UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | ||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
| ¨ | ||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-154975
TNP STRATEGIC RETAIL 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.) | ||
1900 Main Street, Suite 700 Irvine, California, 92614 | (949) 833-8252 | ||
| (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. Yesþx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso¨ Noo¨
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ||||||||
| Accelerated filer | ¨ | |||||||
| Non-accelerated filer | ||||||||
| Smaller reporting company | x | |||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of November 11, 2010,May 6, 2011, there were 2,262,1603,032,467 shares of the Registrant’s common stock issued and outstanding.
INDEX
| Page | ||||||||
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010 | 2 | |||||||
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 | 3 | |||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 42 | ||||||||
| 42 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
2
1
FINANCIAL INFORMATION
The accompanying condensed consolidated unaudited financial statements as of and for the three and nine months ended September 30, 2010,March 31, 2011, have been prepared by TNP Strategic Retail 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 for the year ended December 31, 2009,2010, as filed with the SEC on March 31, 2010, as amended by the Annual Report on Form 10K/A, filed with the SEC on May 17, 2010April 1, 2011 (the “Form 10-K”). The financial statements herein should also be read in conjunction with the notes to the 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, 2010March 31, 2011 are not necessarily indicative of the operating results expected for the full year. The information furnished in ourthe Company’s accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.
3
1
| ITEM 1. | FINANCIAL STATEMENTS |
TNP STRATEGIC RETAIL TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2010 | December 31, 2009 | |||||||
ASSETS | ||||||||
| Cash and cash equivalents | $ | 834,000 | $ | 1,106,000 | ||||
| Prepaid expenses and other assets | 784,000 | 360,000 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $39,000 and $0, respectively | 386,000 | 11,000 | ||||||
| Investments in real estate | ||||||||
| Land | 20,444,000 | 3,080,000 | ||||||
| Building and improvements | 24,674,000 | 6,124,000 | ||||||
| Tenant improvements | 1,716,000 | 656,000 | ||||||
| 46,834,000 | 9,860,000 | |||||||
| Accumulated depreciation | (620,000 | ) | (28,000 | ) | ||||
| Investments in real estate, net | 46,214,000 | 9,832,000 | ||||||
| Lease intangibles, net | 8,613,000 | 2,617,000 | ||||||
| Deferred costs | ||||||||
| Organization and offering | 1,565,000 | 1,425,000 | ||||||
| Financing fees, net | 334,000 | 254,000 | ||||||
| Total deferred costs, net | 1,899,000 | 1,679,000 | ||||||
| Total assets | $ | 58,730,000 | $ | 15,605,000 | ||||
LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 682,000 | $ | 326,000 | ||||
| Amounts due to related parties | 1,728,000 | 1,489,000 | ||||||
| Other liabilities | 290,000 | 12,000 | ||||||
| Acquired below market lease intangibles, net | 2,724,000 | — | ||||||
| Notes payable | 39,904,000 | 10,490,000 | ||||||
| Total liabilities | 45,328,000 | 12,317,000 | ||||||
| Commitments and contingencies | — | — | ||||||
| Equity: | ||||||||
| Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; none issued and outstanding as of September 30, 2010 and December 31, 2009, respectively | — | — | ||||||
| Common stock, $0.01 par value per share; 400,000,000 shares authorized, 2,131,410 and 524,752 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively | 21,000 | 5,000 | ||||||
| Additional paid-in capital | 18,584,000 | 4,512,000 | ||||||
| Accumulated deficit | (5,200,000 | ) | (1,231,000 | ) | ||||
| Total stockholders’ equity | 13,405,000 | 3,286,000 | ||||||
| Noncontrolling interests | (3,000 | ) | 2,000 | |||||
| Total equity | 13,402,000 | 3,288,000 | ||||||
| Total liabilities and equity | $ | 58,730,000 | $ | 15,605,000 | ||||
| March 31, 2011 | December 31, 2010 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Investments in real estate | ||||||||
Land | $ | 23,523,000 | $ | 20,444,000 | ||||
Building and improvements | 32,884,000 | 24,675,000 | ||||||
Tenant improvements | 1,982,000 | 1,723,000 | ||||||
| 58,389,000 | 46,842,000 | |||||||
Accumulated depreciation | (1,443,000 | ) | (1,045,000 | ) | ||||
Total investments in real estate, net | 56,946,000 | 45,797,000 | ||||||
Cash and cash equivalents | 588,000 | 1,486,000 | ||||||
Prepaid expenses and other assets | 567,000 | 674,000 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $178,000 and $147,000 | 587,000 | 563,000 | ||||||
Acquired lease intangibles, net | 9,288,000 | 8,125,000 | ||||||
Deferred costs | ||||||||
Organization and offering | 1,462,000 | 1,571,000 | ||||||
Financing fees, net | 682,000 | 673,000 | ||||||
Total deferred costs, net | 2,144,000 | 2,244,000 | ||||||
TOTAL | $ | 70,120,000 | $ | 58,889,000 | ||||
LIABILITIES AND EQUITY | ||||||||
LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 1,035,000 | $ | 760,000 | ||||
Amounts due to affiliates | 2,041,000 | 1,834,000 | ||||||
Other liabilities | 332,000 | 383,000 | ||||||
Notes payable | 47,795,000 | 39,164,000 | ||||||
Acquired below market lease intangibles, net | 2,740,000 | 2,592,000 | ||||||
Total liabilities | 53,943,000 | 44,733,000 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
EQUITY | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; none issued and outstanding | ||||||||
Common stock, $0.01 par value per share; 400,000,000 shares authorized; 2,802,990 issued and outstanding at March 31, 2011, 2,382,317 issued and outstanding at December 31, 2010 | 28,000 | 24,000 | ||||||
Additional paid-in capital | 24,470,000 | 20,792,000 | ||||||
Accumulated deficit | (8,317,000 | ) | (6,657,000 | ) | ||||
Total stockholders’ equity | 16,181,000 | 14,159,000 | ||||||
Non-controlling interest | (4,000 | ) | (3,000 | ) | ||||
Total equity | 16,177,000 | 14,156,000 | ||||||
TOTAL | $ | 70,120,000 | $ | 58,889,000 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
2
TNP STRATEGIC RETAIL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue: | ||||||||||||||||
| Rental | $ | 1,831,000 | $ | — | $ | 2,747,000 | $ | — | ||||||||
Expenses: | ||||||||||||||||
| General and administrative | 476,000 | 89,000 | 1,155,000 | 89,000 | ||||||||||||
| Acquisition expenses | 492,000 | — | 1,326,000 | — | ||||||||||||
| Operating and maintenance | 719,000 | — | 1,127,000 | — | ||||||||||||
| Depreciation and amortization | 819,000 | — | 1,191,000 | — | ||||||||||||
| Total operating expense | 2,506,000 | 89,000 | 4,799,000 | 89,000 | ||||||||||||
Operating loss | (675,000 | ) | (89,000 | ) | (2,052,000 | ) | (89,000 | ) | ||||||||
Other income and (expense) | ||||||||||||||||
| Interest income | 1,000 | — | 4,000 | — | ||||||||||||
| Interest expense | (712,000 | ) | — | (1,282,000 | ) | — | ||||||||||
| Total other expense | (711,000 | ) | — | (1,278,000 | ) | — | ||||||||||
Net loss | (1,386,000 | ) | (89,000 | ) | (3,330,000 | ) | (89,000 | ) | ||||||||
Net loss attributable to noncontrolling interest | 1,000 | — | 5,000 | — | ||||||||||||
Net loss attributable to stockholders’ | $ | (1,385,000 | ) | $ | (89,000 | ) | $ | (3,325,000 | ) | $ | (89,000 | ) | ||||
Net loss per common share — basic and diluted | $ | (0.76 | ) | $ | (4.01 | ) | $ | (2.69 | ) | $ | (4.01 | ) | ||||
Weighted-average number of common shares outstanding — basic and diluted | 1,837,011 | 22,222 | 1,240,067 | 22,222 | ||||||||||||
| Three Months Ended March 31, 2011 | Three Months Ended March 31, 2010 | |||||||
Revenue: | ||||||||
Rental | $ | 1,854,000 | $ | 298,000 | ||||
Expense: | ||||||||
Operating and maintenance | 839,000 | 161,000 | ||||||
General and administrative | 418,000 | 381,000 | ||||||
Depreciation and amortization | 725,000 | 102,000 | ||||||
Acquisition expenses | 410,000 | 12,000 | ||||||
Interest expense | 680,000 | 221,000 | ||||||
| 3,072,000 | 877,000 | |||||||
Loss before other income (expense) | (1,218,000 | ) | (579,000 | ) | ||||
Other income and expense: | ||||||||
Interest income | 1,000 | 2,000 | ||||||
Net loss | $ | (1,217,000 | ) | $ | (577,000 | ) | ||
Net loss attributable to non-controlling interests | 1,000 | 3,000 | ||||||
Net loss attributable to common stockholders | $ | (1,216,000 | ) | $ | (574,000 | ) | ||
Net loss per share — basic and diluted | $ | (0.48 | ) | $ | (0.81 | ) | ||
Weighted average number of common shares outstanding — basic and diluted | 2,518,786 | 709,573 | ||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
3
TNP STRATEGIC RETAIL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | Additional | |||||||||||||||||||||||||||
| Number of | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | |||||||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Equity | Interests | Equity | ||||||||||||||||||||||
| BALANCE — January 1, 2010 | 524,752 | $ | 5,000 | $ | 4,512,000 | $ | (1,231,000 | ) | $ | 3,286,000 | $ | 2,000 | $ | 3,288,000 | ||||||||||||||
| Issuance of common stock | 1,578,954 | 16,000 | 15,595,000 | — | 15,611,000 | — | 15,611,000 | |||||||||||||||||||||
| Offering costs | — | — | (1,775,000 | ) | — | (1,775,000 | ) | — | (1,775,000 | ) | ||||||||||||||||||
| Issuance of vested and non-vested restricted common stock | 7,500 | — | 67,000 | — | 67,000 | 67,000 | ||||||||||||||||||||||
| Deferred stock compensation | — | — | (7,000 | ) | — | (7,000 | ) | — | (7,000 | ) | ||||||||||||||||||
| Issuance of common stock under the DRIP | 20,204 | — | 192,000 | — | 192,000 | — | 192,000 | |||||||||||||||||||||
| Distributions | — | — | — | (644,000 | ) | (644,000 | ) | — | (644,000 | ) | ||||||||||||||||||
| Net loss | — | — | — | (3,325,000 | ) | (3,325,000 | ) | (5,000 | ) | (3,330,000 | ) | |||||||||||||||||
| BALANCE — September 30, 2010 | 2,131,410 | $ | 21,000 | $ | 18,584,000 | $ | (5,200,000 | ) | $ | 13,405,000 | $ | (3,000 | ) | $ | 13,402,000 | |||||||||||||
(Unaudited)
Number | Par Value | Additional Paid-In Capital | Accumulated Deficit | Stockholders’ Equity | Non- controlling Interest | Total Equity | ||||||||||||||||||||||
BALANCE — December 31, 2010 | 2,382,317 | $ | 24,000 | $ | 20,792,000 | $ | (6,657,000 | ) | $ | 14,159,000 | $ | (3,000 | ) | $ | 14,156,000 | |||||||||||||
Issuance of common stock | 405,765 | 4,000 | 4,012,000 | — | 4,016,000 | — | 4,016,000 | |||||||||||||||||||||
Offering costs | — | — | (492,000 | ) | — | (492,000 | ) | — | (492,000 | ) | ||||||||||||||||||
Deferred stock compensation | — | — | 16,000 | — | 16,000 | — | 16,000 | |||||||||||||||||||||
Issuance of common stock under DRIP | 14,908 | 142,000 | — | 142,000 | — | 142,000 | ||||||||||||||||||||||
Distributions | — | — | — | (444,000 | ) | (444,000 | ) | — | (444,000 | ) | ||||||||||||||||||
Net loss | — | — | — | (1,216,000 | ) | (1,216,000 | ) | (1,000 | ) | (1,217,000 | ) | |||||||||||||||||
BALANCE — March 31, 2011 | 2,802,990 | $ | 28,000 | $ | 24,470,000 | $ | (8,317,000 | ) | $ | 16,181,000 | $ | (4,000 | ) | $ | 16,177,000 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
4
TNP STRATEGIC RETAIL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | ||||||||
| 2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
| Net loss | $ | (3,330,000 | ) | $ | (89,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of deferred financing fees and lease intangibles | 163,000 | — | ||||||
| Depreciation and amortization | 1,191,000 | — | ||||||
| Stock based compensation | 60,000 | — | ||||||
| Allowance for doubtful accounts | 39,000 | |||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (9,000 | ) | (38,000 | ) | ||||
| Accounts receivable | (322,000 | ) | — | |||||
| Accounts payable and accrued expenses | 157,000 | — | ||||||
| Due to related parties | 139,000 | 128,000 | ||||||
| Other liabilities | 397,000 | — | ||||||
| Net cash (used in) provided by operating activities | (1,515,000 | ) | 1,000 | |||||
Cash flows from investing activities: | ||||||||
| Investments in real estate | (16,390,000 | ) | — | |||||
| Net cash used in investing activities | (16,390,000 | ) | — | |||||
Cash flows from financing activities: | — | |||||||
| Proceeds from issuance of common stock | 15,611,000 | — | ||||||
| Distributions | (388,000 | ) | — | |||||
| Payment of offering costs | (1,815,000 | ) | — | |||||
| Proceeds from notes payable | 8,500,000 | |||||||
| Repayment of notes payable | (3,976,000 | ) | — | |||||
| Financing fees | (299,000 | ) | — | |||||
| Increase in restricted cash from subscription proceeds | — | (125,000 | ) | |||||
| Subscription proceeds due to investors | — | 125,000 | ||||||
| Net cash provided by financing activities | 17,633,000 | — | ||||||
Net (decrease) increase in cash and cash equivalents | (272,000 | ) | 1,000 | |||||
Cash and cash equivalents — beginning of period | 1,106,000 | 201,000 | ||||||
Cash and cash equivalents — end of period | $ | 834,000 | $ | 202,000 | ||||
Supplemental disclosure of non-cash financing activities: | ||||||||
| Deferred organization and offering costs accrued | $ | 140,000 | $ | — | ||||
| Common stock issued through distribution reinvestment plan | $ | 192,000 | $ | — | ||||
| Distributions declared and unpaid | $ | 82,000 | $ | — | ||||
| Notes payable assumed upon investment in real estate | $ | 25,140,000 | $ | — | ||||
| Accrued sales commissions and dealer manager fees | $ | 4,000 | $ | — | ||||
| Accrued tenants improvements | $ | 135,000 | $ | — | ||||
Supplemental cash flow disclosures: | ||||||||
| Cash paid for interest | $ | 1,178,000 | $ | — | ||||
| Three Months Ended March 31, | ||||||||
| 2011 | 2010 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,217,000 | ) | $ | (577,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Amortization of deferred financing costs and note payable premium/discount | 65,000 | 66,000 | ||||||
Depreciation and amortization | 725,000 | 102,000 | ||||||
Amortization of above and below market leases | (63,000 | ) | — | |||||
Allowance for doubtful accounts | 45,000 | — | ||||||
Stock based compensation | 16,000 | 13,000 | ||||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other assets | 108,000 | (172,000 | ) | |||||
Accounts receivables | (85,000 | ) | (22,000 | ) | ||||
Deferred costs | 109,000 | |||||||
Accounts payable and accrued expenses | 254,000 | (22,000 | ) | |||||
Amounts due to affiliates | 174,000 | (5,000 | ) | |||||
Other liabilities | (51,000 | ) | 17,000 | |||||
Net cash provided by (used in) operating activities | 80,000 | (619,000 | ) | |||||
Cash flows from investing activities: | ||||||||
Acquired below market leases | 280,000 | — | ||||||
Investments in real estate | (11,529,000 | ) | — | |||||
Acquired lease intangibles | (1,560,000 | ) | — | |||||
Net cash used in investing activities | (12,809,000 | ) | — | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | 4,016,000 | 3,858,000 | ||||||
Distributions | (282,000 | ) | (73,000 | ) | ||||
Payment of offering costs | (459,000 | ) | (444,000 | ) | ||||
Proceeds from notes payable | 9,250,000 | — | ||||||
Repayment of notes payable | (635,000 | ) | (30,000 | ) | ||||
Loan fees | (59,000 | ) | — | |||||
Net cash provided by financing activities | 11,831,000 | 3,311,000 | ||||||
Net (decrease) increase in cash and cash equivalents | (898,000 | ) | 2,692,000 | |||||
Cash and cash equivalents — beginning of period | 1,486,000 | 1,106,000 | ||||||
Cash and cash equivalents — end of period | $ | 588,000 | $ | 3,798,000 | ||||
Supplemental disclosure of non-cash financing activities: | ||||||||
Increase to tenant improvements | $ | 17,000 | $ | — | ||||
Deferred organization and offering costs accrued | $ | 33,000 | $ | 9,000 | ||||
Issuance of common stock under the DRIP | $ | 142,000 | $ | 31,000 | ||||
Distributions declared but not paid | $ | 154,000 | $ | 33,000 | ||||
Cash paid for interest | $ | 573,000 | $ | 151,000 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7
5
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 2011
1. ORGANIZATION AND BUSINESS
TNP Strategic Retail Trust, Inc. (the “Company”) was formed on September 18, 2008 as a Maryland corporation. 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. As discussed in Note 8, theThe Company was initially capitalized by the sale of shares of common stock to Thompson National Properties, LLC (the “Sponsor”) on October 16, 2008. The Company’s fiscal year end is December 31.
