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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-54376
_________________________________
STRATEGIC REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
_________________________________
Maryland
90-0413866
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
66 Bovet Road, Suite 100
San Mateo, California, 94402
(650) 343-9300
(Address of Principal Executive Offices; Zip Code)
(Registrant’s Telephone Number, Including Area Code)
_________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
ý
Smaller reporting company
ý
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
As of November 5, 2018, there were 10,926,513 shares of the registrant’s common stock issued and outstanding.




STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 



Table of Contents

PART I
FINANCIAL INFORMATION
The accompanying interim unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018, have been prepared by Strategic Realty Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2017, as filed with the SEC on March 23, 2018 (the “2017 Annual Report on Form 10-K”). The interim unaudited condensed consolidated financial statements herein should also be read in conjunction with the Notes to Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, equity, and cash flows reflects all adjustments that, in management’s opinion, are necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.

3

Table of Contents

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
(unaudited)
 
September 30,
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Investments in real estate
 
 
 
Land
$
15,217

 
$
14,020

Building and improvements
32,013

 
30,825

Tenant improvements
1,466

 
1,188

 
48,696

 
46,033

Accumulated depreciation
(3,619
)
 
(2,579
)
Investments in real estate, net
45,077

 
43,454

Properties under development and development costs
 
 
 
Land
25,851

 
25,851

Buildings
574

 
585

Development costs
12,928

 
9,609

Properties under development and development costs
39,353

 
36,045

Cash, cash equivalents and restricted cash
3,148

 
3,902

Prepaid expenses and other assets, net
272

 
200

Tenant receivables, net of $62 and $0 bad debt reserve
791

 
1,007

Investments in unconsolidated joint ventures
3,030

 
2,705

Lease intangibles, net
1,910

 
2,061

Assets held for sale
12,683

 
20,646

Deferred financing costs, net
894

 
1,258

TOTAL ASSETS (1)
$
107,158

 
$
111,278

LIABILITIES AND EQUITY
 
 
 
LIABILITIES
 
 
 
Notes payable, net
$
43,979

 
$
42,223

Accounts payable and accrued expenses
1,775

 
2,006

Amounts due to affiliates
24

 
21

Other liabilities
300

 
387

Liabilities related to assets held for sale
5,963

 
13,017

Below-market lease liabilities, net
386

 
438

Deferred gain on sale of properties to unconsolidated joint venture

 
668

TOTAL LIABILITIES (1)
52,427

 
58,760

Commitments and contingencies (Note 13)


 


EQUITY
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 10,926,513 and 10,988,438 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
111

 
111

Additional paid-in capital
95,717

 
96,097

Accumulated deficit
(42,189
)
 
(44,741
)
Total stockholders’ equity
53,639

 
51,467

Non-controlling interests
1,092

 
1,051

TOTAL EQUITY
54,731

 
52,518

TOTAL LIABILITIES AND EQUITY
$
107,158

 
$
111,278

(1)
As of September 30, 2018 and December 31, 2017, includes approximately $39.9 million and $37.2 million, respectively, of assets related to consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities and approximately $18.5 million and $19.6 million, respectively, of liabilities of consolidated variable interest entities for which creditors do not have recourse to the general credit of the Company. Refer to Note 5. “Variable Interest Entities”.
See accompanying notes to condensed consolidated financial statements.

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Table of Contents

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
(unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Rental and reimbursements
$
1,516

 
$
2,219

 
$
5,103

 
$
7,084

 
 
 
 
 
 
 
 
Expense:
 
 
 
 
 
 
 
Operating and maintenance
660

 
848

 
1,925


2,554

General and administrative
421

 
483

 
1,317


1,478

Depreciation and amortization
483

 
653

 
1,182


2,439

Transaction expense
7

 

 
39


85

Interest expense
147

 
449

 
667


1,505

 
1,718

 
2,433

 
5,130

 
8,061

Operating loss
(202
)
 
(214
)
 
(27
)
 
(977
)
 
 
 
 
 
 
 
 
Other income (loss):
 
 
 
 
 
 
 
Equity in income (loss) of unconsolidated joint ventures
290

 
(19
)
 
245

 
(24
)
Net gain on disposal of real estate
1,293

 

 
3,741

 
9,131

Loss on extinguishment of debt

 

 

 
(80
)
Income (loss) before income taxes
1,381

 
(233
)
 
3,959

 
8,050

Income taxes
5

 
3

 
(19
)

(99
)
Net income (loss)
1,386


(230
)
 
3,940

 
7,951

Net income (loss) attributable to non-controlling interests
29

 
(13
)
 
83

 
293

Net income (loss) attributable to common stockholders
$
1,357

 
$
(217
)
 
$
3,857

 
$
7,658

 
 
 
 
 
 
 
 
Earnings (loss) per common share - basic and diluted
$
0.12

 
$
(0.02
)
 
$
0.35

 
$
0.70

 
 
 
 
 
 
 
 
Weighted average shares outstanding used to calculate earnings (loss) per common share - basic and diluted
10,962,529

 
10,885,095

 
10,976,030

 
10,909,141

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except shares)
(unaudited)
Nine Months Ended September 30, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional
Paid-in Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Non-controlling
Interests
 
Total
Equity
BALANCE — December 31, 2017
10,988,438

 
$
111

 
$
96,097

 
$
(44,741
)
 
$
51,467

 
$
1,051

 
$
52,518

Redemption of common shares
(61,925
)
 

 
(380
)
 

 
(380
)
 

 
(380
)
Quarterly distributions

 

 

 
(1,973
)
 
(1,973
)
 
(42
)
 
(2,015
)
Cumulative effect from change in accounting principle (Note 2)

 

 

 
668

 
668

 

 
668

Net income

 

 

 
3,857

 
3,857

 
83

 
3,940

BALANCE — September 30, 2018
10,926,513

 
$
111

 
$
95,717

 
$
(42,189
)
 
$
53,639

 
$
1,092

 
$
54,731

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE — December 31, 2016
10,938,245

 
$
111

 
$
96,032

 
$
(50,676
)
 
$
45,467

 
$
1,766

 
$
47,233

Conversion of OP units to common shares
162,409

 

 
809

 

 
809

 
(809
)
 

Redemption of common shares
(87,928
)
 

 
(558
)
 

 
(558
)
 

 
(558
)
Quarterly distributions

 

 

 
(1,967
)
 
(1,967
)
 
(66
)
 
(2,033
)
Net income

 

 

 
7,658

 
7,658

 
293

 
7,951

BALANCE — September 30, 2017
11,012,726

 
$
111

 
$
96,283

 
$
(44,985
)
 
