Document and Entity Information
Document and Entity Information | 6 Months Ended |
Jun. 30, 2017USD ($)shares | |
Document and Entity Information: | |
Entity Registrant Name | Hartman Short Term Income Properties XX, Inc. |
Document Type | 10-Q |
Document Period End Date | Jun. 30, 2017 |
Trading Symbol | hartxx |
Amendment Flag | false |
Entity Central Index Key | 1,446,687 |
Current Fiscal Year End Date | --12-31 |
Entity Common Stock, Shares Outstanding | shares | 18,170,818 |
Entity Public Float | $ | $ 168,977,000 |
Entity Filer Category | Smaller Reporting Company |
Entity Current Reporting Status | Yes |
Entity Voluntary Filers | No |
Entity Well-known Seasoned Issuer | No |
Document Fiscal Year Focus | 2,017 |
Document Fiscal Period Focus | Q2 |
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands | Jun. 30, 2017 | Dec. 31, 2016 |
ASSETS | ||
Real estateInvestment property at cost | $ 257,109 | $ 253,099 |
Real estate investment property accumulated depreciation | (61,971) | (49,872) |
Real estate investment property at cost, net | 195,138 | 203,227 |
Cash and cash equivalents | 711 | 3,254 |
Restricted cash | 2,371 | 2,371 |
Accrued rent and accounts receivable, net | 6,522 | 5,266 |
Notes receivable - related party | 11,431 | 11,431 |
Deferred lease commissions and loan costs, net | 5,795 | 4,775 |
Goodwill | 250 | 250 |
Prepaid expenses and other assets | 2,533 | 1,662 |
Real estate held for disposition | 7,050 | |
Due from related parties | 1,025 | |
Investment in affiliate | 8,978 | 8,978 |
Total assets | 234,754 | 248,264 |
LIABILITIES | ||
Note payable | 113,946 | 114,151 |
Note payable - real estate held for disposition, net | 3,458 | |
Accounts payable and accrued expenses | 9,921 | 12,057 |
Due to related parties | 343 | |
Tenants' security deposits | 1,858 | 1,824 |
Total liabilities | 125,725 | 131,833 |
Common stock | 18 | 18 |
Additional paid in capital | 168,977 | 169,406 |
Accumulated distributions and net loss | (70,521) | (59,674) |
Noncontrolling interests in subsidiary | 10,555 | 6,681 |
Total equity | 109,029 | 116,431 |
Total liabilities and total stockholders' equity | $ 234,754 | $ 248,264 |
CONSOLIDATED STATEMENTS OF OPER
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ / shares in Thousands | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2017 | Jun. 30, 2016 | Jun. 30, 2017 | Jun. 30, 2016 | |
Revenues | ||||
Rental revenues | $ 9,665,000 | $ 8,058,000 | $ 19,350,000 | $ 15,993,000 |
Tenant reimbursements and other revenues | 1,082,000 | 1,158,000 | 2,619,000 | 2,473,000 |
Total revenues | 10,747,000 | 9,216,000 | 21,969,000 | 18,466,000 |
Expenses | ||||
Property operating expenses | 3,788,000 | 2,842,000 | 6,987,000 | 6,068,000 |
Asset management and acquisition fees | 440,000 | 888,000 | 880,000 | 1,221,000 |
Organization and offering costs | 206,000 | (44,000) | ||
Real estate taxes and insurance | 1,478,000 | 1,162,000 | 2,982,000 | 2,349,000 |
Depreciation and amortization | 5,940,000 | 5,383,000 | 12,098,000 | 10,685,000 |
General and administrative | 744,000 | 670,000 | 1,321,000 | 1,245,000 |
Interest and dividend income | (314,000) | (391,000) | (666,000) | (391,000) |
Interest expense | 1,481,000 | 890,000 | 2,864,000 | 1,736,000 |
Total expenses | 13,557,000 | 11,650,000 | 26,466,000 | 22,869,000 |
Loss from continuing operations | (2,810,000) | (2,434,000) | (4,497,000) | (4,403,000) |
Loss from discontinued operations, net | 8,000 | |||
Net loss | (2,810,000) | (2,434,000) | (4,505,000) | (4,403,000) |
Net income attributable to noncontrolling interests | $ (17,000) | $ 50,000 | $ 47,000 | $ 50,000 |
Loss attributable to common stockholders | $ (2,793) | $ (2,484) | $ (4,552) | $ (4,453) |
Net loss attributable to common stockholders per share | $ (0.15) | $ (0.14) | $ (0.25) | $ (0.27) |
Weighted average number of common shares outstanding, basic and diluted | 18,126 | 17,910 | 18,147 | 16,500 |
CONSOLIDATED STATEMENTS OF CASH
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands | 6 Months Ended | |
Jun. 30, 2017 | Jun. 30, 2016 | |
Cash flows from operating activities: | ||
Net loss | $ (4,505) | $ (4,403) |
Stock based compensation | 66 | 50 |
Depreciation and amortization expense | 12,098 | 10,685 |
Deferred loan and leasing commission costs amortization | 830 | 510 |
Loss on real estate held for disposition | 27 | |
(Increase) decrease accrued rent and accounts receivable | (1,445) | (1,006) |
Deferred leasing commmission costs | (1,609) | (1,489) |
(Increase) decrease prepaid expenses and other assets | (891) | (628) |
Increase (decrease) accounts payable and accrued expenses | (2,387) | (2,243) |
Increase (decrease) on due to related parties | (1,368) | (4,349) |
