STRATEGIC REALTY TRUST, INC. The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto included in this Annual Report. Also refer to "Forward Looking Statements" preceding Part I. As used herein, the terms "we," "our," "us," and "Company" refer toStrategic Realty Trust, Inc. , and, as required by context,Strategic Realty Operating Partnership, L.P. , aDelaware limited partnership, which we refer to as our "operating partnership" or "OP", and to their respective subsidiaries. References to "shares" and "our common stock" refer to the shares of our common stock. Overview We are aMaryland corporation that was formed onSeptember 18, 2008 , to invest in and manage a portfolio of income-producing retail properties, located inthe 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. As ofDecember 31, 2022 , our property portfolio included six retail properties, excluding a land parcel, comprising an aggregate of approximately 27,000 square feet of multi-tenant, commercial retail space located inCalifornia . 29
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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 Delaware limited
liability company (the "Advisor") pursuant to an advisory agreement with the
Advisor (the "Advisory Agreement") initially executed on August 10, 2013 , and
subsequently renewed every year through 2022. The current term of the Advisory
Agreement terminates on August 9, 2023 . Effective April 1, 2021 , the Advisor
merged with PUR SRT Advisors LLC , an affiliate of PUR Management LLC , which is
an affiliate of L3 Capital, LLC . L3 Capital, LLC is 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. As a result of
this transaction, PUR SRT Advisors LLC , controls SRT Advisor, LLC .
Our focus in 2023 is exploring strategic alternatives available to us to provide
liquidity to our stockholders. Although we have begun the process of exploring
strategic alternatives, there is no assurance that this process will result in
stockholder liquidity, or provide a return to stockholders that equals or
exceeds our estimated value per share.
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 general state of the economy on our portfolio and retail tenants as well as any continued impact from the COVID-19 pandemic. As ofDecember 31, 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 year endedDecember 31, 2022 , inflation inthe United States has 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. TheFederal Reserve has recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise. 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.
Market Outlook - Real Estate and Real Estate Finance Markets
Data from theU.S. Department of Commerce showed total retail sales in 2022 increased 8.1% from 2021. Total e-commerce sales for 2022 were estimated at$1,034.1 billion , an increase of 7.7% from 2021. E-commerce sales in 2022 accounted for approximately 14.6% of total sales, which was approximately the same as 2021. Despite retreating from a 40-year record annual growth level of 9.1% in June to 7.1% near the end of the year, inflation had a profound impact on consumer sentiment, shopping behavior and bottom-line sales in 2022. According to a report from Jones Lang LaSalle, "climbing food and gas costs bifurcated consumer spending, causing most consumers to focus on necessities and away from discretionary goods during the year. And, while holiday sales increased 7.6% over 2021, the numbers are much tamer when accounting for elevated prices. Consumers are also shifting spending away from goods to services. Data from theBureau of Economic Analysis shows a 3.5% year-over-year growth in real consumer spending on services in November. In contrast, real spending on durable and nondurable goods rose 0.6% and fell 1.5%, respectively." Jones Lang LaSalle also reported preliminary estimates showing single-asset and portfolio sales transaction volumes narrowly exceeded$70 billion across roughly 4,700 deals last year, a 7% increase over both 2021 and 2019. M&A activity saw a return to normalcy from 2021 with three significant entity-level transactions valued at$5.4 billion , down from the$14.3 billion in 2021. Retail real estate lending markets remained difficult with retail being among the least favored property classes, and industrial and multifamily attracting more lender attention. As theFederal Reserve Bank continually increases benchmark interest rates to combat inflation, the cost to borrow money for real estate acquisitions continues to increase, thus threatening underlying values of the real estate. 30
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Jones Lang LaSalle reported retail net absorption reached its highest level in 5 years, which have broadly contributed to solid rent growth in most metro markets. That being noted, theSan Francisco market in which the majority of our properties are located has suffered a 4.6% decline in retail rents from the fourth quarter of 2021 to the fourth quarter of 2022.
2022 Significant Events
Property Dispositions
On
OnDecember 21, 2022 , we consummated the disposition of the Sunset & Gardner Joint Venture Property, located inHollywood, California , for$12.9 million in cash, before customary closing and transaction costs.