$
51,409

 
$
1,184

 
$
52,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional
Paid-in Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Non-controlling
Interests
 
Total
Equity
BALANCE — June 30, 2018
10,963,416

 
$
111

 
$
95,940

 
$
(42,890
)
 
$
53,161

 
$
1,077

 
$
54,238

Redemption of common shares
(36,903
)
 

 
(223
)
 

 
(223
)
 

 
(223
)
Quarterly distributions

 

 

 
(656
)
 
(656
)
 
(14
)
 
(670
)
Net income

 

 

 
1,357

 
1,357

 
29

 
1,386

BALANCE — September 30, 2018
10,926,513

 
$
111

 
$
95,717

 
$
(42,189
)
 
$
53,639

 
$
1,092

 
$
54,731

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE — June 30, 2017
10,868,550

 
$
111

 
$
95,589

 
$
(44,108
)
 
$
51,592

 
$
2,022

 
$
53,614

Conversion of OP units to common shares
162,409

 

 
809

 

 
809

 
(809
)
 

Redemption of common shares
(18,233
)
 

 
(115
)
 

 
(115
)
 

 
(115
)
Quarterly distributions

 

 

 
(660
)
 
(660
)
 
(16
)
 
(676
)
Net loss

 

 

 
(217
)
 
(217
)
 
(13
)
 
(230
)
BALANCE — September 30, 2017
11,012,726

 
$
111

 
$
96,283

 
$
(44,985
)
 
$
51,409

 
$
1,184

 
$
52,593

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
3,940

 
$
7,951

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net gain on disposal of real estate
(3,741
)
 
(9,131
)
Loss on extinguishment of debt

 
80

Equity in (income) loss of unconsolidated joint ventures
(245
)
 
24

Straight-line rent
(109
)
 
(179
)
Amortization of deferred costs
443

 
404

Depreciation and amortization
1,182

 
2,439

Amortization of above and below-market leases
(15
)
 
(129
)
Bad debt expense
75

 
20

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
(72
)
 
803

Tenant receivables
231

 
288

Accounts payable and accrued expenses
52

 
(118
)
Amounts due to affiliates
3

 
(73
)
Other liabilities
(87
)
 
87

Net cash provided by operating activities
1,657

 
2,466

 
 
 
 
Cash flows from investing activities:
 
 
 
Net proceeds from the sale of real estate
9,314

 
32,398

Acquisition of real estate

 
(17,812
)
Investment in properties under development and development costs
(3,147
)
 
(3,810
)
Improvements, capital expenditures, and leasing costs
(643
)
 
(1,110
)
Investments in unconsolidated joint ventures
(191
)
 

Distributions from unconsolidated joint ventures
111

 
1,998

Net cash provided by investing activities
5,444

 
11,664

 
 
 
 
Cash flows from financing activities:
 
 
 
Redemption of common shares
(380
)
 
(558
)
Quarterly distributions
(2,018
)
 
(2,038
)
Proceeds from notes payable
15,950

 
29,700

Repayment of notes payable
(20,769
)
 
(41,999
)
Loan proceeds from an affiliate

 
2,500

Payment of penalties associated with early repayment of notes payable

 
(1
)
Payment of loan fees from investments in consolidated variable interest entities
(559
)
 
(453
)
Payment of loan fees and financing costs
(79
)
 
(1,314
)
Net cash used in financing activities
(7,855
)
 
(14,163
)
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
(754
)
 
(33
)
Cash, cash equivalents and restricted cash – beginning of period
3,902

 
7,858

Cash, cash equivalents and restricted cash – end of period
$
3,148

 
$
7,825

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities and other cash flow information:
 
 
 
Distributions declared but not paid
$
670

 
$
676

Change in accrued liabilities capitalized to investment in development
(194
)
 
(225
)
Change to accrued mortgage note payable interest capitalized to investment in development
(85
)
 
5

Amortization of deferred loan fees capitalized to investment in development
441

 
367

Cumulative effect from change in accounting principle
668

 

Cash paid for interest, net of amounts capitalized
326

 
1,110

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS
Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008, as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations.
Since the Company’s inception, its business has been managed by an external advisor. The Company has no direct employees and all management and administrative personnel responsible for conducting the Company’s business are employed by its advisor. Currently, the Company is externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year through 2018. The current term of the Advisory Agreement terminates on August 10, 2019. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (the “OP”). During the Company’s initial public offering (“Offering”), as the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. The Company is the sole general partner of the OP. As of both September 30, 2018 and December 31, 2017, the Company owned 97.9% of the limited partnership interests in the OP.
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders, and investments in unconsolidated joint ventures as well as development of properties. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.
The Company invests in and manages 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. The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on grocery anchored multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. During the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development.
As of September 30, 2018, in addition to the development projects, the Company’s portfolio of properties was comprised of 9 properties, including one property held for sale, with approximately 233,000 rentable square feet of retail space located in three states. As of September 30, 2018, the rentable space at the Company’s retail properties was 89% leased.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Regulation S-X.
The interim unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

present fairly the Company’s condensed consolidated financial position, results of operations and cash flows have been included.
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of September 30, 2018 and December 31, 2017, the Company held ownership interests in two unconsolidated joint ventures. Refer to Note 4. “Investments in Unconsolidated Joint Ventures” for additional information. As of September 30, 2018 and December 31, 2017, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 5. “Variable Interest Entities” for additional information.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents represent current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in cash.
Restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders.
In November 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash, which amends (Topic 230), Statement of Cash Flows (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explains the change during the reporting period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 requires adoption using a retrospective transition method. The Company adopted ASU 2016-18 on January 1, 2018. As a result of adopting ASU 2016-18, the Company revised the presentation of cash, cash equivalents and restricted cash on the condensed consolidated balance sheets and condensed consolidated statements of cash flows for all the periods presented. Upon adoption of ASU 2016-18, the Company recorded a decrease of $0.1 million in net cash provided by operating activities and $0.4 million in net cash provided by investing activities for the nine months ended September 30, 2017, related to reclassifying the changes in the restricted cash balance from operating activities and investing activities to the cash, cash equivalents and restricted cash balances on the condensed consolidated statements of cash flows.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statement of cash flows (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
2,835

 
$
3,086

Restricted cash
313

 
816

Total cash, cash equivalents, and restricted cash
$
3,148

 
$
3,902

Revenue Recognition
Revenues include minimum rents, expense recoveries and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased property. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
whether the lease stipulates how a tenant improvement allowance may be spent;
whether the amount of a tenant improvement allowance is in excess of market rates;
whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
whether the tenant improvements are unique to the tenant or general-purpose in nature; and