Increase (decrease) tenants' security deposits | 34 | 86 |
Net cash provided by (used in) operating activities | 1,039 | (2,544) |
Cash flows from investing activities: | ||
Acquisition deposit | 20 | |
Proceeds received - disposition of joint venture real estate held for disposition | 7,050 | |
Investment in note receivable | (7,231) | |
Investment in affiliates | (8,959) | |
Additions to real estate | (4,037) | (23,840) |
Net cash provide from (used in) investing activities | 3,033 | (40,030) |
Cash flows from financing activities: | ||
Dividend distributions paid in cash | (6,584) | (2,976) |
Payment of selling commissions | (2,112) | |
Proceeds from insurance premium finance note | 561 | 421 |
Repayment of insurance premium finance note | (280) | (210) |
Noncontrolling interests capital | 4,100 | 5,500 |
Payment of deferred loan costs | (6) | (139) |
Proceeds under term loan notes | 10,819 | |
Repayments under term loan notes | (4,148) | (593) |
Proceeds from revolving credit facility | 1,750 | 27,600 |
Repayment of revolving credit advances | (1,500) | (36,546) |
Proceeds from issuance of common stock | (508) | 40,881 |
Net cash provided by (used in) financing activities | (6,615) | 42,645 |
Net change in cash | (2,543) | 71 |
Cash and cash equivalents, beginning of period | 3,254 | 1,380 |
Cash and cash equivalents, end of period | $ 711 | $ 1,451 |
Fair Value Measures and Disclos
Fair Value Measures and Disclosures - USD ($) $ in Thousands | Jun. 30, 2017 | Dec. 31, 2016 |
Fair Value Measures and Disclosures: | ||
Total equity | $ 109,029 | $ 116,431 |
Organization and Business
Organization and Business | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Organization and Business | Organization and Business Hartman Short Term Income Properties XX, Inc. (the Company), is a Maryland corporation formed on February 5, 2009. The Company elected to be treated as a real estate investment trust (REIT) beginning with the taxable year ending December 31, 2011. Effective March 31, 2016, the Company terminated the offer and sale of its common stock to the public in its follow-on offering. The sale of shares of the Companys common stock to its stockholders pursuant to the Companys distribution reinvestment plan terminated July 16, 2016. The Company was originally a majority owned subsidiary of Hartman XX Holdings, Inc. Hartman XX Holdings, Inc. is a Texas corporation wholly owned by Allen R. Hartman. The Company sold 19,000 shares to Hartman XX Holdings, Inc. at a price of $10.00 per share. The Company has also issued 1,000 shares of convertible preferred stock to its advisor, Hartman Advisors LLC (Advisor), at a price of $10.00 per share. The Advisor is owned 70% by Allen R. Hartman, the Companys Chief Executive Officer and Chairman of the Board of Directors and 30% by Hartman Income REIT Management, Inc. (the Property Manager). The Property Manager is a wholly owned subsidiary of Hartman Income REIT, Inc. of which Allen R. Hartman owns approximately 16% of the voting common stock. On April 11, 2014, the Company formed Hartman XX Limited Partnership, a Texas limited partnership (the Operating Partnership). On March 7, 2014, the Company formed Hartman XX REIT GP LLC, a Texas limited liability company, to serve as the sole general partner of the Operating Partnership. The Company is the sole limited partner of the Operating Partnership. The Companys member interests in its limited liability company subsidiaries are owned by the Operating Partnership or its wholly owned subsidiaries. On April 11, 2017, the Operating Partnership entered into a membership interest purchase agreement with Hartman vREIT XXI, Inc. (vREIT XXI), an affiliate of the Company. Pursuant to the terms of a membership interest purchase agreement between vREIT XXI and the Company, vREIT XXI may acquire up to $10,000,000 of the equity membership interest of Operating Partnership in Hartman Three Forest Plaza, LLC (Three Forest Plaza LLC). As of June 30, 2017, vREIT XXI has acquired an approximately 30% equity interest in Three Forest Plaza LLC for $5,450,000. On July 19, 2017, vREIT XXI acquired and an additional 6% equity interest for $1,000,000 bringing its total equity interest to approximately 36%. Subject to certain restrictions and limitations, the Advisor is responsible for managing the Companys affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company pursuant to an advisory agreement (the Advisory Agreement) by and among the Company and Advisor. Management of the Companys properties is through the Property Manager. D.H. Hill Securities, LLLP was the dealer manager for the Companys public offerings. These parties receive compensation and fees for services related to the