Loans Secured by Properties
OnSeptember 14, 2022 , we entered into the Modification and Extension Agreement withReadyCap Commercial, LLC to extend the maturity date of the construction loan related to the Wilshire Joint Venture Property for an additional six-month period under the same terms and conditions. The new maturity date wasNovember 10, 2022 . In connection with the disposition of the Wilshire Joint Venture Property, we repaid the construction loan fromReadyCap Commercial, LLC in the amount of$12.7 million , which loan was secured by a first Deed ofTrust on the Wilshire Joint Venture Property .
Loans Secured by
OnSeptember 7, 2022 , we extended the Sunset &Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 8.6% per annum. The new maturity date isOctober 31, 2023 . In connection with the disposition of the Sunset & Gardner Joint Venture Property, we repaid the loan from Sunset & Gardner loan in the amount of$8.7 million , which loan was secured by a first Deed ofTrust on the Sunset & Gardner Joint Venture Property .
Review of our Policies
Our board of directors, including our independent directors, has reviewed our policies described in this Annual Report and determined that they are in the best interest of our stockholders because: (1) they increase the likelihood that we will be able to successfully maintain and manage our current portfolio of investments; (2) our executive officers, directors and affiliates of our Advisor have expertise with the type of properties in our current portfolio; and (3) the use of leverage has enabled us to acquire income producing assets, thereby increasing the likelihood of generating income for our stockholders.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies and estimates that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Revenue Recognition Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
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•whether the tenant improvements are expected to have any residual value at the end of the lease term.
For leases with minimum scheduled rent increases, we recognize income on a
straight-line basis over the lease term when collectability is reasonably
assured. Recognizing rental income on a straight-line basis for leases results
in reported revenue amounts which differ from those that are contractually due
from tenants. If we determine that collectability of straight-line rents is not
reasonably assured, we limit future recognition to amounts contractually owed
and paid, and, when appropriate, establish an allowance for estimated losses.
We maintain an allowance for doubtful accounts, including an allowance for
straight-line rent receivables, for estimated losses resulting from tenant
defaults or the inability of tenants to make contractual rent and tenant
recovery payments. We monitor the liquidity and creditworthiness of our tenants
on an ongoing basis. For straight-line rent amounts, our assessment is based on
amounts estimated to be recoverable over the term of the lease.
Certain leases contain provisions that require the payment of additional rents
based on the respective tenants' sales volume (contingent or percentage rent)
and substantially all contain provisions that require reimbursement of the
tenants' allocable real estate taxes, insurance and common area maintenance
costs ("CAM"). Revenue based on percentage of tenants' sales is recognized only
after the tenant exceeds its sales breakpoint. Revenue from tenant
reimbursements of taxes, CAM and insurance is recognized in the period that the
applicable costs are incurred in accordance with the lease agreement.
We apply the provisions of Accounting Standards Codification 610-20, Gains and
Losses From the Derecognition of Nonfinancial Assets ("ASC 610-20"), for gains
on sale of real estate, and recognize any gains at the time control of a
property is transferred and when it is probable that substantially all of the
related consideration will be collected.
We adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), as amended by
subsequent ASUs, effective January 1, 2019 , utilizing the practical expedients
described in ASU 2018-11. We elected the lessor practical expedient to not
separate common area maintenance and reimbursement of real estate taxes from the
associated lease for all existing and new leases as the timing and pattern of
payments and associated lease payments are the same. The timing of revenue
recognition remains the same for our existing leases and new leases. Revenues
related to our leases continue to be reported on one line in the presentation
within the statement of operations as a result of electing this lessor practical
expedient. We continue to capitalize our direct leasing costs. These costs are
incurred as a result of obtaining new leases, and renewing leases, and are paid
to our Advisor. Additionally, we are not a lessee of real estate or equipment,
as we are externally managed by our Advisor.
Investments in Real Estate
We evaluate our acquisitions in accordance with ASU No. 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business ("ASU
2017-01") that clarifies the framework for determining whether an integrated set
of assets and activities meets the definition of a business. The revised
framework establishes a screen for determining whether an integrated set of
assets and activities is a business and narrows the definition of a business,
which is expected to result in fewer transactions being accounted for as
business combinations. Acquisitions of integrated sets of assets and activities
that do not meet the definition of a business are accounted for as asset
acquisitions.