On November 4, 2008, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 100,000,000 shares of its common stock to the public in its primary offering and 10,526,316 shares of its common stock pursuant to its distribution reinvestment plan (“DRIP”) (collectively, the “Offering”). On August 7, 2009, the SEC declared the registration statement effective and the Company commenced its initial public offering.the Offering. The Company is offering shares to the public in its primary offering at a price of $10.00 per share, with discounts available for certain purchasers, and to its stockholders pursuant to the DRIP at a price of $9.50 per share.
On November 12, 2009, the Company achieved the minimum offering amount of $2,000,000 and offeringpursuant to the terms of the Offering, proceeds were released to the Company from an escrow account. From commencement of the offeringOffering through September 30, 2010,March 31, 2011, the Company had accepted investors’ subscriptions for, and issued, 2,131,4102,780,490 shares of the Company’s common stock, including 20,91944,687 shares issued pursuant to the DRIP, resulting in gross offering proceeds of $21,013,426.
The Company intends to use the net proceeds from its public offeringthe Offering to invest in a portfolio of income-producing retail properties, primarily located in the Western United States, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. In addition to investments in real estate directly or through joint ventures, the Company may also acquire or originate first mortgages or second mortgages, mezzanine loans or other real estate-related loans, in each case provided that the underlying real estate meets the Company’s criteria for direct investment. The Company may also invest in any other real property or other real estate-related assets that, in the opinion of the Company’s board of directors, meets the Company’s investment objectives and is in the best interests of its stockholders.
As of September 30, 2010,March 31, 2011, the Company’s portfolio included fourfive properties comprising 408,000 of500,733 rentable square feet of multi-tenant retail and commercial space located in three states. As of September 30, 2010,March 31, 2011, the rentable space at these properties was 85.9%82.0% leased.
The Company’s advisor is TNP Strategic Retail Advisor, LLC, a Delaware limited liability company (“Advisor”). Subject to certain restrictions and limitations, Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company.
Substantially all of the Company’s business is conducted through TNP Strategic Retail Operating Partnership, LP, the Company’s operating partnership (the “OP”). The Company is the sole general partner of the OP. The initial limited partners of the OP are Advisor and TNP Strategic Retail OP Holdings, LLC, a Delaware limited liability company (“TNP OP”). Advisor has invested $1,000 in the OP in exchange for common limited partnership units and TNP OP has invested $1,000 in the OP and has been issued a separate class of limited partnership units (the “Special Units”). As the Company accepts subscriptions for shares of its common stock, it will transfer substantially all of the net proceeds of the offeringOffering to the OP as a capital contribution. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the Company owned 99.95%99.96% and 99.80%99.96%, respectively, of the limited partnership interest in the OP. As of September 30, 2010March 31, 2011 and December 31, 2009, Advisor owned 0.05%0.04% and 0.20%0.04%, respectively, of the limited partnership interest in the OP. TNP OP owned 100% of the outstanding Special Units as of September 30, 2010March 31, 2011 and December 31, 2009.
6
The OP limited partnership agreement provides that the OP will be operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the OP will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code, which classification could result in the OP being taxed as a corporation, rather than as a partnership. In addition to the administrative and operating costs and expenses incurred by the OP in acquiring and operating real properties, the OP will pay all of the Company’s administrative costs and expenses, and such expenses will be treated as expenses of the OP.
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Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been established to conformprepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These condensed for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated unaudited financial statements do not include all disclosuresof the information and footnotes required by GAAP for complete consolidatedaudited financial statements. InterimIn the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results of operationsfor such periods. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results tothat may be expected for the full year; such results may be less favorable. Our accompanying condensed consolidated unaudited financial statements should be read in conjunction withyear ending December 31, 2011. For further information, refer to the auditedCompany’s consolidated financial statements and the notes thereto for the year ended December 31, 2010 included in the Form 10-K, as filed with the SEC on March 31, 2010, as amended by theCompany’s Annual Report on Form 10-K/A,10-K filed with the SEC on May 17, 2010 (the “Form 10-K”).
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires significant management to use judgment in the application of accounting policies, including makingjudgments, assumptions and estimates and assumptions.about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and the Company’s disclosure of contingent assets and liabilities at the datedates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgmentWith different estimates or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied orassumptions, materially different amounts of assets, liabilities, revenues and expenses willcould be recorded, resulting in a different presentation of the financial statements or different amounts reported in the Company’s financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of the Company’s results of operations to those of companies in similar businesses.
Cash and Cash Equivalents
Cash and cash equivalents represents 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. As of September 30, 2010,March 31, 2011, the Company had $277,000did not have cash balances in excess of federally insured limits. 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.
Revenue Recognition
The Company reviews long-livedrecognizes rental income on a straight-line basis over the term of each lease. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts receivable in the accompanying condensed consolidated unaudited balance sheets. The Company anticipates collecting these amounts over the terms of the leases as scheduled rent payments are made. Reimbursements from tenants for recoverable real estate taxes and operating expenses are accrued as revenue in the period the applicable expenditures are incurred. Lease payments that depend on a factor that does not exist or is not measurable at the inception of the lease, such as future sales volume, would be contingent rentals in their entirety and, accordingly, would be excluded from minimum lease payments and included in the determination of income as they are earned.
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If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
whether the lease stipulates how a tenant improvement allowance may be spent;
whether the amount of a tenant improvement allowance is in excess of market rates;
whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
whether the tenant improvements are unique to the tenant or general-purpose in nature; and
whether the tenant improvements are expected to have any residual value at the end of the lease.
The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs as revenue in the period the related expenses are incurred.
Valuation of Accounts Receivable
The Company makes estimates of the collectability of its tenant receivables related to base rents, including deferred rents receivable, expense reimbursements and other revenue or income.
The Company analyzes accounts receivable, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Investments in Real Estate
Real Estate Acquisition Valuation
The Company records the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. The balance of the purchase price is allocated to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a fair value basis at the acquisition date amortized over the remaining lease terms. Tenant improvements are classified as an asset under investments in real estate and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases which come in three forms: (1) leasing commissions and legal costs, which represent the value associated with “cost avoidance” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in markets in which the Company operates; (2) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for impairment wheneverthe period required to lease the “assumed vacant” property to the occupancy level when purchased; and (3) above or below market value of in-place leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks. The value of in-place leases are recorded in acquired lease intangibles, net and amortized over the remaining lease term. Above or below market leases are classified in acquired lease intangibles, net or in other liabilities, depending on whether the contractual terms are above or below market. Above market leases are amortized as a decrease to rental revenue over the remaining non-cancelable terms of the respective leases and below market leases are amortized as an increase to rental revenue over the remaining initial lease term and any fixed rate renewal periods, if applicable.
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Acquisition costs are expensed as incurred and costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. During the three months ended March 31, 2011, the Company acquired one real estate asset, recorded the acquisition as a business combination and expensed $410,000 of acquisition costs. During the three months ended March 31, 2010, the Company did not acquire any real estate related assets.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s net income. These allocations also impact depreciation expense and gains or losses recorded on future sales of properties.
Real Property
Costs related to the development, redevelopment, construction and improvement of properties are capitalized. Interest incurred on development, redevelopment and construction projects is capitalized until construction is substantially complete.
Maintenance and repair expenses are charged to operations as incurred. Costs for major replacements and betterments, which include heating, ventilating, and air conditioning equipment, roofs, and parking lots, are capitalized and depreciated over their estimated useful lives. Gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.
Property is recorded at cost and is depreciated using a straight-line method over the estimated useful lives of the assets as follows:
| Years | ||||
Buildings and improvements | 5-48 years | |||
Exterior improvements | 10-20 years | |||
Equipment and fixtures | 5-10 years | |||
Impairment of Investments in Real Estate and Related Intangible Assets and Liabilities
The Company continually monitors events orand changes in circumstances that could indicate that the carrying amountamounts of an assetits investments in real estate and related intangible assets may not be recoverable. Generally, a provision forWhen indicators of potential impairment is recorded if estimated future operating cash flows (undiscountedsuggest that the carrying value of real estate and without interest charges) plus estimated disposition proceeds (undiscounted) are less thanrelated intangible assets may not be recoverable, the current bookCompany assesses the recoverability by estimating whether the Company will recover the carrying value of the property.real estate and related intangible assets through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the investments in real estate and related intangible assets. Key inputs that the Company estimates in this analysis include projected rental rates, capital expenditures and property sales capitalization rates. Additionally, a property classified as held for sale is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell.
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Deferred Financing Costs
Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financings that do not close are expensed in the period in which it is determined that the financing will not close. As of March 31, 2011 and December 31, 2010, the Company’s deferred financing costs were identified$682,000 and $673,000 respectively, net of amortization.
Notes Payable
Mortgage and other loans assumed upon acquisition of real estate properties are stated at estimated fair value upon their respective dates of assumption, net of unamortized discounts or premiums to their outstanding contractual balances.
Amortization of discount and the accretion of premiums on mortgage and other loans assumed upon acquisition of related real estate properties are recognized from the date of assumption through their contractual maturity date using the straight-line method, which approximates the effective interest method.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method for financial reporting purposes. Buildings and improvements are depreciated over their estimated useful lives which range from 5 to 48 years. Tenant improvement costs recorded as capital assets are depreciated over the shorter of (1) the tenant’s remaining lease term or (2) the life of the improvement. Furniture, fixtures and equipment are depreciated over five to ten years.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT. The Company may also be subject to certain state or local income taxes, or franchise taxes.
Per Share Data
Basic earnings per share (“EPS”) is computed by dividing net income (loss) attributable to stockholders by the weighted average number of 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 unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to stockholders in the Company’s computation of EPS. Diluted EPS equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three months ended March 31, 2011 and 2010.
Reclassification
Certain amounts from the prior year have been reclassified to conform to current year presentation.
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Recent Accounting Pronouncements
In December 2010, the FASB issued Accounting Standards Update, No. 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU No. 2010-29”). Effective for periods beginning after December 15, 2010, ASUC No. 2010-29 specifies that if a public entity enters into business combinations that are material on an individual or aggregate basis and presents comparative financial statements, the entity must present pro forma revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU No. 2010-29 only applies to disclosures in Note 3 related to acquisitions and is not expected to have a significant impact on the Company’s footnote disclosures.