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

whether the tenant improvements are expected to have any residual value at the end of the lease.
For leases with minimum scheduled rent increases, the Company recognizes income on a straight-line basis over the lease term when collectability is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue amounts which differ from those that are contractually due from tenants on a cash basis. If the Company determines the collectability of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed and paid, and, when appropriate, establishes an allowance for estimated losses.
The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants on an ongoing basis. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. The Company’s straight-line rent receivable (not including receivables on property held for sale), which is included in tenant receivables, net, on the condensed consolidated balance sheets, was approximately $0.5 million at both September 30, 2018 and December 31, 2017.
Certain leases contain provisions that require the payment of additional rents based on the respective tenants’ sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on percentage of tenants’ sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, insurance and CAM is recognized in the period that the applicable costs are incurred in accordance with the lease agreement.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was added to the ASC under Topic 606 (“ASC 606”). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. As the Company’s revenues are primarily generated through leasing arrangements, the Company’s revenues fall outside the scope of this standard. As part of ASU 2014-09, ASC 610-20, Gains and Losses from Derecognition of Nonfinancial Assets, (“ASC 610-20”) was issued. ASC 610-20 provided guidance for recognizing gains and losses from the transfer of nonfinancial assets, which includes the sale of real estate.
In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses for the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 amends the guidance on nonfinancial assets in ASC 610-20. The amendments clarify that (i) a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset and may include nonfinancial assets transferred within a legal entity to a counter-party, (ii) an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counter-party and de-recognize each asset when a counter-party obtains control of it, and (iii) an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. Further, ASU 2017-05 provides guidance on accounting for partial sales of nonfinancial assets.
Effective January 1, 2018, the Company applied the provisions of ASC 610-20, for gains on sale of real estate, and recognizes 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. As a result of adopting ASC 610-20, using the modified retrospective method, the sales criteria in ASC 360, Property, Plant, and Equipment, no longer applied. As such, the Company recognized $0.7 million of deferred gains related to sales of properties to the SGO Retail Acquisitions Venture, LLC, through a cumulative effect adjustment to accumulated deficit. Other than the cumulative effect adjustment relating to such deferred gains, the adoption of ASC 606 and ASC 610-20 did not have an impact on the Company’s condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform with current period’s presentation as a result of adoption of ASU 2016-18. See Cash, Cash Equivalents and Restricted Cash section above for discussion of the impact of these reclassifications.
Recent Accounting Pronouncements
The FASB issued the following ASUs which could have potential impact to the Company’s condensed consolidated financial statements:
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures upon issuance of ASU 2018-13 and delayed

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

adoption of the additional disclosures until the effective date. The adoption of ASU 2016-13 will not have an impact on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 will require adoption on a retrospective basis. The Company adopted ASU 2016-15 on January 1, 2018. Adoption of ASU 2016-15 did not have an impact on the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Adjustments resulting from adopting ASU 2016-13 shall be applied through a cumulative-effect adjustment to retained earnings. The adoption of ASU 2016-13 will not have an impact on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the consolidated balance sheet and disclose key information about leasing arrangements. The guidance retains a distinction between finance leases and operating leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous guidance. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB also issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”). ASU 2018-10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements to Topic 842, Leases (“ASU 2018-11”) to amend ASU 2016-02, which would provide lessors with a practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease component, if certain criteria are met. The amendments in this guidance as well as ASU 2018-10 and ASU 2018-11 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company believes that the adoption of ASU 2016-02 will not change the accounting for operating leases on its condensed consolidated financial statements. The Company expects to utilize the practical expedients proposed in ASU 2018-11 as part of its adoption of ASU 2016-02.
3. REAL ESTATE INVESTMENTS
Sales of Properties
On July 17, 2018, the Company consummated the disposition of Ensenada Square, located in Arlington, Texas, for a sales price of approximately $5.8 million in cash. The Company used the net proceeds from the sale of Ensenada Square to repay $5.3 million of the outstanding balance on its line of credit. The disposition of Ensenada Square resulted in a gain of $1.3 million, which was included on the Company’s condensed consolidated statement of operations.
On June 21, 2018, the Company consummated the disposition of a portion of Topaz Marketplace, located in Hesperia, California, for a sales price of approximately $4.2 million in cash. The Company used the net proceeds from the sale of a portion of Topaz Marketplace to repay $4.0 million of the outstanding balance on its line of credit. The disposition of a portion of Topaz Marketplace resulted in a gain of $2.4 million, which was included on the Company’s condensed consolidated statement of operations.
The sales of the above properties did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and their results of operations were not reported as discontinued operations on the Company’s condensed consolidated financial statements.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following table summarizes net operating income related to Ensenada Square and the disposed portion of Topaz Marketplace, which is included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating income (loss)
$
(17
)
 
$
56

 
$
288

 
$
140

Assets Held for Sale and Liabilities Related to Assets Held for Sale
At September 30, 2018 and December 31, 2017, Florissant Marketplace, located in Florissant, Missouri, was classified as held for sale in the condensed consolidated balance sheets.
Since the sale of this property does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations of this property were not reported as discontinued operations in the Company’s condensed consolidated financial statements. Initially, the Company intends to use the net proceeds from the sale of this property to repay a portion of the outstanding balance on its line of credit.
On September 20, 2018, the Company entered into a Purchase and Sale Agreement with an unrelated third party purchaser (the “Purchaser”) for the sale of Florissant Marketplace. The contractual sale price of Florissant Marketplace is approximately $16.6 million. Pursuant to the Purchase and Sale Agreement, the Purchaser would be obligated to purchase the property and the Company would be obligated to sell the property only after satisfaction of agreed upon closing conditions. There can be no assurance that the Company will complete the sale.
As of September 30, 2018, Shops at Turkey Creek, located in Knoxville, Tennessee, no longer met certain criteria to be classified as held for sale. As such, all the related assets, net of depreciation, and liabilities were recorded within the relevant categories in the condensed consolidated balance sheets. Depreciation catch up of approximately $80 thousand was recorded upon the assets being placed back in service.
The Company’s condensed consolidated statements of operations include net operating income of approximately $0.3 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $0.9 million and $0.1 million for the nine months ended September 30, 2018 and 2017, related to the assets held for sale.
At December 31, 2017, Florissant Marketplace, Ensenada Square and Shops at Turkey Creek were classified as held for sale in the consolidated balance sheet.
The major classes of assets and liabilities related to assets held for sale included in the condensed consolidated balance sheets are as follows (amounts in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Investments in real estate
 