Beginning with
Evaluation of business combination or asset acquisition:
We evaluate each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
• Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or
• The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e. revenue generated before and after the transaction).
An acquired process is considered substantive if:
• The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process;
• The process cannot be replaced without significant cost, effort, or delay; or
• The process is considered unique or scarce.
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Generally, we expect that acquisitions of real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets), or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. In asset acquisitions, the purchase consideration, including acquisition costs, is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
Years
Buildings and improvements 5 - 30 years
Tenant improvements 1 - 15 years
Tenant improvement costs recorded as capital assets are depreciated over the
tenant's remaining lease term, which we determined approximates the useful life
of the improvement. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Significant renovations and improvements
that improve or extend the useful lives of assets are capitalized. Acquisition
costs related to asset acquisitions are capitalized in the consolidated balance
sheets.
Impairment of Long-lived Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our investments in real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the real estate and related intangible assets through its undiscounted future cash flows (excluding interest) and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets and liabilities, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that we estimate in this analysis include projected rental rates, capital expenditures, property sales capitalization rates and expected holding period of the property. We evaluate our equity investments for impairment in accordance with ASC Topic 320, Investments -Debt and Securities ("ASC 320"). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. We recorded an impairment loss during the year endedDecember 31, 2022 of approximately$6.0 million related to the operating property and the development property we owned through joint ventures, which was included in our consolidated statement of operations in this Annual Report. For the operating property we recorded a$2.6 million non-cash impairment charge determined using purchase price per the disposition consummated onOctober 11, 2022 , less costs to sell. The non-cash impairment related to the operating property was included in building and improvements in our consolidated balance sheets in this Annual Report. For the development property we recorded a$3.5 million non-cash impairment charge related to development costs. We recorded the non-cash impairment charge as a result of changes in cash flow estimates, which triggered the future estimated undiscounted cash flows to be lower than the net carrying value of the property. The decrease in cash flow projections was primarily due to an adverse change in legal factors including an expiration of entitlements resulting in higher costs to re-entitle the property and proposed zoning changes. Estimates were also impacted by the high inflationary environment, which we believe will result in higher costs to construct the property due to supply chain issues and higher building material costs. We recorded an impairment loss during the year endedDecember 31, 2021 of approximately$6.9 million related to the development project and the operating property we owned through joint ventures, which was included in our consolidated statement of operations in this Annual Report. Refer to Part II, Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " for more information regarding the methodologies used to estimate fair value of the investments in real estate.
Assets Held for Sale
When certain criteria are met, long-lived assets are classified as held for sale and are reported at the lower of their carrying value or their fair value less costs to sell and are no longer depreciated. With the adoption of Accounting Standards Update No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment onApril 30, 2014 , only disposed properties that represent a strategic shift that has (or will have) a major effect on our operations and financial results are reported as discontinued operations. 33
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Fair Value Measurements
Under generally accepted accounting principles ("GAAP"), we are required to
measure or disclose certain financial instruments at fair value on a recurring
basis. In addition, we are required to measure other financial instruments and
balances at fair value on a non-recurring basis (e.g., carrying value of
impaired real estate loans receivable and long-lived assets). Fair value is
defined as the price that would be received upon the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The GAAP fair value framework uses a three-tiered
approach. Fair value measurements are classified and disclosed in one of the
following three categories:
•Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement.
When available, we utilize quoted market prices or other observable inputs (Level 2 inputs), such as interest rates or yield curves, from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a non-binding quoted market price, observable inputs might not be relevant and could require us to use significant judgment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for an asset owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets; or (ii) a present value technique that considers the future cash flows based on contractual obligations discounted by an observed or estimated market rates of comparable liabilities. The use of contractual cash flows with regard to amount and timing significantly reduces the judgment applied in arriving at fair value. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument. We consider the following factors to be indicators of an inactive market (1) there are few recent transactions; (2) price quotations are not based on current information; (3) price quotations vary substantially either over time or among market makers (for example, some brokered markets); (4) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability; (5) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with our estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability; (6) there is a wide bid-ask spread or significant increase in the bid-ask spread; (7) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities; and (8) little information is released publicly (for example, a principal-to-principal market). We consider the following factors to be indicators of non-orderly transactions (1) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions; (2) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant; (3) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced); and (4) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code. To
qualify as a REIT, we must meet certain organizational and operational
requirements, including a requirement to distribute at least 90% of our annual
REIT taxable income to stockholders (which is computed without regard to the
dividends paid deduction or net capital gain and which does not necessarily
equal results of operations as calculated in accordance with GAAP). As a REIT,
we generally will not be subject to federal income tax on income that we
distribute as dividends to our stockholders. If we fail to qualify as a REIT in
any
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taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT. Even if we qualify as a REIT, we may be subject to certain state or local income taxes and toU.S. Federal income and excise taxes on our undistributed income. We evaluate tax positions taken in the consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is "more-likely-than-not" that the tax position will be sustained on examination by taxing authorities. When necessary, deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period's temporary differences (items that are treated differently for tax purposes than for financial reporting purposes). A valuation allowance for deferred income tax assets is provided if all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance is generally included in deferred income tax expense.