3. ACQUISITIONS OF REAL ESTATE
During the three months ended March 31, 2011, the Company acquired the following property:
| Intangibles | ||||||||||||||||||||||||||||||||||||||
Property | Location | Acquisition Date | Acquisition Costs | Land | Building and Improvements | Tenant Improvements | Acquired In Place Lease Intangibles | Above- Market Lease Assets | Below- Market Lease Liabilities | Purchase Price | ||||||||||||||||||||||||||||
Craig Promenade | Las Vegas, NV | 3/30/2011 | $ | 410,000 | $ | 3,079,000 | $ | 8,209,000 | $ | 241,000 | $ | 1,045,000 | $ | 506,000 | $ | 280,000 | $ | 12,800,000 | ||||||||||||||||||||
For the three months ended March 31, 2011, amortization expense for acquired lease intangibles was $2,000. The acquired lease intangibles have a weighted average remaining life of 12.5 years as of March 31, 2011.
As of March 31, 2011, Craig Promenade had 91,750 of rentable square feet, of which 71,134 or 77.5% was occupied. For the three months ended March 31, 2011, the Company recognized two days, or $9,000, in total revenue from Craig Promenade.
The Company acquired Craig Promenade for an aggregate purchase price of approximately $12,800,000, exclusive of closing costs. The Company financed the payment of the purchase price for Craig Promenade with (1) proceeds from the Company’s initial public offering and (2) approximately $8,750,000 in funds borrowed under the Operating Partnership’s revolving credit agreement (the “Credit Agreement”) with KeyBank National Association (“KeyBank”).
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4. PRO FORMA FINANCIAL INFORMATION
The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the three and nine months ended September 30,March 31, 2011 and 2010. The Company acquired three properties during the year ended December 31, 2010 and 2009.
| For the Three Months Ended March 31, (Unaudited) | ||||||||
| 2011 (1) | 2010 (2) | |||||||
Revenues | $ | 2,212,000 | $ | 2,066,000 | ||||
Net loss | $ | (1,351,000 | ) | $ | (952,000 | ) | ||
Net loss per common share, basic and diluted | $ | (0.54 | ) | $ | (1.34 | ) | ||
Weighted-average number of common shares outstanding, basic and diluted | 2,518,786 | 709,573 | ||||||
| (1) | The March 31, 2011 pro forma financials include actual results for Moreno Marketplace, Waianae Mall, Northgate Plaza, and San Jacinto Esplanade and pro forma quarterly results for Craig Promenade. |
| (2) | The March 31, 2010 pro forma financials include actual results for Moreno Marketplace and pro forma quarterly results for Waianae Mall, Northgate Plaza, San Jacinto Esplanade, and Craig Promenade. |
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5. INVESTMENTS IN REAL ESTATE
As of March 31, 2011, the Company’s real estate portfolio comprises five retail properties encompassing approximately 500,733 rentable square feet and was 82.0% leased. The following table provides summary information regarding the properties owned by the Company as of March 31, 2011:
Property | Location | Property Leasable Square Feet | % of Leasable Square Feet | Date Acquired | Purchase Price | Annualized Base Rent (1) | % of Annualized Base Rent | Occupancy (2) | Average Annual Rent Per Leased Square Feet (3) | |||||||||||||||||||||||||||
Moreno Marketplace | Moreno Valley, CA | 78,743 | 15.7 | % | 11/19/2009 | $ | 12,500,000 | $ | 1,131,000 | 16.6 | % | 75.0 | % | $ | 14.36 | |||||||||||||||||||||
Waianae Mall | Waianae, HI | 170,275 | 34.0 | % | 6/4/2010 | 25,688,000 | 2,975,000 | 43.5 | % | 85.2 | % | $ | 17.47 | |||||||||||||||||||||||
Northgate Plaza | Tucson, AZ | 103,492 | 20.7 | % | 7/6/2010 | 8,050,000 | 823,000 | 12.0 | % | 92.0 | % | $ | 7.95 | |||||||||||||||||||||||
San Jacinto | San Jacinto, CA | 56,473 | 11.3 | % | 8/11/2010 | 7,088,000 | 605,000 | 8.9 | % | 70.8 | % | $ | 10.72 | |||||||||||||||||||||||
Craig Promenade | Las Vegas, NV | 91,750 | 18.3 | % | 3/30/2011 | 12,800,000 | 1,301,000 | 19.0 | % | 77.5 | % | $ | 14.18 | |||||||||||||||||||||||
Total | 500,733 | 100 | % | $ | 66,126,000 | $ | 6,835,000 | 100 | % | 82.0 | % | $ | 64.68 | |||||||||||||||||||||||
| (1) | Annualized base rent represents annualized contractual base rental income as of March 31, 2011. |
| (2) | Occupancy includes all leased space of the respective acquisition. |
| (3) | Average annual rent per leased square foot based on leases in effect as of March 31, 2011. |
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2011, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 39.8 years with a weighted-average remaining term (excluding options to extend) of 7.2 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 unaudited balance sheets and totaled $212,000 and $166,000 as of March 31, 2011 and December 31, 2010, respectively.
As of March 31, 2011, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows:
April 1, 2011 through December 31, 2011 | $ | 4,552,000 | ||
2012 | 5,571,000 | |||
2013 | 5,010,000 | |||
2014 | 4,591,000 | |||
2015 | 3,943,000 | |||
Thereafter | 30,253,000 | |||
| $ | 53,920,000 | |||
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As of March 31, 2011, the Company had a concentration of credit risk related to the following tenant’s leases that represented more than 10% of a retail property’s annualized base rent:
Tenant | Property | Annualized Base Rent(1) | Percent of Property Annualized Base Rent | Annualized Base Rent Per Square Foot | Lease Expiration(2) | |||||||||||||||
Stater Brothers | | Moreno Marketplace | | $ | 730,000 | 64.5 | % | $ | 16.59 | November 2028 | ||||||||||
Wells Fargo | | Moreno Marketplace | | $ | 120,000 | 10.6 | % | $ | 24.00 | November 2023 | ||||||||||
Longs Drugs | | Waianae Mall | | $ | 630,000 | 21.2 | % | $ | 28.23 | January 2021 | ||||||||||
Wal-Mart | | Northgate Plaza | | $ | 245,000 | 29.8 | % | $ | 5.74 | May 2025 | ||||||||||
Tuesday Morning | | Northgate Plaza | | $ | 86,000 | 10.4 | % | $ | 12.00 | January 2012 | ||||||||||
Dollar Tree Stores | | Northgate Plaza | | $ | 106,000 | 12.9 | % | $ | 8.63 | January 2015 | ||||||||||
Huey Tran DDS | | San Jacinto Esplanade | | $ | 84,000 | 13.9 | % | $ | 38.04 | April 2018 | ||||||||||
Fresh N Easy | | San Jacinto Esplanade | | $ | 175,000 | 28.9 | % | $ | 12.43 | October 2027 | ||||||||||
Jack in the Box | | San Jacinto Esplanade | | $ | 75,000 | 12.4 | % | $ | 28.26 | March 2027 | ||||||||||
Mr. You Chinese Food | | San Jacinto Esplanade | | $ | 79,000 | 13.1 | % | $ | 37.70 | May 2017 | ||||||||||
Big Lots Store, Inc | | Craig Promenade | | $ | 348,000 | 26.7 | % | $ | 11.50 | January 2016 | ||||||||||
S.L. Investments | | Craig Promenade | | $ | 147,000 | 11.3 | % | $ | 45.97 | February 2032 | ||||||||||
| 2,825,000 | ||||||||||||||||||||
| (1) | Annualized base rent represents annualized contractual base rental income as of March 31, 2011. |
| (2) | Represents the expiration date of the lease at March 31, 2011 and does not take into account any tenant renewal options. |
6.ACQUIRED LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES
As of March 31, 2011 and December 31, 2010, the Company’s acquired lease intangibles and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows:
| Acquired Lease Intangibles | Below-Market | |||||||||||||||
| Lease Liabilities | ||||||||||||||||
| March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||
Cost | $ | 10,677,000 | 9,370,000 | $ | (3,169,000 | ) | $ | (2,890,000 | ) | |||||||
Accumulated Amortization | (1,389,000 | ) | (1,245,000 | ) | 430,000 | 298,000 | ||||||||||
Net Amount | $ | 9,288,000 | 8,125,000 | $ | (2,740,000 | ) | $ | (2,592,000 | ) | |||||||
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Increases (decreases) in net income as a result of amortization of the Company’s acquired lease intangibles and below-market lease liabilities for the three months ended March 31, 2011 and 2010 are as follows:
| Acquired Lease Intangibles | Below-Market Lease Liabilities | |||||||||||||||
| For the Three Months Ended | For the Three Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Amortization | $ | (396,000 | ) | (45,000 | ) | $ | 132,000 | $ | — | |||||||
7. NOTES PAYABLE
As of March 31, 2011 and December 31, 2010, the Company’s notes payable, consisted of the following:
| Principal as of March 31, 2011 | Principal as of December 31, 2010 | Interest Rate at March 31, 2011 (1) | Maturity Date (2) | |||||||||||||
Waianae Mortgage Loan | $ | 20,434,000 | (3) | $ | 20,531,000 | 5.39 | % | October 5, 2015 | ||||||||
Northgate Mortgage Loan | 4,288,000 | (3) | 4,325,000 | 6.25 | % | July 15, 2027 | ||||||||||
Convertible Note | 1,250,000 | 1,250,000 | 8.00 | % | November 18, 2015 | |||||||||||
Line of Credit Tranche A (4) | | 19,966,000 | | | 11,966,000 | | | 5.50 | % | | December 17, 2013, | | ||||
Line of Credit Tranche B (4) | 2,077,000 | (5) | 1,327,000 | 6.25 | % | June 30, 2011 (6) | ||||||||||
Total | 48,015,000 | 39,399,000 | ||||||||||||||
| (1) | Represents the interest rate in effect under the loan as of March 31, 2011. The interest rate is calculated as the actual interest rate in effect at March 31, 2011. |
| (2) | Represents the initial maturity date or the maturity date as of March 31, 2011. Subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown. |
| (3) | Represents total notes payable, excluding unamortized discount of $292,000 and unamortized premium of $72,000. |
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| (4) | In March 2011, the Company entered into an interest rate swap agreement in the notional amount of $16 million with an interest rate cap of 7% effective April 4, 2011. This interest rate swap agreement is not designated as a hedge. |
| (5) | As of March 31, 2011, the outstanding balances under Tranche A and Tranche B of the Credit Agreement were $19,966,000 and $2,077,000, respectively. |
| (6) | The maturity dates for Tranche A and B of the Credit Agreement are December 17, 2013 and June 30, 2011, respectively. The Company has a one year extension of the Tranche A maturity date subject to certain conditions as set forth in the Credit Agreement. |
During the three months ended March 31, 2011 and 2010, the Company incurred $680,000 and $221,000, respectively, of interest expense, which included the amortization of deferred financing costs of $50,000 and $60,000. During the three months ended March 31, 2011 and 2010, interest expense also included the amortization of net premium/discount of $15,000 and $0. As of March 31, 2011 and December 31, 2010, interest expense payable was $209,000 and $136,000.
The following is a schedule of maturities for all of the Company’s notes payable outstanding as of March 31, 2011:
| Current Maturity(1) | Fully Extended Maturity (1) (2) | |||||||
April 1, 2011 through December 31, 2011 | $ | 2,478,000 | $ | 2,478,000 | ||||
2012 | 563,000 | 563,000 | ||||||
2013 | 20,565,000 | 599,000 | ||||||
2014 | 635,000 | 20,601,000 | ||||||
2015 | 20,322,000 | 20,322,000 | ||||||
Thereafter | 3,452,000 | 3,452,000 | ||||||
| $ | 48,015,000 | $ | 48,015,000 | |||||
| (1) | Represents total notes payable, excluding unamortized discount of $292,000 and unamortized premium of $72,000. |
| (2) | Represents the maturities of all notes payable outstanding as of March 31, 2011 assuming the Company exercises all extension options available under the terms of the loan agreements. The Company can give no assurance that it will be able to satisfy the conditions to extend the terms of the loan agreements. |
Certain of the Company’s notes payable contain financial and non-financial debt covenants. As of March 31, 2011, the Company was in compliance with all debt covenants.
Line of Credit
On December 17, 2010, the Company, through its wholly owned subsidiary, TNP SRT Secured Holdings, LLC, entered into a Credit Agreement with KeyBank to establish a secured revolving credit facility (the “Credit Facility”) with an initial maximum aggregate commitment of $35 million. The commitment may be increased in
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minimum increments of $5 million, by up to $115 million in the aggregate, for a maximum commitment of up to $150 million, the (“Maximum Commitment”). The Company may reduce the facility amount at any time, subject to certain conditions, in minimum increments of $5 million, provided that in no event may the facility amount be less than $20 million, unless the commitments are reduced to zero and terminated. The proceeds of the Credit Facility may be used by the Company for general corporate purposes, subject to the terms of the Credit Agreement. Tranche B of the Credit Facility in the maximum amount of $5 million matures on June 30, 2011. Tranche A of the Credit Facility matures on December 17, 2013. The Company has a one year extension of the Tranche A maturity date subject to certain conditions as set forth in the Credit Agreement. As of March 31, 2011, the outstanding balances under Tranche A and Tranche B of the Credit Facility were $19,966,000 and $2,077,000, respectively. In March 2011, the Company entered into an interest rate swap agreement in the notional amount of $16 million with an interest rate cap of 7% effective April 4, 2011. This interest rate swap agreement is not designated as a hedge.