 
 
Land
$
2,817

 
$
5,248

Building and improvements
11,671

 
17,522

Tenant improvements
596

 
1,189

 
15,084

 
23,959

Accumulated depreciation
(3,596
)
 
(5,178
)
Investments in real estate, net
11,488

 
18,781

Tenant receivables, net
187

 
248

Lease intangibles, net
1,008

 
1,617

Assets held for sale
$
12,683

 
$
20,646

LIABILITIES
 
 
 
Notes payable
$
4,056

 
$
10,749

Below-market lease intangibles, net
1,907

 
2,268

Liabilities related to assets held for sale
$
5,963

 
$
13,017


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Amounts above are being presented at their carrying value, which the Company believes to be lower than their estimated fair value less costs to sell.
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The following table summarizes the Company’s investments in unconsolidated joint ventures as of September 30, 2018 and December 31, 2017 (amounts in thousands):
 
 
 
 
Ownership Interest
 
Investment
Joint Venture
 
Date of Investment
 
September 30,
2018
 
December 31,
2017
 
September 30,
2018
 
December 31,
2017
SGO Retail Acquisitions Venture, LLC
 
3/11/2015
 
19
%
 
19
%
 
$
1,084

 
$
978

SGO MN Retail Acquisitions Venture, LLC
 
9/30/2015
 
10
%
 
10
%
 
1,946

 
1,727

Total
 
 
 
 
 
 
 
$
3,030

 
$
2,705

The Company’s off-balance sheet arrangements consist primarily of investments in the joint ventures as set forth in the table above. The joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture members, and do not represent a liability of the members other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of September 30, 2018 and December 31, 2017, the Company has provided carve-out guarantees in connection with the two aforementioned unconsolidated joint ventures; in connection with those carve-out guarantees, the Company has certain rights of recovery from the joint venture members.
5. VARIABLE INTEREST ENTITIES
The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in (i) the Sunset & Gardner Joint Venture (formerly known as Gelson’s Joint Venture) and (ii) the 3032 Wilshire Joint Venture (“Wilshire Joint Venture”). The Company has consolidated the accounts of these variable interest entities.
On April 27, 2018, the Company made an additional contribution of $0.8 million to the Sunset & Gardner Joint Venture.
On April 23, 2018, the Company made an additional contribution of $1.0 million to the Sunset & Gardner Joint Venture.
On March 21, 2018, the Company made an additional contribution of $0.9 million to the Wilshire Joint Venture.
The following reflects the aggregate assets and liabilities of the Sunset & Gardner Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of September 30, 2018 and December 31, 2017 (amounts in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Properties under development and development costs:
 
 
 
Land
$
25,851

 
$
25,851

Buildings
574

 
585

Development costs
12,928

 
9,609

Properties under development and development costs
39,353

 
36,045

Cash, cash equivalents and restricted cash
526

 
1,099

Prepaid expenses and other assets, net
12

 
9

Lease intangibles, net
4

 

TOTAL ASSETS (1)
$
39,895

 
$
37,153

 
 
 
 
LIABILITIES
 
 
 
Notes payable, net (2)
$
18,248

 
$
19,116

Accounts payable and accrued expenses
199

 
478

Amounts due to affiliates
8

 
9

Other liabilities
9

 
9

TOTAL LIABILITIES
$
18,464

 
$
19,612


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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

(1)
The assets of the Sunset & Gardner Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.
(2)
As of September 30, 2018 and December 31, 2017, includes reclassification of approximately $0.2 million and $0.1 million, respectively, of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the consolidated joint ventures are not guaranteed by the Company.
6. FUTURE MINIMUM RENTAL INCOME
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2018, the leases at the Company’s properties, excluding properties classified as held for sale, have remaining terms (excluding options to extend) of up to 13.2 years with a weighted-average remaining term (excluding options to extend) of approximately 6.1 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying condensed consolidated balance sheets and totaled approximately $0.2 million as of both September 30, 2018 and December 31, 2017.
As of September 30, 2018, the future minimum rental income from the Company’s properties under non-cancelable operating leases, excluding properties classified as held for sale, was as follows (amounts in thousands):
Remainder of 2018
$
659

2019
2,691

2020
2,533

2021
2,270

2022
2,256

Thereafter
9,935

Total
$
20,344

7. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of September 30, 2018 and December 31, 2017, the Company’s acquired lease intangibles and below-market lease liabilities were as follows (amounts in thousands):
 
Lease Intangibles
 
Below-Market Lease Liabilities
 
September 30,
2018
 
December 31,
2017
 
September 30,
2018
 
December 31,
2017
Cost
$
2,973

 
$
2,783

 
$
(526
)
 
$
(571
)
Accumulated amortization
(1,063
)
 
(722
)
 
140

 
133

Total
$
1,910

 
$
2,061

 
$
(386
)
 
$
(438
)

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The Company’s amortization of lease intangibles and below-market lease liabilities for the three and nine months ended September 30, 2018 and 2017, were as follows (amounts in thousands): 
 
Lease Intangibles
 
Below-Market Lease Liabilities
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Amortization
$
(156
)
 
$
(164
)
 
$
18

 
$
40

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Intangibles
 
Below-Market Lease Liabilities
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Amortization
$
(314
)
 
$
(761
)
 