investment, management and disposition of the Companys assets. As of June 30, 2017, the Company owned or held a majority ownership interest in 17 commercial properties comprising approximately 2,928,000 square feet plus three pad sites, all located in Texas. As of June 30, 2017, the Company owned nine properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas. As of June 30, 2016, the Company owned 16 commercial properties comprising approximately 2,562,000 square feet plus three pad sites, all located in Texas. As of June 30, 2016, the Company owned eight properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and two properties located in San Antonio, Texas. On July 21, 2017, the Company and Hartman Short Term Income Properties XIX, Inc. (Hartman XIX), entered into an agreement and plan of merger (the XIX Merger Agreement) and (ii) the Company, the Operating Partnership, Hartman Income REIT, Inc. (HIREIT) and Hartman Income REIT Operating Partnership LP, the operating partnership of HIREIT, (HIROP), entered into an agreement and plan of merger (the HIREIT Merger Agreement, and together with the XIX Merger Agreement, the Merger Agreements). Subject to the terms and conditions of the XIX Merger Agreement, including the satisfaction of all closing conditions set forth in the Merger Agreements, Hartman XIX will merge with and into the Company, with the Company surviving the merger (the Hartman XIX Merger). Subject to the terms and conditions of the HIREIT Merger Agreement, (i) HIREIT will merge with and into the Company, with HIREIT surviving the merger (the HIREIT Merger, and together with the Hartman XIX Merger, the REIT Mergers), and (ii) HIROP will merge and with and into the Operating Partnership, with the Operating Partnership surviving the merger (the Partnership Merger, and together with the REIT Mergers, the Mergers). The REIT Mergers are intended to qualify as a reorganization under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended (the Code), and the Partnership Merger is intended to be treated as a tax-deferred exchange under Section 721 of the Code. Subject to the terms and conditions of the XIX Merger Agreement, (i) each share of common stock of Hartman XIX (the XIX Common Stock) issued and outstanding immediately prior to the Effective Time (as defined in the XIX Merger Agreement) will be automatically cancelled and retired and converted into the right to receive 9,171.98 shares of common stock, $0.01 par value per share, of the Company (Company Common Stock), (ii) each share of 8% cumulative preferred stock of Hartman XIX issued and outstanding immediately prior to the Effective Time will be automatically cancelled and retired and converted into the right to receive 1.238477 shares of Company Common Stock, and (iii) each share of 9% cumulative preferred stock of Hartman XIX issued and outstanding immediately prior to the Effective Time will be automatically cancelled and retired and converted into the right to receive 1.238477 shares of Company Common Stock. Subject to the terms and conditions of the HIREIT Merger Agreement, (a) in connection with the HI-REIT Merger, (i) each share of common stock of HIREIT (the HIREIT Common Stock) issued and outstanding immediately prior to the REIT Merger Effective Time (as defined in the HIREIT Merger Agreement) will be automatically cancelled and retired and converted into the right to receive 0.752222 shares of Company Common Stock, and (ii) each share of subordinate common stock of HIREIT will be automatically cancelled and retired and converted into the right to receive 0.752222 shares of Company Common Stock, and (b) in connection with the Partnership Merger, each unit of limited partnership interest in HIREIT Operating Partnership (HIREIT OP Units) issued and outstanding immediately prior to the Partnership Merger Effective Time (as defined in the HIREIT Merger Agreement) (other than any HIREIT OP Units held by HIREIT) will be automatically cancelled and retired and converted into the right to receive 0.752222 validly issued, fully paid and non-assessable units of limited partnership interests in XX Operating Partnership. Each Merger Agreement contains customary covenants, including covenants prohibiting HIREIT and Hartman XIX and their respective subsidiaries and representatives from soliciting, providing information or entering into discussions concerning proposals relating to alternative business combination transactions, subject to certain limited exceptions. The Merger Agreements may be terminated under certain circumstances, including but not limited to (i) by the mutual written consent of all the parties to a Merger Agreement, (ii) by either the Company or HIREIT or