Borrowings determined by reference to the Alternative Base Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Alternate Base Rate plus 2.50% per annum in the case of a Tranche A borrowing and 3.25% in the case of a Tranche B borrowing, or (2) the maximum rate of interest permitted by applicable law. Borrowings determined by reference to the Adjusted LIBO Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Adjusted LIBO Rate plus 3.50% per annum in the case of a Tranche A borrowing and 4.25% in the case of a Tranche B borrowing, or (2) the maximum rate of interest permitted by applicable law.
Borrowings under the Credit Agreement are secured by (1) guarantees granted by Thompson National Properties, LLC, the Company’s sponsor, AWT Family Limited Partnership, and Anthony W. Thompson (the “Tranche B Guarantors”) on a joint and several basis, of the prompt and full payment of all of the obligations, terms and conditions to be paid, performed or observed with respect to any Tranche B borrowings, (2) a security interest granted in favor of KeyBank with respect to all operating, depository (including, without limitation, the deposit account used to receive subscription payments for the sale of equity interests in Offering), escrow and security deposit accounts and all cash management services of the Company, the OP and borrower under the Credit Agreement and, (3) a deed of trust, assignment agreement, security agreement and fixture filing in favor of KeyBank, with respect to the Moreno Marketplace, San Jacinto Esplanade, and Craig Promenade.
As of March 31, 2011, the outstanding balance under the Credit Agreement was $22 million and $13 million was available, subject to KeyBank’s review and approval, and the Company meeting certain requirements pursuant to the terms of the Credit Agreement. The Credit Agreement and certain notes payable contain customary affirmative, negative and financial covenants, including, but not limited to, requirements for minimum net worth, debt service coverage and leverage. The Company believes it was in compliance with the financial covenants of the Credit Facility as of March 31, 2011.
8. FAIR VALUE DISCLOSURES
The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant judgment by management. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The Company believes the total values reflected on its condensed consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and amounts due to affiliates due to their short-term nature, except for the Company’s notes payable, which are disclosed below:
At March 31, 2011 | Total Value (1) | Fair Value (2) | ||||||
Notes Payable | $ | 48,015,000 | $ | 47,795,000 | ||||
At December 31, 2010 | Total Value (1) | Fair Value (2) | ||||||
Notes Payable | $ | 39,399,000 | $ | 39,164,000 | ||||
| (1) | The total value of the Company’s notes payable represents outstanding principal as of March 31, 2011 and December 31, 2010. |
| (2) | The fair value of the Company’s notes payable represents outstanding principal as of March 31, 2011 and December 31, 2010, net of unamortized discount and premium. The estimated fair value of our notes payable is based upon indicative market prices of our notes payable. |
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9. EQUITY
Common Stock
Under the Company’s Articles of Amendment and Restatement (the “Charter”), the Company has the authority to issue 400,000,000 shares of common stock. All shares of common stock have a par value of $0.01 per share. On October 16, 2008, the Company sold 22,222 shares of common stock to Sponsor for an aggregate purchase price of $200,000. As of March 31, 2011 and December 31, 2010, the Company had sold 2,780,490 and 2,390,017 shares of common stock in the Offering and through the DRIP, raising gross proceeds of $27,467,000 and $23,613,000, respectively.
The Company’s board of directors is authorized to amend its Charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. Anthony W. Thompson, the Company’s Chief Executive Officer, directly owns $1,000,000 in shares of the Company’s common stock. Additionally, the Sponsor owns $200,000 in shares of the Company’s common stock.
Preferred Stock
The Charter authorizes the Company to issue 50,000,000 shares of $0.01 par value preferred stock. As of March 31, 2011 and December 31, 2010, no shares of preferred stock were issued and outstanding.
Share Redemption Plan
The Company’s share redemption planprogram allows for share repurchases by the Company when certain criteria are met by requesting stockholders. Share repurchases will be made at the sole discretion of the Company. The number of shares to be redeemed during any calendar year is limited to no more than (1) 5.0% of the weighted average of the number of shares of itsthe Company’s common stock outstanding during the prior calendar year and (2) those that could be funded from the net proceeds from the sale of shares under the DRIP in the prior calendar year plus such additional funds as may be borrowed or reserved for that purpose by the Company’s board of directors. In addition, the Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time. ForDuring the three and nine months ended September 30,March 31, 2011 and 2010, and 2009, the Company did not repurchaseredeem any shares of its common stock pursuant to the share redemption program nor had any such requests been received.
| Carrying value per | Estimated | |||||||
| At September 30, 2010 | balance sheet | fair value | ||||||
| Notes payable | $ | 39,904,000 | $ | 39,904,000 | ||||
| Carrying value per | Estimated | |||||||
| At December 31, 2009 | balance sheet | fair value | ||||||
| Notes payable | $ | 10,490,000 | $ | 10,490,000 | ||||
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| Land | $ | 17,364,000 | ||
| Building & improvements | 18,545,000 | |||
| Tenant improvements | 929,000 | |||
| 36,838,000 | ||||
| Acquired lease intangibles | 6,608,000 | |||
| Acquired below market lease intangibles | (2,890,000 | ) | ||
| Premium on assumed debt | 345,000 | |||
| Discount on assumed debt | (75,000 | ) | ||
| $ | 40,826,000 | |||
| Land | $ | 3,080,000 | ||
| Building & improvements | 6,124,000 | |||
| Tenant improvements | 656,000 | |||
| 9,860,000 | ||||
| Acquired lease intangibles | 2,640,000 | |||
| $ | 12,500,000 | |||
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On August 13, 2009, the Company’s board of directors of the Company approved a monthly cash distribution of $0.05625 per common share, which representsrepresented an annualized distribution of $0.675 per share. The commencement of the distribution was subject to the Company raising ahaving raised minimum of offering proceeds of $2,000,000, the sale of a sufficient number of shares in the Offering to finance an asset acquisition and the identification and completion of an asset acquisition. On November 12, 2009, the Company achieved the minimum offering amount of $2,000,000, and on November 19, 2009 the Company completed theits first asset acquisition, of the Moreno Property, thus satisfying all of the conditions for the commencement of the monthly distribution.
On May 11, 2010, the board of directors of the Company authorized an increase to the Company’s previously declared monthly cash distribution from $0.05625 to $0.05833 per share of the Company’s common stock, contingent upon the closing of the acquisition of the Waianae Property.Mall. The new monthly distribution amount represents an annualized distribution of $0.70 per share of the Company’s common stock and commenced in the calendar month following the closing of the Company’s acquisition of the Waianae Property. As discussed in Note 4, theThe Company closed on the Waianae PropertyMall on June 4, 2010, as suchand the new monthly distribution rate beginbegan to accrue effective July 1, 2010.
| Distributions | Distribution Declared per | |||||||||||||||
| Month | Declared | Common Share | Paid through cash (1) | Paid through DRIP (2) | ||||||||||||
| January | $ | 32,000 | $ | 0.05625 | $ | 18,000 | $ | 7,000 | ||||||||
| February | 40,000 | 0.05625 | 25,000 | 11,000 | ||||||||||||
| March | 47,000 | 0.05625 | 29,000 | 14,000 | ||||||||||||
| April | 56,000 | 0.05625 | 33,000 | 17,000 | ||||||||||||
| May | 64,000 | 0.05625 | 39,000 | 19,000 | ||||||||||||
| June | 80,000 | 0.05625 | 45,000 | 22,000 | ||||||||||||
| July | 96,000 | 0.05833 | 58,000 | 30,000 | ||||||||||||
| August | 109,000 | 0.05833 | 66,000 | 34,000 | ||||||||||||
| September | 120,000 | 0.05833 | 75,000 | 38,000 | ||||||||||||
| Total | $ | 644,000 | $ | 0.51249 | $ | 388,000 | $ | 192,000 | ||||||||
On September 30,December 31, 2010, the Company declaredauthorized a monthly distribution in the aggregate amount of $120,000,$136,000, of which $82,000 was accrued as of September 30, 2010 and$91,000 was paid in cash on October 15, 2010January 14, 2011 and $38,000$45,000 was paid through the DRIP in the form of additional shares issued on September 30, 2010.
On March 31, 2011, the Company authorized a monthly distribution in the aggregate of $154,000, of which $102,000 was paid in cash on April 15, 2011 and $52,000 was paid through the DRIP in the form of additional shares issued on April 15, 2011.
Distribution Reinvestment Plan
The Company has adopted a DRIP which allows stockholders to purchase additional shares of common stock through the reinvestment of distributions, subject to certain conditions. The Company registered and reserved 10,526,316 shares of its common stock for sale pursuant to the DRIP. For the three months ended March 31, 2011 and 2010, $142,000 and $31,000 in distributions were reinvested and 14,908 and 3,316 shares of common stock were issued under the DRIP, respectively.
10. EARNINGS PER SHARE
EPS is computed by dividing net income (loss) attributable to stockholders by the weighted average number of shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive common sharessecurities 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 unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to stockholders in the Company’s computation of EPS.
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| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Numerator for basic and diluted loss earnings per share calculations: | ||||||||||||||||
| Net loss | $ | (1,386,000 | ) | $ | (89,000 | ) | $ | (3,330,000 | ) | $ | (89,000 | ) | ||||
| Less: Net loss attributable to noncontrolling interest | 1,000 | — | 5,000 | — | ||||||||||||
| Net loss attributable to stockholders | (1,385,000 | ) | (89,000 | ) | (3,325,000 | ) | (89,000 | ) | ||||||||
| Less: Allocation to participating securities | (2,000 | ) | — | (6,000 | ) | — | ||||||||||
| Loss attributable to stockholders | $ | (1,387,000 | ) | $ | (89,000 | ) | $ | (3,331,000 | ) | $ | (89,000 | ) | ||||
| Denominator for basic and diluted loss earnings per share calculations: | ||||||||||||||||
| Weighted average shares outstanding — basic effect of dilutive shares: | 1,837,011 | 22,222 | 1,240,067 | 22,222 | ||||||||||||
| Non-vested shares | — | — | — | — | ||||||||||||
| Weighted average shares outstanding — diluted | 1,837,011 | 22,222 | 1,240,067 | 22,222 | ||||||||||||
| Amounts attributable to stockholders per share — basic and diluted: | ||||||||||||||||
| Net loss | $ | (0.76 | ) | $ | (4.01 | ) | $ | (2.69 | ) | $ | (4.01 | ) | ||||
| Unvested shares from share—based compensation that were anti-dilutive | 13,817 | — | 11,300 | — | ||||||||||||
| For the three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
Numerator for basic and diluted (loss) earnings per share calculations: | ||||||||
Net loss | $ | (1,217,000 | ) | $ | (577,000 | ) | ||
Less: Net loss attributable to noncontrolling interest | 1,000 | 3,000 | ||||||
Net loss attributable to common stockholders | (1,216,000 | ) | (574,000 | ) | ||||
Less: Allocation to participating securities | (2,000 | ) | (2,000 | ) | ||||
Net loss attributable to common stockholders | $ | (1,218,000 | ) | $ | (576,000 | ) | ||
Denominator for basic and diluted (loss) earnings per share calculations: | ||||||||
Weighted average shares outstanding — basic | 2,518,786 | 709,573 | ||||||
Effect of dilutive shares: | ||||||||
Non-vested shares | — | — | ||||||
Weighted average shares outstanding — diluted | 2,518,786 | 709,573 | ||||||
Amounts attributable to common stockholders per share — basic and diluted: | ||||||||
Net loss | $ | (0.48 | ) | $ | (0.81 | ) | ||
Unvested shares from share–based compensation that were anti-dilutive | 10,000 | 10,000 | ||||||
11. INCENTIVE AWARD PLAN
The Company adopted an incentive plan on July 7, 2009 (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. The Company has reserved 2,000,000 shares of common stock for stock grants pursuant to the Incentive Award Plan. The Company granted each of its current independent directors an initial grant of 5,000 shares of restricted stock (the “initial restricted stock grant”) following the Company’s raising of the $2,000,000 minimum offering amount in the Offering on November 12, 2009. Each new independent director that subsequently joins the board of directors will receivereceives the initial restricted stock grant on the date he or she joins the board of directors. In addition, on the date of each of the Company’s annual stockholders meetings at which an independent director is re-elected to the board of directors, he or she will receive 2,500 shares of restricted stock. The restricted stock vests one-third on the date of grant and one-third on each of the next two anniversaries of the grant date. The restricted stock will become fully vested and non-forfeitable in the event of an independent director’s termination of service due to his or her death or disability, or upon the occurrence of a change in control of the Company.
For the three and nine months ended September 30,March 31, 2011 and 2010, the Company recognized compensation expense of $33,000$16,000 and $60,000,$13,000, respectively, related to the restricted common stock grants, which is included in general and administrative expense in the Company’s accompanying condensed consolidated unaudited statements of operations. Shares of restricted common stock have full voting rights and rights to dividends.
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As of September 30, 2010March 31, 2011 and December 31, 2009,2010, there was $91,000$57,000 and $85,000,$75,000, respectively, of total unrecognized compensation expense related to nonvested shares of restricted common stock. As of September 30, 2010,March 31, 2011, this expense is expected to be realized over a remaining period of 1.431.3 years. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the fair value of the nonvested shares of restricted common stock was $135,000$90,000 and $90,000, respectively. 7,500During the three months ended March 31, 2011, no additional shares were issued or vestedvested.
| Restricted Stock | Weighted Average Grant Date Fair Value | |||||||
Balance — December 31, 2010 | 10,000 | $ | 9.00 | |||||
Granted | — | — | ||||||
Vested | — | — | ||||||
Balance — March 31, 2011 | 10,000 | $ | 9.00 | |||||
12. RELATED PARTY TRANSACTIONS
Pursuant to the Advisory Agreement by and among the Company, OP and Advisor (the “Advisory Agreement”) and the Dealer Manager Agreement (the “Dealer Manager Agreement”) by and among the Company, the OP, and TNP Securities, LLC (the “Dealer Manager” or “TNP Securities”), the Company is obligated to pay Advisor and the Dealer Manager specified fees upon the provision of certain services related to the Offering, the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to certain limitations, the Company is also obligated to reimburse Advisor and Dealer Manager for organization and offering costs incurred by Advisor and Dealer Manager on behalf of the Company, and the Company is obligated to reimburse Advisor for acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.