$
51

 
$
176

 
8. NOTES PAYABLE, NET
Line of Credit
The Company’s line of credit is a revolving credit facility with an initial maximum aggregate commitment of $30.0 million. Effective February 15, 2017, the Company’s line of credit was refinanced to increase the maximum aggregate commitment under the credit facility from $30.0 million to $60.0 million. The credit facility matures on February 15, 2020. Each loan made pursuant to the credit facility will be either a LIBOR rate loan or a base rate loan, at the election of the Company, plus an applicable margin, as defined. Monthly payments are interest only with the entire principal balance and all outstanding interest due at maturity. The Company will pay the lender an unused commitment fee, quarterly in arrears, which will accrue at 0.30% per annum, if the usage under the the Company’s line of credit is less than or equal to 50% of the line of credit amount, and 0.20% per annum if the usage under the Company’s line of credit is greater than 50% of the line of credit amount. The Company is providing a guaranty of all of its obligations under the Company’s line of credit and all other loan documents.
As of September 30, 2018 and December 31, 2017, the Company’s line of credit had an outstanding principal balance of $25.7 million and $23.1 million, respectively. These balances exclude $4.1 million and $10.7 million which have been classified as held for sale as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, the Company’s line of credit was secured by Topaz Marketplace, 8 Octavia Street, 400 Grove Street, the Fulton Shops, 450 Hayes, 388 Fulton, Silver Lake, Florissant Marketplace, and The Shops at Turkey Creek.
Mortgage Loans Secured by Properties Under Development
During the three months ended September 30, 2018, the Company refinanced and repaid its initial financing (outstanding balance of $8.5 million at the time of refinancing) with a new loan from Lone Oak Fund LLC (the “Wilshire Loan”). The Wilshire Loan has a principal balance of approximately $8.8 million, and bears an interest rate of 6.9% per annum, payable monthly, commencing on November 1, 2018. The Wilshire Loan is scheduled to mature on September 30, 2019. The Wilshire Loan is secured by, a first Deed of Trust on the Wilshire property.
In connection with the Company’s investment in the Sunset & Gardner Joint Venture and the acquisition of the Sunset & Gardner Property, the Company has consolidated borrowings of $9.7 million (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan bears interest at a rate of 9.25% plus 30-day LIBOR with a minimum of 9.5% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. Those conditions were not met, but the Company negotiated a six month extension of the term on January 27, 2017 to mature on July 27, 2017. The Company negotiated a nine month extension of the term on July 27, 2017. The extension was scheduled to mature on April 27, 2018. On April 23, 2018, the Company made a mandatory principal payment of $1.0 million. The Company extended the loan, for an additional six months, effective April 26, 2018. The new maturity date was October 27, 2018. On October 29, 2018, the Company refinanced and repaid its initial financing with a new loan from Lone Oak Fund LLC, refer to Note 14. “Subsequent Events” for additional information. The loan is secured by, among other things, a lien on the Sunset & Gardner development project and other joint venture collateral as defined in the loan agreement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of September 30, 2018 (amounts in thousands): 
Remainder of 2018
$
9,700

2019
8,750

2020
29,787

   Total (1)
$
48,237

(1)
Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $0.2 million deferred financing costs, net.
During the three months ended September 30, 2018 and 2017, the Company incurred and expensed approximately $0.1 million and $0.4 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.2 million and $0.1 million, respectively, for each period. Also during the three months ended September 30, 2018 and 2017, the Company incurred and capitalized approximately $1.1 million and $0.8 million, respectively, of interest expense related to the variable interest entities, which included the amortization of deferred financing costs of approximately $0.2 million and $0.1 million for each period.
During the nine months ended September 30, 2018 and 2017, the Company incurred and expensed approximately $0.7 million and $1.5 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.4 million for each period. Also during the nine months ended September 30, 2018 and 2017, the Company incurred and capitalized approximately $2.9 million and $2.5 million, respectively, of interest expense related to the variable interest entities, which included amortization of deferred financing costs of approximately $0.4 million for each period.
As of September 30, 2018 and December 31, 2017, interest expense payable was approximately $0.2 million and $0.3 million, respectively, including an amount related to the variable interest entities of approximately $0.1 million and $0.2 million, respectively, for each period.
9. FAIR VALUE DISCLOSURES
Certain financial assets and liabilities are measured at fair value on a recurring basis. The Company determines fair value using the following hierarchy:
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.
The Company believes the total carrying values reflected on its condensed consolidated balance sheets for cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, amounts due to affiliates, mortgage loans secured by properties under development, and the Company’s line of credit reasonably approximate their fair values due to their short-term nature.
As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.
For both the three and nine months ended September 30, 2018 and September 30, 2017, the Company did not record any impairment losses.
10. EQUITY
 Share Redemption Program
On April 1, 2015, the Company’s board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “SRP”). The SRP was subsequently amended on August 7, 2015 and August 10, 2016.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

On October 5, 2016, the board of directors approved, pursuant to Section 3(a) of the SRP, an additional $0.5 million of funds available for the redemption of shares in connection with the death of a stockholder. 
On August 2, 2017, the board of directors of the Company approved, pursuant to Section 3(a) of the SRP, an additional $1.0 million of funds available for the redemption of shares in connection with the death of a stockholder.
The following table summarizes share redemption activity during the three and nine months ended September 30, 2018 and 2017 (amounts in thousands, except shares):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Shares of common stock redeemed
36,903

 
18,233

 
61,925

 
87,928

Purchase price
$
223

 
$
115

 
$
380

 
$
558

Cumulatively, through September 30, 2018, the Company has redeemed 674,040 shares sold in the Offering and/or its dividend reinvestment plan for $4.9 million.
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.
Under the terms of the amended Key Bank credit facility, the Company may pay distributions to its investors so long as the total amount paid does not exceed 100% of the cumulative Adjusted Funds From Operations plus up to an additional $2.0 million of the Company’s net proceeds from property dispositions, as defined in the amended Company’s line of credit; provided, however, that the Company is not restricted from making any distributions necessary in order to maintain its status as a REIT. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
The following tables set forth the quarterly distributions declared to the Company’s common stockholders and Common Unit holders for the nine months ended September 30, 2018, and the year ended December 31, 2017 (amounts in thousands, except per share amounts):
 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2018
3/31/2018
 
4/30/2018
 
$
0.06

 
$
659

 
$
14

 
$
673

Second Quarter 2018
6/30/2018
 
7/31/2018
 
0.06

 
658

 
14

 
672

Third Quarter 2018
9/30/2018
 
10/31/2018
 
0.06

 
656

 
14

 
670

Total
 
 
 
 
 
 
$
1,973

 
$
42

 
$
2,015

 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2017
3/31/2017
 
4/28/2017
 
$
0.06

 
$
655

 
$
25

 
$
680

Second Quarter 2017
6/30/2017
 
7/31/2017
 
0.06

 
652

 
25

 
677

Third Quarter 2017
9/30/2017
 
10/31/2017
 
0.06

 
660

 
16

 
676

Fourth Quarter 2017
12/31/2017
 
1/31/2018
 
0.06

 
659

 
14

 
673

Total
 
 
 
 
 
 
$
2,626

 
$
80

 
$
2,706

 

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

11. EARNINGS PER SHARE
Earnings per share (“EPS”) is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. There was no unvested stock as of September 30, 2018. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
The following table sets forth the computation of the Company’s basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2018 and 2017 (amounts in thousands, except shares and per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Numerator - basic and diluted
 
 
 
 
 
 
 
Net income
$
1,386

 
$
(230
)
 
$
3,940

 
$
7,951

Net income attributable to non-controlling interests
29

 
(13
)
 