Hartman XIX, as applicable, if a final and non-appealable order is entered prohibiting or disapproving the applicable Mergers, (iii) by either the Company or HIREIT or Hartman XIX, as applicable, if the required approval of the applicable Mergers by the stockholders of the Company or HIREIT or Hartman XIX, as applicable (the Stockholder Approvals), have not been obtained, (iv) by either the Company or HIREIT or Hartman XIX, as applicable, upon a material uncured breach by the other party that would cause the closing conditions in the applicable Merger Agreement not to be satisfied, or (v) by either the Company or HIREIT or Hartman XIX, as applicable, if the applicable Mergers have not been completed on or before December 31, 2017. No termination fees or penalties are payable by any party to any Merger Agreement in the event of the termination of any Merger Agreement. The Merger Agreements contain certain representations and warranties made by the parties thereto. The representations and warranties of the parties were made solely for purposes of the contract among the parties, and are subject to certain important qualifications and limitations set forth in confidential disclosure letters delivered by the parties to the Mergers to the other parties to the Mergers. Moreover, certain of the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to stockholders, and the representations and warranties are primarily intended to establish circumstances in which either of the parties may not be obligated to consummate the Mergers, rather than establishing matters as facts. Each Merger Agreement sets forth certain conditions of the parties thereto to consummate the Mergers contemplated by such Merger Agreement, including (i) receipt of the applicable Stockholder Approvals, (ii) receipt of all regulatory approvals, (iii) the absence of any judgments, orders or laws prohibiting or restraining the consummation of the applicable Mergers, (iv) the effectiveness with the Securities and Exchange Commission (the SEC) of the registration statement on Form S-4 to be filed by the Company to register the shares of Company Common Stock to be issued as consideration in the REIT Mergers, (v) the delivery of certain documents, consents and legal opinions, and (vi) the truth and correctness of the representations and warranties of the respective parties, subject to the materiality standards contained in the Merger Agreements. In addition, the consummation of the HIREIT Merger and the Partnership Merger is a condition to the consummation of the Hartman XIX Merger, and vice versa. There can be no guarantee that the conditions to the closing of the Mergers set forth in the Merger Agreements will be satisfied. |
Real Estate
Real Estate | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Real Estate | Real Estate The Companys real estate assets consisted of the following, in thousands: June 30, 2017 December 31, 2016 Land $62,320 $62,320 Buildings and improvements 131,215 127,206 In-place lease value intangible 63,573 63,573 257,108 253,099 Less accumulated depreciation and amortization (61,970) (49,872) Total real estate assets $195,138 $203,227 Depreciation expense for the three months ended June 30, 2017 and 2016 was $2,067,000 and $1,505,000, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was $3,878,000 and $2,964,000, respectively. Amortization expense of in-place lease value intangible was $3,873,000 and $3,878,000 for the three months ended June 30, 2017 and 2016, respectively. Amortization expense of in-place lease value intangible was $8,220,000 and $7,721,000 for the six months ended June 30, 2017 and 2016, respectively. Acquisition fees paid to Advisor were $0 and $541,000 for the three and six months ended June 30, 2017 and 2016, respectively. Asset management fees paid to Advisor were $440,000 and $347,000 for the three months ended June 30, 2017 and 2016, respectively. Asset management fees paid to Advisor were $880,000 and $680,000 for the six months ended June 30, 2017 and 2016, respectively. Asset management and acquisition fees are captioned as such in the accompanying consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, respectively. On June 1, 2016, the Company acquired a three story office building containing approximately 166,000 square feet of office space located in Irving, Texas, commonly known as Westway One (the Westway One Property) by Hartman Westway One, LLC, a wholly owned subsidiary of the Operating Partnership. The Westway One Property was acquired for $21,638,000, exclusive of closing costs, from an unaffiliated third party seller. The Westway One Property was 100% occupied at the acquisition date. An acquisition fee of $541,000 was