Our tax returns remain subject to examination and consequently, the taxability of our distributions is subject to change.
Portfolio Investments
As ofDecember 31, 2022 , our portfolio included six retail properties, excluding a land parcel, comprising an aggregate of approximately 27,000 square feet of single- and multi-tenant, commercial retail space located inCalifornia .
Results of Operations
As ofDecember 31, 2022 and 2021, approximately 88% and 86% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately 5.8 years and 6.3 years, respectively. In 2022 there was one property disposition (the Wilshire Joint Venture property) and one disposition of a property in the pre-development stage (the Sunset & Gardner Joint Venture property). In 2021 there was one property disposition (Shops atTurkey Creek ).
Leasing Information
There were two new leases added in our retail properties during the year endedDecember 31, 2022 . The following table provides information regarding our leasing activity for the year endedDecember 31, 2022 for properties we held as ofDecember 31, 2022 . Total Vacant Total Vacant Rentable Lease Terminations New Leases Rentable Sq. Feet at in 2022 in 2022 Lease Renewals in 2022 Sq. Feet at
Tenant Retention Rate in
December 31, 2021 (Sq. Feet) (Sq. Feet) (Sq. Feet) December 31, 2022 2022
3,794 1,902 2,491 - 3,205 n/a
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Comparison of the year ended
The following table provides summary information about our results of operations
for the years ended
Year Ended
December 31,
2022 2021 $ Change % Change
Rental revenue and reimbursements
Operating and maintenance expenses 1,689 2,082 (393) (18.9) %
General and administrative expenses 1,509 1,335
174 13.0 %
Depreciation and amortization expenses 1,098 1,373
(275) (20.0) %
Interest expense 2,418 1,265 1,153 91.1 %
Loss on early lease termination 190 648 (458) (70.7) %
Loss on impairment of real estate 6,035 6,897 (862) (12.5) %
Operating loss (10,152) (11,169) 1,017 (9.1) %
Other (loss) income, net (1,610) 422
(2,032) (481.5) %
Net loss $ (11,762) $ (10,747) $ (1,015) 9.4 %
Our results of operations for the year ended
Revenue
The increase in revenue during the year endedDecember 31, 2022 , compared to the same period 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 a new tenant having a full year of rent at the Silverlake property.
Operating and maintenance expenses
Operating and maintenance expenses decreased during the year endedDecember 31, 2022 , compared to the same period in 2021, primarily due to lower bad debt reserves. Additional decrease due to the sale of Shops atTurkey Creek in the second quarter of 2021 and the sale of the Wilshire Joint Venture Property development onOctober 11, 2022 .
General and administrative expenses
General and administrative expenses increased during the year endedDecember 31, 2022 , compared to the same period in 2021, primarily due to higher legal and professional fees. This was partially offset by lower asset management fees.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased during the year endedDecember 31, 2022 , compared to the same period in 2021, primarily due to 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 ofJune 30, 2022 and the disposition of the Wilshire Joint Venture Property onOctober 11, 2022 . Interest expense Interest expense increased during the year endedDecember 31, 2022 , compared to the same period in 2021, primarily due to draw downs on the unsecured loan fromPUR 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 impairment of real estate
Loss on impairment during the year ended
Loss on impairment during the year ended
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Other (loss) income, net
Other loss, net for year endedDecember 31, 2022 , consisted of losses on sale of the Wilshire Joint Venture Property and the Sunset & Gardner Joint Venture property of approximately$0.4 million and$1.2 million , respectively. Other income, net for the year endedDecember 31, 2021 , consisted of a gain on sale of Shops atTurkey Creek of approximately$0.4 million .