The Company records all related party fees as incurred, subject to any limitations described in the Advisory Agreement. The Company had not incurred any disposition fees during the three and nine months ended SeptemberMarch 31, 2011.
Organization and Offering Costs
Organization and offering costs of the Company (other than selling commissions and the dealer manager fee) are initially being paid by Advisor and its affiliates on the Company’s behalf. Such costs include legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses of certain of Advisor’s employees and employees of Advisor’s affiliates and others. Pursuant to the Advisory Agreement, the Company is obligated to reimburse Advisor or its affiliates, as applicable, for organization and offering costs associated with the Offering, provided the Company is not obligated to reimburse Advisor to the extent organization and offering costs, other than selling commissions and dealer manager fees, incurred by the Company exceed 3.0% of the gross offering proceeds from the Offering. Any such reimbursement will not exceed actual expenses incurred by Advisor. Prior to raising the minimum offering amount of $2,000,000 on November 12, 2009, the Company had no obligation to reimburse Advisor or its affiliates for any organization and offering costs.
As of March 31, 2011 and December 31, 2010, organization and offering costs incurred by Advisor on the Company’s behalf were $2,329,000 and $2,265,000, respectively. These costs are payable by the Company to the extent organization and offering costs, other than selling commissions and dealer manager fees, do not exceed 3.0% of the gross proceeds of the Offering. As of March 31, 2011 and December 31, 2010, organization and offering costs did exceed 3.0% of the gross proceeds of the Offering, thus the amount in excess of the 3.0% limit, or $1,462,000 and $1,571,000, respectively, has been deferred.
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Selling Commissions and Dealer Manager Fees
The Company’s dealer manager, receives a sales commission of 7.0% of the gross proceeds from the sale of shares of our common stock in the primary offering. Our dealer manager also receives 3.0% of the gross proceeds from the sale of shares in the primary offering in the form of a dealer manager fee as compensation for acting as our dealer manager. As of March 31, 2011, the Company incurred $1,743,000 of sales commissions and $745,000 of dealer manager fees, which are recorded as an offset to additional paid-in-capital. All organization costs are recorded as an expense when the Company has an obligation to reimburse Advisor.
Reimbursement of Operating Expenses
The Company reimburses Advisor for all expenses paid or incurred by Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse Advisor for any amount by which the Company’s operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (1) 2% of its average invested assets, or (2) 25% of its net income 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% guidelines”). Notwithstanding the above, the Company may reimburse Advisor for expenses in excess of this limitation if a majority of the independent directors determines that such excess expenses are justified based on unusual and nonrecurring factors. For the twelve months ended March 31, 2011, the Company’s total operating expenses exceeded the 2%/25% guideline by $358,000.
The Company reimburses Advisor for the cost of administrative services, including personnel costs and its allocable share of other overhead of the Advisor such as rent and utilities; provided, however, that no reimbursement shall be made for costs of such personnel to the extent that personnel are used in transactions for which Advisor receives a separate fee or with respect to an officer of the Company. For the three months ended March 31, 2011 and 2010, the Company incurred $101,000 and $23,000 of administrative services to Advisor. As of March 31, 2011 and December 31, 2010, administrative services of $72,000 and $23,000 were included in amounts due to affiliates.
Property Management Fee
The Company pays TNP Property Manager, LLC (“TNP Manager”), its property manager and an affiliate of Advisor, a market-based property management fee of up to 5.0% of the gross revenues generated by the properties in connection with the operation and management of properties. TNP Manager may subcontract with third party property managers and will be responsible for supervising and compensating those property managers. For the three months ended March 31, 2011 and 2010, the Company incurred $81,000 and $12,000 in property management fees to TNP Manager. As of March 31, 2011 and December 31, 2010, property management fees of $7,000 and $16,000 were included in amounts due to affiliates.
Acquisition and Origination Fee
The Company pays the Advisor an acquisition fee equal to 2.5% of the cost of investments acquired, including acquisition expenses and any debt attributable to such investments. The Company incurred $320,000 and $0 in acquisition fees to the Advisor during the three months ended March 31, 2011 and 2010.
The Company pays Advisor 2.5% of the amount funded by the Company to acquire or originate real estate-related loans, including third party expenses related to such investments and any debt used to fund the acquisition or origination of the real estate related loans. There were no loan origination fees earned by Advisor for the three months ended March 31, 2011 and 2010. As of March 31, 2011 and December 31, 2010, acquisition fees of $100,000 and $0 were included in amounts due to affiliates.
Asset Management Fee
The Company pays Advisor a monthly asset management fee of one-twelfth of 0.6% on all real estate investments the Company acquires; provided, however, that Advisor will not be paid the asset management fee until the Company’s funds from operations exceed the lesser of (1) the cumulative amount of any distributions declared and payable to the Company’s stockholders or (2) an amount that is equal to a 10.0% cumulative, non-compounded, annual return on invested capital for the Company’s stockholders. For the three months ended March 31, 2011 and 2010, the Company incurred $80,000 and $20,000 of asset management fees to Advisor. As of March 31, 2011 and December 31, 2010, asset management fees of $293,000 and $213,000 were included in amounts due to affiliates.
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Disposition Fee
If Advisor or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, Advisor or its affiliates also will be paid disposition fees up to 50.0% of a customary and competitive real estate commission, but not to exceed 3.0% of the contract sales price of each property sold. For the three months ended March 31, 2011 and 2010, the Company did not incur any disposition fees. As of March 31, 2011 and December 31, 2010, no disposition fees were included in amounts due to affiliates.
Guaranty Fee
As part of the acquisition of the Waianae Mall property, Mr. Thompson guaranteed the assumed Waianae Loan discussed in Note 7. Additionally, the Sponsor guaranteed the Credit Agreement discussed in Note 7. In connection with these guaranties, the Company has agreed to pay Mr. Thompson and the Sponsor certain yearly fees. For the three months ended March 31, 2011 and 2010, the Company incurred $10,000 and $0, of guaranty fees. As of March 31, 2011 and December 31, 2010, guaranty fees of $20,000 and $11,000 were included in amounts due to affiliates.
Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2011 and 2010, respectively, and payable as of March 31, 2011 and December 31, 2010:
| Incurred | Payable | |||||||||||||||
| Three Months Ended March 31, | As of March 31, | As of December 31, | ||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Expensed | ||||||||||||||||
Asset management fees | $ | 80,000 | $ | 20,000 | $ | 293,000 | $ | 213,000 | ||||||||
Reimbursement of operating expenses | 101,000 | 23,000 | 72,000 | 23,000 | ||||||||||||
Acquisition fees | 320,000 | — | 100,000 | — | ||||||||||||
Property management fees | 81,000 | 12,000 | 7,000 | 16,000 | ||||||||||||
Guaranty fees | 10,000 | — | 20,000 | 11,000 | ||||||||||||
Additional Paid-in Capital | ||||||||||||||||
Selling commissions | 306,000 | 244,000 | 32,000 | — | ||||||||||||
Dealer manager fees | 115,000 | 108,000 | 14,000 | — | ||||||||||||
Organization and offering costs | 64,000 | 125,000 | 1,503,000 | 1,571,000 | ||||||||||||
| $ | 1,077,000 | $ | 532,000 | $ | 2,041,000 | $ | 1,834,000 | |||||||||
Interest Expense
In connection with the Company’s acquisition of the Craig Promenade property on March 30, 2010.
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13. COMMITMENTS AND CONTINGENCIES
Economic Dependency
Environmental
As an owner of monitoring its properties forreal estate, the presenceCompany is subject to various environmental laws of hazardous or toxic substances. Whilefederal, state and local governments. Although there can be no assurance, that a material environmental liability does not exist at the Company’s properties, it is not currently aware of any environmental liability with respect to its properties that would have a material effect on the Company’s consolidated financial position, results of operations or cash flows. Further, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or any unasserted claim or assessmentresults 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 anthe properties could result in future environmental liability that it believes would require additional disclosure or the recording of a loss contingency.
Legal Matters
From time to time, the Company has engagedis party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on its results of operations or will engage Advisor and its affiliates to provide certain services thatfinancial condition.
14. SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the condensed consolidated financial statements are essentialissued.
Changes to the Board of Directors
As previously reported, on March 24, 2011, Arthur M. Friedman notified the Company including asset management services, supervisionof his resignation as a director of the managementCompany and leasingas Chairman of properties owned bythe Audit Committee of the Company asset acquisition(the “Audit Committee”), effective as of April 1, 2011. On April 1, 2011, in connection with Mr. Friedman’s resignation and disposition decisions,pursuant to the sale of sharesterms of the Company’s 2009 Long-Term Incentive Plan, the Company’s board of directors approved the acceleration of the vesting of approximately 3,333 shares of restricted common stock available for issue,of the Company held by Mr. Friedman so that none of such shares of restricted common stock would be forfeited upon Mr. Friedman’s resignation.
On April 1, 2011, the board of directors of the Company appointed Phillip I. Levin to serve as wella director of the Company in order to fill the vacancy on the board of directors created by Mr. Friedman’s resignation, effective as other administrative responsibilitiesof April 1, 2011. Mr. Levin will serve as a member of the board of directors until the next annual meeting of the Company’s stockholders and until his successor is duly elected and qualifies. On April 1, 2011, the board of directors also appointed Mr. Levin to serve as a member of the Audit Committee in order to fill the vacancy on the Audit Committee created by Mr. Friedman’s resignation, effective as of April 1, 2011. Mr. Levin was also appointed as the Chairman of the Audit Committee.
Approval of Certain Total Operating Expenses
For the twelve months ended March 31, 2011, the Company’s total operating expenses exceeded the 2%/25% guideline by $358,000. On May 10, 2011, the independent directors determined the excess amount of operating expenses for the twelve months ended March 31, 2011 was justified because (1) the amounts reflect legitimate operating expenses necessary for the operation of the Company’s business, (2) the Company including accounting servicesis currently in its acquisition and investor relations. Asdevelopment stage, (3) certain of the Company’s properties are not yet stabilized, and (4) the Company is continuing to raise capital in the Offering, but the expenses incurred as a result of these relationships,being a public company (including for audit and legal services, director and officer liability insurance and fees for directors) are disproportionate to the Company’s average invested assets and net income and such expenses will benefit the Company is dependent upon the Advisor and its affiliates. In the eventstockholders in future periods. The independent directors further resolved, however, that these companies were unable to provide the Company with the respective services, the Company wouldAdvisor will be required to find alternative providers of these services.
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Status of the Offering
The Company commenced its initial public offering of up to $1,100,000,000 in shares of common stockOffering on August 7, 2009. As of November 11, 2010,May 6, 2011, the Company had accepted investors’ subscriptions for, and issued, 2,262,160sold 3,007,091 shares of common stock including 25,228 shares issued pursuant toin the DRIP, resulting inOffering for gross offering proceeds of $22,313,000.
Distributions Declared
On September 30, 2010,March 31, 2011, the Company declaredauthorized a monthly distribution in the aggregate amount of $120,000,$154,000, of which $82,000$102,000 was paid in cash on OctoberApril 15, 20102011 and $38,000$52,000 was paid through the DRIP in the form of additional shares issued on September,April 15, 2011. On April 30, 2010. On October 31, 2010,2011, the Company declaredauthorized a monthly distribution in the aggregate amount of $127,000,$169,000, of which $86,000$113,000 was paid in cash on November 15, 2010May 13, 2011 and $41,000$56,000 was paid through the DRIP in the form of additional shares issued on October 31, 2010.
Proposed Property Acquisition
On May 11, 2010,2011, the Company has paid down $300,000announced that the board of directors of the outstanding balance underCompany authorized the Credit Agreement with KeyBankCompany to reducepursue the aggregate amount outstandingacquisition of Pinehurst Square East in Bismarck, North Dakota. Pinehurst Square East is an 114,292 square foot multi-tenant retail center built in 2005. The property is more than 90% leased. Major tenants include T.J. Maxx, Old Navy, and Shoe Carnival. Tenants have staggered lease expirations that range from 2011 to $4,500,000, which remaining amount relates to the San Jacinto Property2017. The acquisition and is secured by a pledge of the San Jacinto Property and subject to the covenants and borrowing terms of the Credit Agreement as discussed in Note 6.
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| 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 condensed consolidated unaudited financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report inon Form 10-Q and also in our audited consolidated financial statements and the notes thereto, and “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations”Operations included in our 20092010 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or SEC, on March 31, 2010, as amended by our Annual Report on Form 10-K/A filed with the SEC on May 17, 2010, as the same may be further amended and supplemented from time to time,April 1, 2011, which we refer to herein as our “Form 10-K.” As used herein, the terms “we,” “our,” and “us” refer to TNP Strategic Retail Trust, Inc. and, as required by context, TNP Strategic Retail Operating Partnership, LP, a Delaware limited partnership, which we refer to as our “operating partnership,” and to their subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. 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. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
our ability to raise substantial proceeds in our initial public offering;
our ability to effectively deploy the proceeds raised in our initial public offering;
changes in economic conditions generally and the real estate and debt markets specifically;
our level of debt and the terms and limitations imposed on us by our debt agreements;
our ability to fill tenant vacancies;
legislative or regulatory changes (including changes to the laws governing the taxation of REITs);
the availability of capital;
interest rates; and
changes to U.S. generally accepted accounting principles, or GAAP.
Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed on any such forward-looking statements included herein.statements. All forward-looking statements are made as of the date this quarterly report is filed with the SEC, 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 herein, whether as a result of new information, future events, changed circumstances or any other reason.