83

 
293

Net income attributable to common shares
$
1,357

 
$
(217
)
 
$
3,857

 
$
7,658

Denominator - basic and diluted
 
 
 
 
 
 
 
Basic weighted average common shares
10,962,529

 
10,885,095

 
10,976,030

 
10,909,141

Common Units (1)

 

 

 

Diluted weighted average common shares
10,962,529

 
10,885,095

 
10,976,030

 
10,909,141

Earnings per common share - basic and diluted
 
 
 
 
 
 
 
Net earnings attributable to common shares
$
0.12

 
$
(0.02
)
 
$
0.35

 
$
0.70

(1)
The effect of 235,194 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive.
12. RELATED PARTY TRANSACTIONS
On August 7, 2013, the Company entered into the Advisory Agreement with the Advisor. The Advisory Agreement with the Advisor was renewed for an additional 12 months, beginning on August 10, 2018. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.
On March 11, 2015, the Company, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC to form the SGO Joint Venture. On September 30, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC to form the SGO MN Joint Venture. For additional information regarding the SGO Joint Venture and the SGO MN Joint Venture, refer to Note 4. “Investments in Unconsolidated Joint Ventures.”
Although paid in full on December 14, 2017, on September 27, 2017, the Company, through the OP, entered into a $2.5 million bridge loan with Glenborough Property Partners, LLC, an affiliate of the Advisor (the “Bridge Loan”). The Bridge Loan was scheduled to mature on March 31, 2018, at which point the outstanding balance of the principal and all accrued and unpaid interest would be due and payable. The Bridge Loan incurred interest at an adjustable rate equal to the KeyBank prime rate. Interest was payable monthly in arrears. The Company had the right to prepay the Bridge Loan at any time in whole or in part without premium or penalty. There were no other loan fees or financing coordination fees paid or payable in connection with this loan. During the year ended December 31, 2017, the Company incurred $23 thousand of interest expense related to the Bridge Loan.



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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Summary of Related Party Fees
The following table sets forth the Advisor related party costs incurred and payable by the Company for the periods presented (amounts in thousands):
 
 
Incurred
 
Payable as of
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
September 30,
 
December 31,
Expensed
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Financing coordination fees
 
$

 
$

 
$
30

 
$

 
$

 
$

Asset management fees
 
187

 
232

 
566

 
667

 

 

Reimbursement of operating expenses
 
35

 
73

 
116

 
173

 

 

Property management fees
 
56

 
81

 
203

 
280

 
24

 
21

Disposition fees
 
79

 

 
133

 
430

 

 

Total
 
$
357

 
$
386

 
$
1,048

 
$
1,550

 
$
24

 
$
21

 
 
 
 
 
 
 
 
 
 
 
 
 
Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees
 
$

 
$

 
$
46

 
$
194

 
$

 
$

Leasing fees
 

 
80

 
4

 
145

 

 

Legal leasing fees
 

 
35

 
8

 
86

 

 

Construction management fees
 
12

 
19

 
17

 
19

 

 

Financing coordination fees
 
44

 
107

 
226

 
814

 

 

Total
 
$
56

 
$
241

 
$
301

 
$
1,258

 
$

 
$

Acquisition Fees
Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. An acquisition fee is capitalized by the Company when the related transaction does not qualify as a business combination; otherwise an acquisition fee is expensed.
Financing Coordination Fees
Under the Advisory Agreement, the Advisor is entitled to receive a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by the Company or the OP and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by the Company or the OP.
Asset Management Fees
Under the Advisory Agreement, the Advisor is entitled to receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments, or (2) the fair market value of the Company’s investments (before non-cash reserves and depreciation) if the board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Reimbursement of Operating Expenses
The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described below) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors.
For the three and nine months ended September 30, 2018 and 2017, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fees
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive property management fees calculated at a maximum of up to 4% of the properties’ gross revenue. The property management agreements with Glenborough have been renewed for an additional 12 months, beginning on August 10, 2018. Property management agreements with Glenborough automatically renew every year, unless expressly terminated.
Disposition Fees
Under the Advisory Agreement, if the Advisor or its affiliates provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, the Advisor or its affiliates may be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold.
Leasing Fees
Under the property management agreements, Glenborough is entitled to receive a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.
Legal Leasing Fees
Under the property management agreements, Glenborough is entitled to receive a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.
Construction Management Fees
In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and is entitled to receive a fee equal to 5% of the hard costs for the project in question.
Related-Party Fees Paid by the Unconsolidated Joint Ventures
The unconsolidated joint ventures are party to certain agreements with Glenborough for services related to the investment of funds and management of the joint ventures’ investments, as well as the day-to-day management, operation and maintenance of the properties owned by the joint ventures. The joint ventures pay fees to Glenborough for these services. For the three months ended September 30, 2018 and 2017, the SGO Joint Venture recognized related party fees and reimbursements of $62 thousand and $58 thousand, respectively. For each of the nine months ended September 30, 2018 and 2017, the SGO Joint Venture recognized related party fees and reimbursements of $0.2 million. For the three months ended September 30, 2018 and 2017, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.1 million and $0.2 million, respectively. For the nine months ended September 30, 2018 and 2017, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.6 million and $0.5 million, respectively.The related-party amounts consist of property management, asset management, leasing commission, legal leasing, construction management fees and salary reimbursements.

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STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

13. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its condensed consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
14. SUBSEQUENT EVENTS
Distributions
On August 9, 2018, the Company’s board of directors declared a third quarter distribution in the amount of $0.06 per share/unit to common stockholders and holders of common units of record as of September 30, 2018. The distribution was paid on October 31, 2018.
Variable Interest Entities
On October 23, 2018, the Company made an additional contribution of approximately $0.2 million to the Wilshire Joint Venture.
On October 26, 2018, the Company made an additional contribution of approximately $1.0 million to the Sunset & Gardner Joint Venture.
Mortgage Loans Secured by Properties Under Development
On October 29, 2018, the Company refinanced its initial financing (outstanding balance of $9.7 million at the time of refinancing) with a new loan from Lone Oak Fund LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and bears an interest rate of 6.9% per annum. The Sunset & Gardner Loan is scheduled to mature on October 31, 2019. The Sunset & Gardner Joint Venture used working capital funds to repay the $1.0 million difference between the new loan and the prior maturing loan.

21



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission, or SEC, on March 23, 2018, which we refer to herein as our “2017 Annual Report on Form 10-K.”
As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock. 
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:
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.
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 2017 Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and

22

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undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 2017 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.