Liquidity and Capital Resources
Our principal demand for funds is for the payment of operating expenses and interest on our outstanding indebtedness, as well as the payment of distributions to our stockholders. Prior to the termination of our initial public offering inFebruary 2013 we used offering proceeds and debt financing 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. Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from real estate investments is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures, all of which may be adversely affected by the general market conditions impacting commercial real estate and our tenants as discussed above. As ofDecember 31, 2022 , our cash and cash equivalents were approximately$3.1 million and we had$0.4 million of 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 ofDecember 31, 2022 and 2021, our borrowings were approximately 82.6% and 120.2%, respectively, of the value of our net assets.
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (amounts in thousands):
Year Ended
December 31,
2022 2021 $ Change
Net cash provided by (used in):
Operating activities $ (2,833) $ (2,290) $ (543)
Investing activities 26,472 1,220 25,252
Financing activities (22,575) 855 (23,430)Net increase (decrease) in cash, cash equivalents and restricted cash
$ 1,064 $
(215)
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 year endedDecember 31, 2022 as compared to the same period in 2021.
Cash Flows from Investing Activities
Cash flows provided by investing activities during the year endedDecember 31, 2022 , primarily consisted of approximately$28.0 million in proceeds from the sales of the Wilshire Joint Venture Property and the Sunset & Gardner Joint Venture Property, partially offset by$0.8 million of additional investment in the Sunset & Gardner Joint Venture prior to sale. Cash flows provided by investing activities during the year endedDecember 31, 2021 primarily consisted of approximately$3.8 million in proceeds from the sale of Shops atTurkey Creek , partially offset by$1.8 million of additional investment in the Sunset & Gardner Joint Venture. 37
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Cash Flows from Financing Activities
Cash flows used by financing activities during the year endedDecember 31, 2022 , primarily consisted of repayments of$12.7 million ,$8.7 million , and$3.0 million related to our Wilshire Construction Loan (as defined below), Sunset &Gardner Loan (as defined below), and Unsecured Loan (as defined below), respectively. Partially offset by proceeds of$2.0 million from the draw down on the Unsecured Loan fromPUR Holdings Lender, LLC , an affiliate of the Advisor. Cash flows provided by financing activities during the year endedDecember 31, 2021 , primarily consisted of proceeds of$1.0 million from the draw down on the Unsecured Loan fromPUR Holdings Lender, LLC , an affiliate of the Advisor. Partially offset by payment of financing costs related to the extension of the Sunset & Gardner loan and loan fees associated with Unsecured Loan.
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.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for operating expenses, distributions to stockholders, redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs 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 8. "Notes Payable, Net" to our consolidated financial statements included in this Annual Report on Form 10-K 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, the fixed costs associated with managing a public REIT, including the significant cost of corporate compliance with all federal, state and local regulatory requirements applicable to us with respect to our business activities, are substantial. Such costs include, without limitation, the cost of preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports, documents and filings required under the Exchange Act, or other federal or state laws for the general maintenance of our status as a REIT, under the applicable provisions of the Code, or otherwise. Given the size of our portfolio of properties, these costs constitute a significant percentage of our gross income, reducing our net income and cash flow. Moreover, over the long term, if our cash flow from operations does not increase from current levels, whether through increased occupancy or rent rates, we may have to address a liquidity deficiency as our cash flow is not sufficient to cover our current operating expenses. These forward-looking statements are subject to a number of uncertainties, including with respect to the continuing impact of the COVID-19 pandemic, and the current economic environment and there can be no guarantee that we will be successful with our plan.
We are actively exploring options should cash flow from operations not sufficiently improve, including reviewing strategic alternatives available to us to provide liquidity to our stockholders.
