loan in the amount of $12.7 million, which was secured by a first Deed of Trust on the Wilshire Joint Venture Property. The Purchase and Sale 27
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Agreement was entered on
Venture Property was classified as held for sale in the consolidated balance
sheets as of
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments, additional investment in our development projects and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 7. "Notes Payable, Net" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs could be affected by the continued effects of the COVID-19 pandemic, the current economic slowdown, the rising interest rate environment and inflation (or the public perception that any of these events may continue). The full impact of these events on our rental revenue and, as a result, future cash from operations cannot be determined at present. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that we may be able to obtain, will be sufficient to fund our working capital needs and debt obligations for at least the next twelve months and beyond. However, this forward-looking statement is subject to a number of uncertainties, including with respect to the duration of the COVID-19 pandemic, and the current economic environment and there can be no guarantee that we will be successful with our plan. Moreover, over the long term, if our cash flow from operations does not increase from current levels, we may have to address a liquidity deficiency. We are actively exploring options should cash flow from operations not sufficiently improve, including a sale of one or more assets that are not generating positive cash flow.
Recent Financing Transactions
Multi-Property Secured Financing
secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on our five
San Franciscoassets ( Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and 388 Fulton Street) as well as our Silverlake Collection located in Los Angeles. The SRT Loan matures on January 9, 2023. We have an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. We have the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. As of September 30, 2022, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating Secured Overnight Financing Rate ("SOFR") rate loan which bears interest at 30-day SOFR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity. Pursuant to the SRT Loan, we must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SECfilings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on our liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates.
In connection with the SRT Loan, we executed customary non-recourse carveout and
environmental guaranties, together with limited additional assurances with
regard to the condominium structures of the
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Loans Secured by Properties
May 7, 2019, we refinanced and repaid our financing with Lone Oak Fund, LLCwith a new construction loan from ReadyCap Commercial, LLC(the "Lender") (the "Wilshire Construction Loan"). As of September 30, 2022, the Wilshire Construction Loan had a principal balance of approximately $12.7 million, with future funding available up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. On October 11, 2022, we consummated the disposition of the Wilshire Joint Venture Property for $16.5 millionin cash, before customary closing and transaction costs. In connection with the disposition of the Wilshire Joint Venture Property, we repaid the Wilshire Construction Loan in the amount of $12.7 million, which was secured by a first Deed of Trust on the Wilshire Joint Venture Property. We executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of our joint venture partner in the Wilshire Joint Venture (the "Guarantor"), guarantees performance of borrower's obligations under the loan agreement with respect to the completion of capital improvements to the property. We executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. We used working capital funds of approximately $3.1 millionto repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
Loans Secured by
October 29, 2018, we entered into a loan agreement with Lone Oak Fund, LLC(the "Sunset & Gardner Loan"). The Sunset & Gardner Loanhas a principal balance of approximately $8.7 million, and had an interest rate of 6.9% per annum. At each maturity date in October 2019, 2020 and 2021, in connection with an extension of the loan for an additional twelve-month period, the interest rate of the loan was changed to 6.5%, 7.3% and 7.0%, respectively. On September 7, 2022, the Company extended the Sunset & Gardner Loanfor an additional twelve-month period under the same terms, except an increase in the interest rate to 8.6% per annum. The new maturity date is October 31, 2023. The Sunset & Gardner Loanis secured by a first Deed of Trust on the Sunset & Gardner Property.
Loan with Affiliate
December 30, 2021, we obtained a $4.0 millionunsecured loan (the "Unsecured Loan") from PUR Holdings Lender, LLC, an affiliate of the Advisor. The Unsecured Loan has a term of 12 months with an interest rate of 7.0% per annum, compounding monthly with the ability to pay-off during the term of the loan. The Unsecured Loan requires draw downs in increments of no less than approximately $0.3 million. The Unsecured Loan will be due and payable upon the earlier of 12 months or the termination of the Advisory Agreement by us. The Unsecured Loan is guaranteed by us. On March 15, 2022, we and PUR Holdings Lender, LLC, amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, from December 30, 2022to June 30, 2023, if we provide PUR Holdings Lender, LLC, with notice, pay an extension fee, and no event of default has occurred. On August 2, 2022, PUR Holdings Lender, LLCagreed to an additional six month extension at the option of the Company to extend the maturity date until December 31, 2023. As of September 30, 2022the Unsecured Loan had an outstanding balance of approximately $3.0 million.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the "2%/25% Guidelines" unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three and nine months ended
September 30, 2022and 2021, our total operating expenses did not exceed the 2%/25% Guidelines. Our Advisory Agreement provides that the Advisor shall not be required to reimburse to us any operating expenses incurred during a given period that exceed the applicable limit on "Total Operating Expenses" (as defined in the Advisory Agreement) to the extent that such excess operating expenses are incurred as a result of certain unusual and non-recurring factors approved by our board of directors. 29
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The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the
IRSgrants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue
to be paid, from sources other than cash flows from operations.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on
March 27, 2020, our board of directors determined to suspend the payment of any dividend for the quarters ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as of September 30, 2022.
Funds From Operations
Funds from operations ("FFO") is a supplemental non-GAAP financial measure of a real estate company's operating performance.
The National Association of Real Estate Investment Trusts, or "NAREIT", an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions. We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. 30
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Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows (amounts in thousands, except shares and per share amounts): Three Months Ended Nine Months Ended September 30, September 30, FFO 2022 2021 2022 2021 Net loss
$ (1,087) $ (6,976) $ (8,927) $ (8,906)Adjustments: Gain on disposal of assets - - - (422) Depreciation of real estate 205 309 710 932 Amortization of in-place leases and leasing costs 49 42 136 136 Loss on impairment of real estate 152 5,628 6,035 5,628 FFO attributable to common shares and Common Units (1) $ (681)$
FFO per share and Common Unit (1)
Weighted average common shares and units outstanding (1) 10,957,289 10,957,204 10,957,289 10,957,204 (1)Our common units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to common units in the computation of FFO and including the common units together with weighted average shares outstanding for the computation of FFO per share and common unit.
Related Party Transactions and Agreements
We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 11. "Related Party Transactions" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Critical Accounting Policies and Estimates
Our interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the
SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of additional accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2021 Annual Report on Form 10-K.
Venture Property for
transaction costs of
Joint Venture Property, we repaid the construction loan from
first Deed of
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