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All forward-looking statements included herein should be read in light of the factors identified in the “Risk Factors” section previously disclosed in our 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 will be achieved.
Overview
We are a Maryland corporation formed on September 18, 2008 to invest in and manage a portfolio of income producing retail properties located primarily in the Western United States. We may also invest in real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. We plan to own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We have elected to be taxed as a real estate investment trust, or REIT, commencing with the taxable year ended December 31, 2009.
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On November 12, 2009, we achievedraised the minimum offering amount of $2,000,000 and offering proceeds were released to us from an escrow account. From the commencement of our public offering through September 30, 2010,March 31, 2011, we sold 2,131,4102,780,490 shares for gross offering proceeds of $21,013,000,$27,467,000, which includes 20,91944,687 shares issued throughpursuant to the DRIP,dividend reinvestment plan, for gross proceeds of $199,000.
We intend to invest in a portfolio of income-producing retail properties, primarily located in the Western United States, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. In addition to investments in real estate directly or through joint ventures, we may also acquire or originate first mortgages or second mortgages, mezzanine loans or other real estate-related loans, which we refer to collectively as “real estate-related loans,” in each case provided that the underlying real estate meets our criteria for direct investment. We may also invest in any other real property or other real estate-related assets that, in the opinion of our board of directors, meets our investment objectives and is in the best interests of our stockholders.
As of September 30, 2010,March 31, 2011, our portfolio included fourfive properties, which we refer to as “our properties” or “our portfolio”,portfolio,” comprising 408,000500,733 square feet of rentable square feet of multi-tenant retail and commercial space located in three states. These properties include Moreno Marketplace, or the Moreno Property,property, located in Moreno Valley, CA, Waianae Mall, or the Waianae Property,property, located in Oahu, HI, Northgate Plaza, or the Northgate Property,property, located in Tucson, AZ, and San Jacinto Esplanade, or the San Jacinto Property,property, located in San Jacinto, CA.CA, and Craig Promenade, or the Craig Promenade, located in Las Vegas, NV. As of September 30, 2010,March 31, 2011, the rentable space at theseour properties was 85.9%82.0% leased.
We have, and intend to in the future, used secured and unsecured financing to acquire real estate. Under our Articles of Amendment and Restatement, which we refer to as our “charter,” we have a limitation on borrowing which precludes us from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined as our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, our charter allows us to 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, 2010March 31, 2011 and December 31, 2009,2010, we exceeded the 300% limit due to the exclusion from total assets of intangible assets that were acquired with the acquisition of the Moreno, Waianae, Northgate and San Jacinto Properties.our properties, Because these intangible assets were part of the purchase price and because our overall indebtedness iswas less than 75% of the book value of our assets at September 30, 2010March 31, 2011 and December 31, 2009,2010, this excess borrowing has been approved by our independent directors.
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Subject to certain restrictions and limitations, our business is managed by TNP Strategic Retail Advisor, LLC, our external advisor, pursuant to an advisory agreement. We refer to TNP Strategic Retail Advisor, LLC as our “Advisor.“advisor.” Our Advisoradvisor conducts our operations and manages our portfolio of real estate investments. We have no paid employees.
TNP Securities, LLC, an affiliate of our Advisor,advisor, serves as the dealer manager for our dealer manager.initial public offering. We refer to TNP Securities, LLC as “TNP Securities” or our “dealer manager.”
Our office is located at 1900 Main Street, Suite 700, Irvine, California 92614, and our main telephone number is
(949) 833-8252.
First Quarter Highlights
During the three months ended March 31, 2011, we acquired the Craig Promenade Property for an aggregate purchase price of approximately $12,800,000, exclusive of closing costs.
Results of Operations
Our results of operations for the three months ended September 30, 2010March 31, 2011 are not indicative of those expected in future periods as we commenced operations on November 19, 2009 in connection with our first property acquisition. For the three months ended September 30, 2009, we had been formed and had begun
The following table provides summary information about our ongoing initial public offering but had not yet commenced real estate operations. As a result, we had no material results of operations for that period.
Comparison of the three months ended March 31, 2011 versus the three months ended March 31, 2010
| Three Months Ended March 31, | Increase | Percentage | ||||||||||||||
| 2011 | 2010 | (Decrease) | Change | |||||||||||||
Rental income | $ | 1,854,000 | 298,000 | $ | 1,556,000 | 522 | % | |||||||||
Interest income | 1,000 | 2,000 | (1,000 | ) | (50 | %) | ||||||||||
Operating and maintenance expenses | 839,000 | 161,000 | 678,000 | 421 | % | |||||||||||
General and administrative expenses | 418,000 | 381,000 | 37,000 | 10 | % | |||||||||||
Depreciation and amortization expense | 725,000 | 102,000 | 623,000 | 611 | % | |||||||||||
Acquisition expenses | 410,000 | 12,000 | 398,000 | 3,317 | % | |||||||||||
Interest expense | 680,000 | 221,000 | 459,000 | 208 | % | |||||||||||
Net loss | (1,217,000 | ) | (577,000 | ) | (640,000 | ) | 111 | % | ||||||||
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Revenue
Revenue was $1,854,000 for the three months ended March 31, 2011 and was comprised solely of rental income from our properties. The average occupancy rate for our portfolio was 85.9%82.0% based on 408,000500,733 of rentable square feet as of September 30, 2010.March 31, 2011. We expect rental income to increase in future periods as we acquire additional real estate investments and have full period operations from existing real estate investments.
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Operating and maintenance expenses were $839,000 for the three months ended March 31, 2011. Included in operating and maintenance expense are asset management and property management fees incurred and payable to our advisor and its affiliates of $80,000 and $81,000, respectively. We expect asset management and property management fees to increase in future periods as a result of anticipated future acquisitions. Operating and maintenance expense increased by $678,000 to $839,000 during the three months ended March 31, 2011 compared to $161,000 for the three months ended March 31, 2010. The increase was primarily due to four additional property acquisitions since March 31, 2010.
General and administrative expenses were $476,000$418,000 for the three months ended September 30, 2010.March 31, 2011. These general and administrative expenses consisted primarily of legal and accounting, restricted stock compensation, directors’ fees, insurance, due diligence costs for potential acquisitions and organization expenses reimbursable to our Advisor. We expect generaladvisor. General and administrative expensesexpense increased by $37,000 to increase in$418,000 during the future based on a full year of real estate operations and as a result of anticipated future acquisitions, butthree months ended March 31, 2011 compared to decrease as a percentage of total revenue.
Acquisition expenses
Acquisition expenses were $410,000 for the three months ended March 31, 2011, relating to the purchase of the Northgate Property and the San Jacinto Property.Craig Promenade. Pursuant to the advisory agreement with our Advisor,advisor, we pay an acquisition fee to our Advisoradvisor of 2.5% of the contract purchase price of each property or asset acquired. We may also be required to reimburse our Advisoradvisor for acquisition expenses incurred in the process of acquiring a property.
Depreciation and amortization expense
Depreciation and amortization expense was $819,000$725,000 for the three months ended September 30, 2010.March 31, 2011. We expect these amounts to increase in future years as a result of owning certain of our properties for a full year and as a result of anticipated future acquisitions.
Interest expense
Interest expense was $712,000$680,000 for the three months ended September 30, 2010,March 31, 2011, which included the amortization of deferred financing costs of $105,000.$50,000. Our real estate property acquisitions were financed with $40,155,000$48,015,000 of indebtedness. We expect that in future periods our interest expense will vary based on the amount of our borrowings, which will depend on the cost of borrowings, the amount of proceeds we raise in our ongoing initial public offering and our ability to identify and acquire real estate and real estate-related assets that meet our investment objectives.
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Interest income
Interest income for the three months ended March 31, 2011 and 2010 was $1,000, and $2,000, respectively, which was related primarily to interest earned on cash deposits held for future acquisitions.
Net loss
We had a net loss of $1,386,000$1,217,000 for the three months ended September 30, 2010.March 31, 2011. Our operating loss is due primarily to the reasons set forth above, the fact that we owned fourfive real estate investments as of September��30, 2010March 31, 2011 and that we commenced real estate operations on November 19, 2009.
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Liquidity and Capital Resources
Cash Flows from Operating Activities
As of March 31, 2011, we owned five real estate properties. During the three months ended March 31, 2011, net cash provided by operating activities increased by $699,000 to $80,000, compared to net cash used in operating activities of $619,000 during the three months ended March 31, 2010. During the three months ended March 31, 2011, net cash provided by operating activities consisted primarily of the following:
net loss of $1,217,000, adjusted for depreciation and amortization of $662,000;
$108,000 from decreases in prepaid and other assets;
$(85,000) from increases in accounts receivable;
$109,000 from decreases in deferred costs;
$254,000 from increases in accounts payable and accrued expenses;
$174,000 from increases in amounts due to affiliates; and
$45,000 from increases in allowance for doubtful accounts.
Cash Flows from Investing Activities
Our cash used in investing activities will vary based on how quickly we raise funds in our ongoing initial public offering and how quickly we invest those funds. During the three months ended March 31, 2011, net cash used in investing activities was $12,809,000 compared to $0 during the three months ended March 31, 2010. The increase primarily consisted of the acquisition of the Craig Promenade Property for an aggregate purchase price of $12,800,000. During the three months ended March 31, 2010, we did not acquire any real estate related properties and therefore, did not record net cash used in or provided by investing activities.
Cash Flows from Financing Activities
Our cash flows from financing activities consist primarily of proceeds from our ongoing initial public offering, debt financings and distributions paid to our stockholders. During the three months ended March 31, 2011, net cash provided by financing activities increased by $8,520,000 to $11,831,000, compared to net cash provided by financing activities of $3,311,000 during the three months ended March 31, 2010. The increase primarily consisted of the following:
Net cash provided by debt financings as a result of proceeds from notes payable of $9,250,000, partially offset by principal payments on notes payable of $635,000 and payments of deferred financing costs of $59,000;
$4,016,000 of cash provided by offering proceeds related to our initial public offering, net of payments of commissions, dealer manager fees and other organization and offering expenses of $459,000; and
$282,000 of cash distributions, after giving effect to dividends reinvested by stockholders of $142,000.
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Short-term Liquidity and Capital Resources
We commenced real estate operations with the acquisition of our first property on November 19, 2009. Our principal demand for funds will be for the acquisition of real estate assets, the payment of operating expenses, principal and interest payments on our outstanding indebtedness and the payment of distributions to our stockholders. Currently our cash needs for operations are covered from cash provided by property operations and the sale of shares of our common stock, including those offered for sale through the DRIP.distribution reinvestment plan. Over time, we intend to generally fund our cash needs for items other than asset acquisitions from operations. Our cash needs for acquisitions and investments will be funded primarily from the sale of shares of our common stock, including those offered for sale through the DRIP,distribution reinvestment plan, and through the assumption of debt or other financing. Operating cash flows are expected to increase as additional properties are added to our portfolio. The offering and organization costs associated with our ongoing offering are initially paid by our Advisor,advisor, which will be reimbursed for such costs up to 3.0% of the gross proceeds raised by us in the offering. As of September 30, 2010,March 31, 2011, our Advisoradvisor or its affiliates have paid, $2,189,000$2,329,000 and we have reimbursed $624,000$826,000 of offering and organization costs.
As of November 12, 2010,March 31, 2011, we have $4,500,000$22,042,763 outstanding on our existing line of credit with KeyBank National Association, or KeyBank, which expired on November 12, 2010. We have received an extension of the existing Credit Agreement, or the Credit Agreement, from KeyBank until December 10, 2010, and are currently in the process of negotiating a new credit facility with KeyBank, or the New Credit Facility. We intend to transfer the $4,500,000 currently outstanding under the existing Credit Agreement into the New Credit Facility, which we anticipate will provide long-term financing of up to three years under the New Credit Facility.KeyBank. See below for more information regarding our Credit Agreement.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for real estate and real estate-related investments and the payment of acquisition related expenses, operating expenses, distributions to stockholders, redemptions of shares and interest and principal on any future indebtedness. Generally, we expect to meet cash needs for items other than acquisitions and acquisition related expenses from our cash flow from operations, and we expect to meet cash needs for acquisitions from the net proceeds of our ongoing offering and from debt financings. We expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid at the properties; however, we may use other sources to fund distributions as necessary, including the proceeds from our ongoing offering, cash advanced to us by our Advisor,advisor, borrowing under our Credit Agreement or New Credit Facility once it is completedcredit agreement and/or borrowings in anticipation of future cash flow. During the three and nine months ended September 30, 2010,March 31, 2011, we funded distributions to our stockholders from the proceeds of our offering.
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On November 12, 2009, the operating partnershipDecember 17, 2010, we, through our wholly owned subsidiary, TNP SRT Secured Holdings, LLC, entered the Credit Agreement with KeyBank, as administrative agent for itself and the other lenders named ininto the credit agreement or the lenders,with KeyBank to establish a secured revolving credit facility, or the credit facility, with an initial maximum aggregate commitment of $35 million. The commitment may be increased in minimum increments of $5 million, by up to $115 million in the aggregate, for a maximum aggregate borrowing capacitycommitment of up to $15,000,000.$150 million, or the maximum commitment. We may reduce the facility amount at any time, subject to certain conditions, in minimum increments of $5 million, provided that in no event may the facility amount be less than $20 million, unless the commitments are reduced to zero and terminated. The proceeds of the revolving credit facility may be used by our operating partnershipus for investments in properties and real estate-related assets, improvementgeneral corporate purposes, subject to the terms of properties, costs involvedthe credit agreement. Tranche B of the credit facility in the ordinary coursemaximum amount of $5 million matures on June 30, 2011. Tranche A of the operating partnership’s business and for other general working capital purposes; provided, however, that prior to any funds being advanced to the operating partnership under the revolving credit facility KeyBank shallmatures on December 17, 2013. We have a one year extension of the authorityTranche A maturity date subject to review and approve, in its sole discretion, the investments that the operating partnership proposes to make with such funds, and the operating partnership shall be required to satisfy certain enumerated conditions as set forth in the credit agreement. As of March 31, 2011, the outstanding balances under Tranche A and Tranche B of the credit facility were $19,966,000 and $2,077,000, respectively. In March 2011, we entered into an interest rate swap agreement including, butin the notional amount of $16 million with an interest rate cap of 7% effective April 4, 2011. This interest rate swap agreement is not limiteddesignated as a hedge.