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Overview
We are a Maryland corporation that was formed on September 18, 2008, to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development. 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 2018. The current term of the Advisory Agreement terminates on August 10, 2019. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Property Portfolio
As of September 30, 2018, our property portfolio included 9 retail properties, including one property held for sale, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 233,000 square feet of multi-tenant, commercial retail space located in three states. We purchased our properties for an aggregate purchase price of approximately $66.7 million. As of September 30, 2018 and December 31, 2017, approximately 89% and 96% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately 6.1 years and 7.0 years, respectively.
(dollars in thousands)
 
 
 
Rentable Square
Feet (1)
 
Percent Leased (2)
 
Effective
Rent (3)
(per Sq. Foot)
 
Date
Acquired
 
Original
Purchase
 Price (4) (5)
Property Name
 
Location
 
 
 
 
 
Topaz Marketplace
 
Hesperia, CA
 
43,199

 
80
%
 
$
20.34

 
9/23/2011
 
$
11,880

Shops at Turkey Creek
 
Knoxville, TN
 
16,324

 
61
%
 
44.76

 
3/12/2012
 
4,300

400 Grove Street
 
San Francisco, CA
 
2,000

 
100
%
 
60.00

 
6/14/2016
 
2,890

8 Octavia Street
 
San Francisco, CA
 
3,640

 
47
%
 
43.95

 
6/14/2016
 
2,740

Fulton Shops
 
San Francisco, CA
 
3,758

 
100
%
 
56.78

 
7/27/2016
 
4,595

450 Hayes
 
San Francisco, CA
 
3,724

 
100
%
 
89.82

 
12/22/2016
 
7,567

388 Fulton
 
San Fancisco, CA
 
3,110

 
100
%
 
64.22

 
1/4/2017
 
4,195

Silver Lake
 
Los Angeles, CA
 
10,497

 
100
%
 
64.85

 
1/11/2017
 
13,300

 
 
 
 
86,252

 
 
 
 
 
 
 
51,467

 
 
 
 
 
 
 
 
 
 
 
 
 
Property Held for Sale
 
 
 
 
 
 
 
 
 
 
Florissant Marketplace
 
Florissant, MO
 
146,257

 
95
%
 
10.26

 
5/16/2012
 
15,250

 
 
 
 
232,509

 
 
 
 
 
 
 
$
66,717

(1)
Square feet includes improvements made on ground leases at the property.
(2)
Percentage is based on leased rentable square feet of each property as of September 30, 2018.
(3)
Effective rent per square foot is calculated by dividing the annualized September 2018 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries.
(4)
The purchase price for Shops at Turkey Creek includes the issuance of common units in our operating partnership to the sellers.
(5)
The original purchase price for Topaz Marketplace was reduced to reflect a pad sale during the second quarter of 2018.

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Properties Under Development
As of September 30, 2018, we had two properties under development. The properties are identified in the following table (dollar amounts in thousands):
Properties Under Development
 
Location
 
Estimated
Completion Date
 
Estimated
Expected
Square Feet
 
Debt
Wilshire Property
 
Santa Monica, CA
 
June, 2019
 
12,500

 
$
8,750

Sunset & Gardner Property
 
Hollywood, CA
 
January, 2021
 
37,000

 
9,700

Total
 
 
 
 
 
49,500

 
$
18,450

Unconsolidated Joint Ventures
As of September 30, 2018, our portfolio included investments in two unconsolidated joint ventures, which own, in aggregate, six retail centers, comprising an aggregate of approximately 532,000 square feet and located in two states.
Results of Operations
Comparison of the three and nine months ended September 30, 2018, versus the three and nine months ended September 30, 2017.
The following table provides summary information about our results of operations for the three and nine months ended September 30, 2018 and 2017 (amounts in thousands):
 
Three Months Ended
September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Rental revenue and reimbursements
$
1,516

 
$
2,219

 
$
(703
)
 
(31.7
)%
Operating and maintenance expenses
660

 
848

 
(188
)
 
(22.2
)%
General and administrative expenses
421

 
483

 
(62
)
 
(12.8
)%
Depreciation and amortization expenses
483

 
653

 
(170
)
 
(26.0
)%
Transaction expense
7

 

 
7

 
100.0
 %
Interest expense
147

 
449

 
(302
)
 
(67.3
)%
Operating loss
(202
)
 
(214
)
 
12

 
(5.6
)%
Other income, net
1,583

 
(19
)
 
1,602

 
(8,431.6
)%
Income taxes
5

 
3

 
2

 
66.7
 %
Net income (loss)
$
1,386

 
$
(230
)
 
$
1,616

 
(702.6
)%
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Rental revenue and reimbursements
$
5,103

 
$
7,084

 
$
(1,981
)
 
(28.0
)%
Operating and maintenance expenses
1,925

 
2,554

 
(629
)
 
(24.6
)%
General and administrative expenses
1,317

 
1,478

 
(161
)
 
(10.9
)%
Depreciation and amortization expenses
1,182

 
2,439

 
(1,257
)
 
(51.5
)%
Transaction expense
39

 
85

 
(46
)
 
(54.1
)%
Interest expense
667

 
1,505

 
(838
)
 
(55.7
)%
Operating loss
(27
)
 
(977
)
 
950

 
(97.2
)%
Other income, net
3,986

 
9,027

 
(5,041
)
 
(55.8
)%
Income taxes
(19
)
 
(99
)
 
80

 
(80.8
)%
Net income
$
3,940

 
$
7,951

 
$
(4,011
)
 
(50.4
)%
Our results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of those expected in future periods.