Recent Financing Transactions
Multi-Property Secured Financing
On
The SRT Loan is secured by first deeds of trust on our fiveSan Francisco assets (Fulton Shops , 8 Octavia, 400 Grove, 450 Hayes and388 Fulton Street ) as well as our Silverlake Collection located inLos Angeles . The SRT Loan was scheduled to mature onJanuary 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. OnJanuary 18, 2023 , the Company and the SRT Lender extended the maturity date of the SRT Loan for an additional twelve-month period under the same terms and conditions. The new maturity date isJanuary 9, 2024 . We have the right to prepay the SRT Loan in whole at 38
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any time or in part from time to time, as well as 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 ofDecember 31, 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,SEC filings, 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
Loans Secured by Properties
OnMay 7, 2019 , the Company refinanced and repaid its financing fromLoan Oak Fund, LLC with a new construction loan fromReadyCap Commercial, LLC (the "Lender") (the "Wilshire Construction Loan"). The Wilshire Construction Loan had funding available up to a total of approximately$13.9 million , and an interest rate of 1-month LIBOR (with a floor of 2.467%) plus an interest margin of 4.25% per annum, payable monthly. OnSeptember 14, 2022 , the Company entered into the Modification and Extension Agreement with the Lender to extend the maturity date of the Wilshire Construction Loan for an additional six-month period under the same terms and conditions. The new maturity date wasNovember 10, 2022 . OnOctober 11, 2022 , the Company consummated the disposition of the Wilshire Joint Venture Property for$16.5 million in cash, before customary closing and transaction costs. In connection with the disposition of the Wilshire Joint Venture Property, the Company repaid the principal balance of the Wilshire Construction Loan in the amount of$12.7 million , which was secured by a first Deed ofTrust on the Wilshire Joint Venture Property .
Loans Secured by
OnOctober 29, 2018 , the Company entered into a loan agreement withLone Oak Fund, LLC (the "Sunset &Gardner Loan "). The Sunset &Gardner Loan had a principal balance of approximately$8.7 million , and had an initial interest rate of 6.9% per annum. At each maturity date inOctober 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 7.9%, respectively. OnSeptember 7, 2022 , the Company extended the Sunset &Gardner Loan for an additional twelve-month period under the same terms, except an increase of the interest rate to 8.6% per annum. The new maturity date wasOctober 31, 2023 . The Sunset &Gardner Loan was secured by a first Deed ofTrust on the Sunset & Gardner Property . In connection with the disposition of the Sunset & Gardner Joint Venture Property, we repaid the loan from Sunset & Gardner loan in the amount of$8.7 million .
Loan with Affiliate
OnDecember 30, 2021 , we obtained a$4.0 million unsecured loan (the "Unsecured Loan") fromPUR 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. OnMarch 15, 2022 , we andPUR Holdings Lender, LLC , amended the loan agreement to allow for an extension of the maturity date of the Unsecured Loan by six months, fromDecember 30, 2022 toJune 30, 2023 , if we providePUR Holdings Lender, LLC , with notice, pay an extension fee, and no event of default has occurred. OnAugust 2, 2022 ,PUR Holdings Lender, LLC agreed to an additional six month extension at the option of the Company to extend the maturity date untilDecember 31, 2023 . We declined both options to extend the maturity date of the Unsecured Loan. OnDecember 23, 2022 the Company paid off the outstanding balance of$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
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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 years ended
December 31, 2022 and 2021, our total operating expenses did not exceed the
2%/25% Guidelines.
Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless theIRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Distributions
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 regularly evaluates the amount and timing of distributions based on our operational cash needs. In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, onMarch 27, 2020 , our board of directors decided to suspend the payment of any dividend for the quarters endingMarch 31, 2020 , and to reconsider future dividend payments on a quarter by quarter basis. Dividend payments were not reinstated as ofDecember 31, 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.
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Our calculation of FFO attributable to common shares and Common Units and the
reconciliation of net loss to FFO is as follows (amounts in thousands, except
shares and per share amounts):
Year Ended
December 31,
FFO 2022 2021
Net loss $ (11,762) $ (10,747)
Adjustments:
Loss (gain) on disposal of assets 1,610 (422)
Depreciation of real estate 918 1,192
Amortization of in-place leases and leasing costs 180 181
Loss on impairment of real estate 6,035 6,897
FFO attributable to common shares and Common Units (1) $ (3,019) $ (2,899)
FFO per share and Common Unit (1) $ (0.28) $ (0.26)
Weighted average common shares and units outstanding (1) 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 12. "Related Party Transactions" to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Subsequent Events
On
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