Borrowings determined by reference to limitationsthe Alternative Base Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Alternate Base Rate plus 2.50% per annum in the case of a Tranche A borrowing and 3.25% in the case of a Tranche B borrowing, or (2) the maximum rate of interest permitted by applicable law. Borrowings determined by reference to the Adjusted LIBO Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Adjusted LIBO Rate plus 3.50% per annum in the case of a Tranche A borrowing and 4.25% in the case of a Tranche B borrowing, or (2) the maximum rate of interest permitted by applicable law. The Tranche A maturity date is December 17, 2013. We have a one year extension available to us subject to certain conditions as set forth in the credit agreement. The Tranche B maturity date is June 30, 2011.
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Borrowings under the credit agreement are secured by (1) guarantees granted by Thompson National Properties, LLC, our sponsor, AWT Family Limited Partnership, and Anthony W. Thompson, collectively the “Tranche B guarantors” on outstanding indebtednessa joint and several basis, of the prompt and full payment of all of the obligations, terms and conditions to be paid, performed or observed with respect to any Tranche B borrowings, (2) a proposed property acquisition,security interest granted in favor of KeyBank with respect to all operating, depository (including, without limitation, the deposit account used to receive subscription payments for the sale of equity interests in our public offering), escrow and security deposit accounts and all cash management services of the US, our operating partnership and borrower under the credit agreement and, (3) a ratiodeed of net operating incometrust, assignment agreement, security agreement and fixture filing in favor of KeyBank, with respect to debt service on the prospective propertyMoreno Marketplace, San Jacinto Esplanade, and Craig Promenade properties.
As of at least 1.35March 31, 2011, the outstanding balance under the credit agreement was $22 million and $13 million was available, subject to 1.00KeyBank’s review and a requirement thatapproval, and our meeting certain requirements pursuant to the prospective property be 100% owned, directly or indirectly, byterms of the operating partnership.
Notes Payable
During the three and nine months ended September 30,March 31, 2011 and 2010, a totalwe incurred $680,000 and $221,000 of $8,500,000 was borrowed under the Credit Agreement, including $1,900,000 and $6,600,000 relating to the Northgate and San Jacinto Property acquisitions, respectively.interest expense. As of September 30, 2010March 31, 2011 and December 31, 2009, $4,800,0002010, interest expense payable was $209,000 and $0 were outstanding on the Credit Agreement, respectively. The $4,800,000 outstanding at September 30, 2010 relates to the San Jacinto Property acquisition and is secured by the property subject to the covenants and borrowing terms described above. As of November 11, 2010, we paid down $300,000 of the existing $4,800,000 outstanding to reduce the aggregate amount outstanding to $4,500,000.
Our scheduled debt of $74,000 and $325,000, respectively, which consisted of $34,105,000 of outstanding mortgage debt on the Moreno Property, the Waianae Property and the Northgate Property, $1,250,000 of outstanding indebtedness pursuant to a subordinated convertible note issued in connection with the Moreno Property acquisition and $4,800.000 outstanding under our existing Credit Agreement relating to the San Jacinto Property acquisition.
| Payments due by period (1) | ||||||||||||||||||||
| Less Than 1 | More Than 5 | |||||||||||||||||||
| Total | Year | 1-3 Years | 4-5 Years | Years | ||||||||||||||||
| Principal payments – fixed rate debt | $ | 35,355,000 | (2) | $ | 616,000 | $ | 10,802,000 | $ | 20,641,000 | $ | 3,296,000 | |||||||||
| Principal payments – variable rate debt | 4,800,000 | 4,800,000 | — | — | — | |||||||||||||||
| Interest payments – fixed rate debt | 9,141,000 | 1,894,000 | 4,328,000 | 1,670,000 | 1,249,000 | |||||||||||||||
| Interest payments – variable rate debt | 56,000 | 56,000 | — | — | — | |||||||||||||||
Total | $ | 49,352,000 | $ | 7,366,000 | $ | 15,130,000 | $ | 22,311,000 | $ | 4,545,000 | ||||||||||
| Payments due by period (1) | ||||||||||||||||||||
| Total | Less Than 1 Year | 1-3 Years | 4-5 Years | More Than 5 Years | ||||||||||||||||
Principal payments – fixed rate debt | $ | 25,972,000 | (2) | $ | 539,000 | $ | 1,826,000 | $ | 20,419,000 | $ | 3,188,000 | |||||||||
Principal payments – variable rate debt | 22,043,000 | 2,077,000 | 19,966,000 | — | — | |||||||||||||||
Interest payments – fixed rate debt | 7,933,000 | 1,474,000 | 4,217,000 | 1,095,000 | 1,147,000 | |||||||||||||||
Interest payments – variable rate debt | 3,052,000 | 1,130,000 | 1,922,000 | — | — | |||||||||||||||
Total | $ | 59,000,000 | $ | 5,220,000 | $ | 27,931,000 | $ | 21,514,000 | $ | 4,335,000 | ||||||||||
| (1) | The table above does not include amounts due to our | |
| (2) |
Contractual Commitments and Contingencies
In order to execute our investment strategy, we primarily utilize secured debt, and, to the extent available, may in the future utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest rate risks, are properly balanced with the benefit of using leverage. We may elect to obtain financing subsequent to the acquisition date on future real estate acquisitions and initially acquire investments without debt financing. Once we have fully invested the proceeds of our ongoing initial public offering, we expect our debt financing to be between 50% of the market value of our properties Our charter limits our borrowings to us from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined as our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, our charter allows us to temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of March 31, 2011 and December 31, 2010, we exceeded the 300% limit due to the
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exclusion from total assets of intangible assets that were acquired with the acquisition of our properties, Because these intangible assets were part of the purchase price and because our overall indebtedness was less than 75% of the book value of our assets at March 31, 2011 and December 31, 2010, this excess borrowing has been approved by our independent directors.
In addition to using our capital resources for investing purposes and meeting our debt obligations, we expect to use our capital resources to make certain payments to our advisor and the dealer manager. During our organization and offering stage, these payments will include payments to the dealer manager for selling commissions and dealer manager fees and payments to the dealer manager and our advisor for reimbursement of certain organization and other offering expenses. However, we will not reimburse our advisor to the extent that organization and offering expenses, excluding selling commissions and dealer manager fees paid by us would exceed 3% of our gross offering proceeds. During our acquisition and development stage, we expect to make payments to our advisor in connection with the selection and origination or purchase of real estate and real estate-related investments, the management of our assets and costs incurred by our advisor in providing services to us.
The following is a summary of our contractual obligations as of March 31, 2011:
| Payments Due During the Years Ending December 31, | ||||||||||||||||||||
Contractual Obligations | Total | Remainder of 2011 | 2012-2013 | 2014-2015 | Thereafter | |||||||||||||||
Outstanding debt obligations (1) | $ | 48,015,000 | $ | 2,616,000 | $ | 21,792,000 | $ | 20,419,000 | $ | 3,188,000 | ||||||||||
Interest payments on outstanding debt obligations (2) | 10,985,000 | 2,604,000 | 6,139,000 | 1,095,000 | 1,147,000 | |||||||||||||||
Tenant improvements (3) | $ | 98,000 | $ | 98,000 | — | — | — | |||||||||||||
| (1) | Amounts include principal payments under notes payable based on maturity dates of debt obligations outstanding as of March 31, 2011. |
| (2) | Projected interest payments are based on the outstanding principal amounts and interest rates in effect at March 31, 2011 (consisting of the contractual interest rate). We incurred interest expense of $680,000 during the three months ended March 31, 2011, excluding amortization of deferred financing costs totaling $50,000. |
| (3) | Represents obligations for tenant improvements under tenant leases as of March 31, 2011. |
Organization and Offering Costs
Organization and offering costs (other than selling commissions and the dealer manager fee) are initially being paid by our advisor and its affiliates on our behalf. Such costs include legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses of certain of our advisor’s employees and employees of our advisor’s affiliates and others. Pursuant to the advisory agreement with our advisor, we are obligated to reimburse our advisor or its affiliates, as applicable, for organization and offering costs associated with our initial public offering, provided we are not obligated to reimburse our advisor to the extent organization and offering costs, other than selling commissions and dealer manager fees, incurred by us exceed 3.0% of the gross offering proceeds from the initial public offering. Any such reimbursement will not exceed actual expenses incurred by our advisor. Prior to raising the minimum offering amount of $2,000,000 on November 12, 2009, we had no obligation to reimburse our advisor or its affiliates for any organization and offering costs.
As of March 31, 2011 and December 31, 2010, organization and offering costs incurred by our advisor on our behalf were $2,329,000 and $2,265,000, respectively. These costs are payable by us to the extent organization and offering costs, other than selling commissions and dealer manager fees, do not exceed 3.0% of the gross proceeds of our initial public offering. As of March 31, 2011 and December 31, 2010, organization and offering costs did exceed 3.0% of the gross proceeds of our initial public offering, thus the amount in excess of the 3.0% limit, or $1,462,000 and $1,571,000, respectively, has been deferred.
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All offering costs, including sales commissions of $1,743,000 and dealer manager fees of $745,000, are recorded as an offset to additional paid-in-capital, and all organization costs are recorded as an expense when the Company has an obligation to reimburse Advisor.
Funds from Operations and Modified Funds from Operations
Funds from operations, or FFO, is a non-GAAP performance financial measure that is widely recognized as a measure of Real Estate Investment Trust operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with generally accepted accounting principles, or GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of preexisting relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.
Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management, investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Investment Program Association, or the IPA, MFFO as defined by the IPA excludes from FFO the following items:
| (1) | acquisition fees and expenses; |
| (2) | straight line rent amounts, both income and expense; |
| (3) | amortization of above or below market intangible lease assets and liabilities; |
| (4) | amortization of discounts and premiums on debt |
| (5) | impairment charges; |
| (6) | gains or losses from the early extinguishment of debt; |
| (7) | gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations; |
| (8) | gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives; |
| (9) | gains or losses related to consolidation from, or deconsolidation to, equity accounting; |
| (10) | gains or losses related to contingent purchase price adjustments; and |
| (11) | adjustments related to the above items for unconsolidated entities in the application of equity accounting. |
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We believe that MFFO is a helpful measure of operating performance because it excludes costs that management considers more reflective of investing activities or non-operating valuation and other changes. Accordingly, we believe that MFFO can be a useful metric to assist management, investors and analysts in assessing the sustainability of operating performance. As explained below, management’s evaluation of September 30,our operating performance excludes the items considered in the calculation based on the following economic considerations:
In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analyses differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both business combinations and equity investments were capitalized; however, beginning in 2009, acquisition costs related to business combinations are expensed. These acquisitions costs have been and will continue to be funded from the proceeds of our continuous public offering and other financing sources and not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition expenses include those costs paid to our advisor and third parties.
Adjustments for amortization of above or below market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate.
Adjustments for straight line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
We believe MFFO is useful to investors in evaluating how our portfolio might perform after our offering and acquisition stage has been completed and, as a result, may provide an indication of the sustainability of our distributions in the future. However, as described in greater detail below, MFFO should not be considered as an alternative to net income (loss), nor as an indication of our liquidity. Many of the adjustments to MFFO are similar to adjustments required by SEC rules for the presentation of pro forma business combination disclosures, particularly acquisition expenses, gains or losses recognized in business combinations and other activity not representative of future activities. Because MFFO is primarily affected by the same factors as FFO but without non-operating changes, particularly valuation changes, we believe the presentation of MFFO is useful to investors because fluctuations in MFFO are more indicative of changes in operating activities. MFFO is also more comparable in evaluating our performance over time and as compared to other real estate companies, which may not be as involved in acquisition activities or as affected by impairments and other non-operating charges.
FFO or MFFO should not be considered as an alternative to net income (loss), nor as indications of our liquidity, nor are they either indicative of funds available to fund our cash needs, including our ability to make distributions. In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments which are increases to MFFO are, and may continue to be, a significant use of cash. MFFO also excludes impairment charges, rental revenue adjustments and unrealized gains and losses related to certain other fair value adjustments. Although the related holdings are not held for sale or used in trading activities, if the holdings were sold currently, it could affect our operating results. Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.