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Revenue
The decrease in revenue during the three and nine months ended September 30, 2018, compared to the same periods in 2017, was primarily due to the sales of Woodland West Marketplace in April 2017, Cochran Bypass in October 2017, Morningside Marketplace in November 2017, a portion of Topaz Marketplace in June 2018, and Ensenada Square in July 2018.
Operating and maintenance expenses 
Operating and maintenance expenses decreased during the three and nine months ended September 30, 2018, when compared to the same periods in 2017, which corresponds to the decrease in revenue.
General and administrative expenses
General and administrative expenses decreased during the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to lower asset management fees, lower audit fees and lower professional tax fees, all corresponding to the decrease in portfolio size.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased during the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to the classification of Florissant Marketplace as held for sale during the fourth quarter of 2017. The sales of a portion of Ensenada Square, Topaz Marketplace, Cochran Bypass and Morningside Marketplace also contributed to the decrease.
Transaction expense
Transaction expense incurred during the nine months ended September 30, 2018, as compared to the same period in 2017 was primarily due to payment of financing fees related to the extension of a loan held by one of our unconsolidated joint ventures.
Interest expense
Interest expense decreased during the three and nine months ended September 30, 2018, compared to the same periods in 2017, due to decreases in debt balances as a result of using the proceeds from property dispositions activities to repay debt.
Other income (loss), net
Other income, net for the three months ended September 30, 2018, primarily consisted of approximately $1.3 million related to the gain on sale of Ensenada Square in July 2018.
Other income, net for the nine months ended September 30, 2018, primarily consisted of approximately $3.7 million related to the gain on sale of a portion of Topaz Marketplace in June 2018 and Ensenada Square in July 2018. Other income, net for the nine months ended September 30, 2017, primarily consisted of approximately $9.1 million related to the gain on sale of Pinehurst Square East in January 2017 and Woodland West Marketplace in April 2017, as well as the recognition of deferred gain resulting from the first quarter of 2017 sale by SGO Retail Acquisitions Venture, LLC (“SGO Joint Venture”) of Aurora Commons.
Income taxes
In addition to various state tax payments, we may from time-to-time incur federal tax, due to our election to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal Revenue Code. A TRS is subject to federal and state income taxes.
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
As of September 30, 2018, our cash and cash equivalents were approximately $2.8 million and our restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover

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reserves and other financing needs) was approximately $0.3 million. For properties with lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.
Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. 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, 2018 and December 31, 2017, our borrowings were approximately 80.7% and 93.7%, respectively, of the carrying value of our net assets.
The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (amounts in thousands):
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
 
$ Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
1,657

 
$
2,466

 
$
(809
)
Investing activities
5,444

 
11,664

 
(6,220
)
Financing activities
(7,855
)
 
(14,163
)
 
6,308

Net decrease in cash, cash equivalents and restricted cash
$
(754
)
 
$
(33
)
 
 
Cash Flows from Operating Activities
The decrease in cash flows from operating activities was primarily due to a significant decrease in deposit balances resulting from the closing of the acquisitions of 388 Fulton and Silver Lake during the first quarter of 2017.
Cash Flows from Investing Activities
Cash flows from investing activities during the nine months ended September 30, 2018, primarily consisted of proceeds from the disposition of a portion of Topaz Marketplace and Ensenada Square of approximately $9.3 million, partially offset by our aggregate additional $3.1 million investments in the Wilshire and Sunset & Gardner Joint Ventures. Cash flows from investing activities during the nine months ended September 30, 2017, primarily consisted of proceeds from the disposition of Pinehurst Square East and Woodland West Marketplace of approximately $32.4 million, partially offset by our aggregate $17.8 million in acquisitions of 388 Fulton and Silver Lake in January 2017.
Cash Flows from Financing Activities
Cash flows used in financing activities during the nine months ended September 30, 2018, primarily consisted of repayment of our debt balances and our quarterly dividend payments of approximately $20.8 million and $2.0 million, respectively, partially offset by proceeds of approximately $16.0 million from proceeds from loans and draws on our line of credit. Cash flows used in financing activities during the nine months ended September 30, 2017, primarily consisted of repayment of our debt balances of approximately $42.0 million, partially offset by proceeds of approximately $29.7 million from draws on our line of credit.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses, the payment of principal and interest on our outstanding indebtedness and distributions. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties and the sale of shares of our common stock. We may fund our short-term operating cash needs from operations, from the sales of properties and from debt.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after

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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 interim unaudited 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.
Mortgage Loans Secured by Properties Under Development
During the three months ended September 30, 2018, we refinanced and repaid our initial financing (outstanding balance of $8.5 million at the time of refinancing) with a new loan from Lone Oak Fund LLC (the “Wilshire Loan”). The Wilshire Loan has a principal balance of approximately $8.8 million, and bears an interest rate of 6.9% per annum, payable monthly, commencing on September 1, 2018. The Wilshire Loan is scheduled to mature on September 30, 2019. The Wilshire Loan is secured by, a first Deed of Trust on the property.
In connection with our investment in the Sunset & Gardner Joint Venture and the acquisition of the Sunset & Gardner Property, we have consolidated borrowings of $9.7 million (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan bears interest at a rate of 9.25% plus 30-day LIBOR with a minimum of 9.5% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. Those conditions were not met, but we negotiated a six month extension of the term on January 27, 2017 to mature on July 27, 2017. We negotiated a nine month extension of the term on July 27, 2017. The extension was scheduled to mature on April 27, 2018. On April 23, 2018, we made a mandatory principal payment of $1.0 million. We extended the loan, for an additional six months, effective April 26, 2018. The new maturity date was October 27, 2018. On October 29, 2018, we refinanced and repaid our initial financing with a new loan from Lone Oak Fund LLC, refer to Note 14. “Subsequent Events” to our interim unaudited condensed consolidated financial statements included in this Quarterly Report on form 10-Q for additional information. The loan is secured by, among other things, a lien on the Sunset & Gardner development project and other joint venture collateral as defined in the loan agreement.
Interim Financial Information
The financial information as of and for the period ended September 30, 2018, included in this Quarterly Report on Form 10-Q is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three and nine months ended September 30, 2018. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete consolidated financial statements. Interim results of operations are not necessarily indicative of the results to be expected for the full year; and such results may be less favorable. Our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2017 Annual Report on Form 10-K.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the nine months ended September 30, 2018 and 2017, our total operating expenses did not exceed the 2%/25% Guidelines.
On August 2, 2018, we entered into the Sixth Amendment to the Advisory Agreement. The Advisory Agreement Amendment 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, including some related to the execution of our investment strategy as directed by our board of directors. 
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.

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REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly 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.
Under the terms of the Key Bank credit facility, we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds specified in the Key Bank credit facility; provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue to be paid, from sources other than cash flows from operations.
The following tables set forth the quarterly distributions declared to our common stockholders and common unit holders for the nine months ended September 30, 2018 and the year ended December 31, 2017 (amounts in thousands, except per share amounts):
 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2018
3/31/2018
 
4/30/2018
 
$
0.06

 
$
659

 
$
14

 
$
673

Second Quarter 2018
6/30/2018
 
7/31/2018
 
0.06

 
658

 
14

 
672

Third Quarter 2018
9/30/2018
 
10/31/2018
 
0.06

 
656

 
14

 
670

Total
 
 
 
 
 
 
$
1,973

 
$
42

 
$
2,015

 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2017
3/31/2017
 
4/28/2017
 
$
0.06

 
$
655

 
$