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Our calculation of FFO and MFFO and the reconciliation to net income (loss) is presented in the following table for the three months ended March 31, 2011 and 2010:
| Three Months Ended March 31, 2011 | Three Months Ended March 31, 2010 | |||||||
Net loss | $ | (1,217,000 | ) | $ | (577,000 | ) | ||
Adjustments: | ||||||||
Depreciation of real estate assets | 647,000 | 75,000 | ||||||
Amortization of tenant improvements and tenant allowances | 69,000 | 10,000 | ||||||
Amortization of deferred leasing costs | 9,000 | 17,000 | ||||||
FFO | $ | (492,000 | ) | $ | (475,000 | ) | ||
FFO per share - basic and diluted | $ | (0.20 | ) | $ | (0.67 | ) | ||
Adjustments: | ||||||||
Straight line rent | (47,000 | ) | (23,000 | ) | ||||
Acquisition costs | 410,000 | 12,000 | ||||||
Amortization of above market leases | 69,000 | 9,000 | ||||||
Amortization of below market leases | (132,000 | ) | — | |||||
Accretion of discounts on debt investments | (1,000 | ) | — | |||||
Amortization of debt premiums | 16,000 | — | ||||||
MFFO | $ | (177,000 | ) | $ | (477,000 | ) | ||
MFFO per share - basic and diluted | $ | (0.07 | ) | $ | (0.67 | ) | ||
Net loss per share - basic and diluted | $ | (0.48 | ) | $ | (0.81 | ) | ||
Weighted average common shares outstanding - basic and diluted | 2,518,786 | 709,573 | ||||||
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Distributions
During our offering stage, when we may raise capital in our ongoing initial public offering more quickly than we acquire income-producing assets, and for some period after our offering stage, we may not be able to pay distributions solely from our cash FFO, in which case distributions may be paid in part from debt financing or with proceeds from our initial public offering. Distributions declared and distributions paid for the three months ended March 31, 2011 were as follows:
Period | Distributions Declared (1) | Distributions Declared Per Share (1) | Cash | Distributions Paid (2) Reinvested | Total | |||||||||||||||
| First Quarter 2011 | $ | 444,000 | $ | 0.05833 | $ | 282,000 | $ | 142,000 | $ | 424,000 | ||||||||||
| (1) | Distributions for the period from January 1, 2011 through March 31, 2011 are calculated at a monthly cash distribution rate of $0.05833 per share of common stock. |
| (2) | Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 15 days following month end. |
We commenced operations upon the acquisition of the Moreno Marketplace property on November 19, 2009. We paid $933,000 in cash distributions during the period from December 2009 (the date we first paid distributions) through March 31, 2011. The Company’s net income (loss) from inception through March 31, 2011 was $(6,809,000). For the fourth quarter of 2009, the year ended December 31, 2010, we had cash and cash equivalents on hand of $834,000.
For the three months ended March 31, 2011, we paid aggregate distributions of $424,000, including $282,000 of distributions paid in cash and $142,000 of distributions reinvested through our dividend reinvestment plan. Our net loss for the ninethree months ended September 30, 2010March 31, 2011 was $1,515,000,$(1,217,000), FFO for the three months ended March 31, 2011 was $(492,000), and cash flow from operations for the three months ended March 31, 2011 was $80,000. We funded our total distributions paid, which was primarily dueincludes net cash distributions and dividends reinvested by stockholders with proceeds from our initial public offering. See the reconciliation of FFO to the net loss incurred as a resultabove under “Funds From Operations and Modified Funds From Operations.”
Critical Accounting Policies
Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the fact that we owned four properties and we commenced real estate operations on November 19, 2009.
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Interim Financial Information
The financial information as of and for the period ended September 30, 2010March 31, 2011 included in this quarterly report 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, 2010.March 31, 2011. 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Form 10-K.
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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.
REIT Compliance
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, for tax purposes, we are requiredmust meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax on income that we distribute as dividends to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year, following the first year we elect to be taxed as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income and net cash available for distribution to our stockholders.
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| Three Months ended | Nine Months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Net Loss | $ | (1,386,000 | ) | $ | (89,000 | ) | $ | (3,330,000 | ) | $ | (89,000 | ) | ||||
| Add: | ||||||||||||||||
| Depreciation and amortization of real estate assets | 819,000 | — | 1,191,000 | — | ||||||||||||
| FFO | (567,000 | ) | (89,000 | ) | (2,139,000 | ) | (89,000 | ) | ||||||||
| Add: | ||||||||||||||||
| Acquisition expenses | 492,000 | — | 1,326,000 | — | ||||||||||||
| Adjusted FFO | $ | (75,000 | ) | $ | (89,000 | ) | $ | (813,000 | ) | $ | (89,000 | ) | ||||
| Adjusted FFO per share — basic and diluted | $ | (0.04 | ) | $ | (4.01 | ) | $ | (0.66 | ) | $ | (4.01 | ) | ||||
| Weighted-average number of shares outstanding — basic and diluted | 1,837,011 | 22,222 | 1,240,067 | 22,222 | ||||||||||||
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As of September 30, 2010,March 31, 2011, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial conditions,condition, changes in financial conditions,condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Related-Party Transactions and Agreements
We have entered into agreements with our advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our advisor or its affiliates for acquisition fees and expenses, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and reimbursement of operating costs. Refer to Note 1312 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for further explanationa discussion of applicable new accounting pronouncements.
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Subsequent Events
Status of the Offering
We commenced our ongoing initial public offering of 100,000,000 shares of common stock on August 7, 2009. As of May 6, 2011, we had sold 3,007,091 shares of common stock in the offering for gross offering proceeds of $ 29,729,165, including 50,192 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $476,824.
On March 31, 2011, we authorized a monthly distribution in the aggregate amount of $154,000, of which $154,000 was accrued as of March 31, 2011 and $102,000 was paid in cash on April 15, 2011 and $52,000 was paid through the date of this Quarterly Report on Form 10-Q. Refer to Note 14 to our condensed consolidated unaudited financial statements includeddividend reinvestment plan in the Quarterly Reportform of additional shares issued on Form 10-Q for further explanation. Such events include:
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Proposed Property Acquisition
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We may beare exposed to the effects of interest rate changes primarily as a result of long-term debtborrowings used to maintain liquidity and to fund capital expendituresthe acquisition, expansion and expandrefinancing of our real estate investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or highoperations.. Our interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We will seekrate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower our overall borrowing costs. We have managed and will continue to manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may use derivativeutilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to hedge exposures tolimit the effects of changes in interest rates on loans secured by our assets. The marketoperations. When we use these types of derivatives to hedge the risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limitof interest-bearing liabilities, we may be subject to certain risks, including the types and degree of market risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may be undertaken. With regardexceed the amount we invested in the instruments.
Borrowings determined by reference to the Alternative Base Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Alternate Base Rate plus 2.50% per annum in the case of a Tranche A borrowing and 3.25% in the case of a Tranche B borrowing, or (2) the maximum rate of interest permitted by applicable law. Borrowings determined by reference to the Adjusted LIBO Rate (as defined in the Credit Agreement) bear interest at the lesser of (1) the Adjusted LIBO Rate plus 3.50% per annum in the case of a Tranche A borrowing and 4.25% in the case of a Tranche B borrowing, or (2) the maximum rate of interest permitted by applicable law. The Tranche A maturity date is December 17, 2013. We have a one year extension available to us subject to certain conditions as set forth in the credit agreement. The Tranche B maturity date is June 30, 2011.
We borrow funds at a combination of fixed and variable rates. Interest rate financing,fluctuations will generally not affect our Advisor will assessfuture earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. At March 31, 2011, the fair value of our fixed rate debt was $25,752,000 and the total value of our fixed rate debt was $25,972,000. The fair value estimate of our fixed rate debt was estimated using a discounted cash flow risk by continually identifyinganalysis utilizing rates we would expect to pay for debt of a similar type and monitoring changesremaining maturity if the loans were originated at March 31, 2011. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our Advisor will maintain risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy will be designed to minimize theinstruments, would have a significant impact on our net income and funds from operations from changesoperations.
Conversely, movements in interest rates on variable rate debt would change our future earnings and cash flows, but not significantly affect the overall returnsfair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. At March 31, 2011, we were exposed to market risks related to fluctuations in interest rates on your investment may be reduced. As$22 million of September 30, 2010, we had $4,800,000 variable rate debt outstanding, underafter giving consideration to the impact of a cap rate agreement on approximately $16 million of our Credit Agreement. An increase of 1.0% invariable rate debt. Based on interest rates relating to thisas of March 31, 2011, if interest rates were 100 basis points higher during the 12 months ending March 31, 2012, interest expense on our variable rate debt would result in an increase of $48,000 ofby $210,000 and if interest rates were 100 basis points lower during the 12 months ending March 31 2012, interest expense overon our variable rate debt would decrease by $210,000.
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The weighted-average interest rates of our fixed rate debt and variable rate debt at March 31, 2011 were 5.66% and 5.57%, respectively. The weighted-average interest rate represents the next 12 months.
As of the end of the period covered by this report, our management, including our Chief Executive Officerchief executive officer and our Chief Financial Officer,chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures.procedures (as defined in Rule 13a-15(e) and 13d-15(e) under the Exchange Act). Based upon, and as of the date of, the evaluation, our Chief Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that the disclosure controls and procedures were effective (as definedas of the end of the period covered by this report to ensure that information required to be disclosed in Rules 13a-15(e)the reports we file and 15d-15(e)submit under the Securities Exchange Act of 1934,is recorded, processed, summarized and reported as amended, orand when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act).
Internal Control Over Financial Reporting
There have not evaluated any changebeen no changes in our internal control over financial reporting that occurred during our last fiscal quarter duethat have materially affected, or are reasonably likely to a transition period established by the rules of the SEC for newly public companies.
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| ITEM 1A. | RISK FACTORS |
Please see the risks discussed in Part 1,I, Item 1A Risk Factors of theour Annual Report on Form 10-K.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the nine months ended September 30, 2010,period covered by this Quarterly Report on Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, or the Securities Act, and we did not repurchase any of our shares pursuant to our share redemption program.
On August 7, 2009, our Registration Statement on Form S-11 (File No. 333-154975) registering, covering a public offering of up to $1,100,000,000 in100,000,000 shares of our common stock in our primary offering and 10,526,316 shares of common stock under our dividend reinvestment plan, was declared effective under the Securities Act and we commenced our initial public offering.of 1933. We are offering up to 100,000,000 shares of our common stock to the public in our primary offering at an aggregate offering price of up to $1.0 billion, or $10.00 per share, with discounts available to certain categories of purchasers. The 10,526,316 shares offered under our distribution reinvestment plan are initially being offered at an aggregate offering price of $9.50 per share. We will offer shares in our primary offering until the earlier of August 7, 2011, unless extended, or until all 100,000,000 shares are sold in the primary offering. We may sell shares under the dividend reinvestment plan beyond the termination of the primary offering until we have sold all the shares under the plan.
From the commencement of our ongoing initial public offering through March 31, 2011, we had accepted investors’ subscriptions for and upissued 2,780,490 shares of common stock in our ongoing initial public offering for gross offering proceeds of $27,467,000, including 44,687 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $425,000.
As of March 31, 2011, we had incurred selling commissions, dealer manager fees and organization and other offering costs in the amounts set forth below. The dealer manager re-allowed all of the selling commissions and a portion of the dealer manager fees to 10,526,316participating broker dealers.
Type of Expense Amount | Amount | Estimated/Actual | ||||||
Selling commissions and dealer manager fees | $ | 2,488,000 | Actual | |||||
Other underwriting compensation | Actual | |||||||
Organization and offering costs | 2,329,000 | Actual | ||||||
Total expenses | $ | 4,817,000 | ||||||
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We expect to use substantially all of the net proceeds from our ongoing initial public offering to invest in and manage a diverse portfolio of real estate and real estate-related investments. We may use the net proceeds from the sale of shares under our dividend reinvestment plan for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program; capital expenditures; tenant improvement costs and other funding obligations. As of March 31, 2011, we have used the net proceeds from our ongoing primary public offering and debt financing to invest $66,126,000 in real estate properties, including $2,171,000 of acquisition expenses.
For the three months ended March 31, 2011, we did not redeem any shares of our common stock pursuant to our distribution reinvestment plan at $9.50 per share.
| ITEM 5. | OTHER INFORMATION. |
On March 31, 2011, we entered into an interest rate swap agreement with KeyBank in the notional amount of $16 million with an interest rate cap of 7%, effective April 4, 2011.
| ITEM 6. | EXHIBITS |
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
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| TNP Strategic Retail Trust, Inc. | |||||||
| Date: | By: | /s/ Anthony W. Thompson | |||||
| Anthony W. Thompson | |||||||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | |||||||
| Date: | |||||||
| May 13, 2011 | |||||||
| By: | /s/ James R. Wolford | ||||||
| James R. Wolford | |||||||
Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) | |||||||
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The following exhibits are included, or incorporated by reference, in the Quarterly Report on Form 10-Q for the ninethree months ended September 30, 2010March 31, 2011 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | ||
3.1 | Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc. (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-154975) and incorporated herein by reference). | ||
3.2 | Bylaws of TNP Strategic Retail Trust, Inc. (incorporated by reference as Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (No. 333-154975) and incorporated herein by reference). | ||
4.1 | Form of Subscription Agreement | ||
4.2 | Distribution Reinvestment Plan | ||
10.1 | |||
10.2 | Reinstatement and Second Amendment to Purchase and Sale Agreement, dated September 29, 2010, by and between TNP Acquisitions, LLC and 525, 605, 655, 675, 715, 725, 755, 775 & 785 West Craig Road Holdings, LLC (incorporated by reference Exhibit 10.2 to the April 5 Form 8-K) | ||
10.3 | Fourth Amendment to Purchase and Sale Agreement, dated March 15, 2011, by and between TNP Acquisitions, LLC and 525, 605, 655, 675, 715, 725, 755, 775 & 785 West Craig Road Holdings, LLC (incorporated by reference Exhibit 10.3 to the April 5 Form 8-K) | ||
10.4 | Assignment of Purchase and Sale Agreement, dated March 30, 2011, by and between TNP Acquisitions, LLC and TNP SRT Craig Promenade, LLC (incorporated by reference Exhibit 10.4 to the April 5 Form 8-K) | ||
10.5 | Property and Asset Management Agreement, dated March 30, 2011, by and between TNP SRT Craig Promenade, LLC and TNP Property Manager, LLC (incorporated by reference Exhibit 10.5 to the April 5 Form 8-K) | ||
10.6 | Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated | ||
10.7 | Environmental and Hazardous Substances Indemnity Agreement, dated | ||
10.8 | First Omnibus Amendment and Reaffirmation of Loan Documents, dated as of March 30, 2011, by and among TNP SRT Secured Holdings, LLC, TNP SRT Moreno Marketplace, LLC, TNP SRT San Jacinto, LLC, TNP SRT Craig Promenade, LLC, KeyBank National Association, TNP Strategic Retail (incorporated by reference | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
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