earned by the Advisor in connection with the purchase of the Westway One Property. The following table summarizes the fair value of the assets acquired and liabilities assumed based upon the Companys initial purchase price allocation as of the acquisition date, in thousands: Westway One Assets acquired: Real estate assets $ 21,638 Other assets - Total assets acquired 21,638 Liabilities assumed: Accounts payable and accrued expenses 232 Security deposits 38 Total liabilities assumed 270 Fair value of net assets acquired $ 21,368 On June 17, 2016, Hartman Westway One, LLC admitted an unrelated independent investor as a member for $5,500,000 in exchange for a 45.67% noncontrolling member interest. The Company identifies and records the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms. With respect to all properties owned by the Company, we consider all of the in-place leases to be market rate leases. The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows, in thousands: June 30, 2017 December 31, 2016 In-place lease value intangible $ 63,573 $ 63,573 In-place leases accumulated amortization (42,855) (34,635) Acquired lease intangible assets, net $ 20,718 $ 28,938 |
Accrued Rent and Accounts Recei
Accrued Rent and Accounts Receivable, Net | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Accrued Rent and Accounts Receivable, Net | Accrued Rent and Accounts Receivable, net Accrued rent and accounts receivable, net, consisted of the following, in thousands: June 30, 2017 December 31, 2016 Tenant receivables $ 3,257 $ 2,889 Accrued rent 4,660 3,583 Allowance for doubtful accounts (1,395) (1,206) Accrued Rents and Accounts Receivable, net $ 6,522 $ 5,266 As of June 30, 2017 and December 31, 2016, the Company had an allowance for uncollectible accounts of $1,395,000 and $1,206,000, respectively. For the three months ended June 30, 2017 and 2016, the Company recorded bad debt expense in the amount of $38,000 and $91,000, respectively, related to tenant receivables that we have specifically identified as potentially uncollectible based on our assessment of each tenants credit-worthiness. For the six months ended June 30, 2017 and 2016, the Company recorded bad debt expense in the amount of $189,000 and $285,000, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded write-offs of $0 and $40,000, respectively. Bad debt expense and any related recoveries are included in property operating expenses in the accompanying consolidated statements of operations. |
Deferred Leasing Commission Cos
Deferred Leasing Commission Costs, Net | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Deferred Leasing Commission Costs, Net | Deferred Leasing Commission Costs, net Costs which have been deferred consist of the following, in thousands: June 30, 2017 December 31, 2016 Deferred leasing commissions costs $ 7,725 $ 6,116 Less: leasing cost accumulated amortization (1,930) (1,341) Deferred leasing commission costs, net $ 5,795 $ 4,775 |
Notes Payable
Notes Payable | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Notes Payable | Notes Payable The Company is a party to a $30.0 million revolving credit agreement (the TCB Credit Facility) with Texas Capital Bank. The TCB Credit Facility is secured by the Gulf Plaza, Parkway Plaza I&II, Timbercreek, Copperfield and One Technology Center properties. The borrowing base based on the collateral properties is $20.925 million. The TCB Credit Facility note, bears interest at the greater of 4.25% per annum or the banks prime rate plus 1% per annum. The interest rate was 5.00% and 4.75% per annum as of June 30, 2017 and December 31, 2016. As of April 1, 2017, the Company will pay 0.25% per annum on the unused balance of the TCB Credit Facility. All borrowings under the TCB Credit Facility mature on May 9, 2018. The outstanding balance under the TCB Credit Facility was $8,050,000 as of June 30, 2017 and $7,800,000 as of December 13, 2016, respectively. As of June 30, 2017 the amount available to be borrowed is $12,875,000. As of June 30, 2017, the Company was in compliance with all loan covenants under the TCB Credit Facility. The Company is a party to a $15.52 million revolving credit agreement (the EWB Credit Facility) with East West Bank. The borrowing base of the EWB Credit Facility may be adjusted from time to time subject to the lenders underwriting with respect to real property collateral. The EWB Credit Facility is secured by the Commerce Plaza Hillcrest, Corporate Park Place and 400 North Belt properties. The EWB Credit Facility note bears interest at the greater of 3.75% per annum or the banks prime rate plus 0.50%. The interest rate was 4.50% and 4.25% per annum as of June 30, 2017 and as of December 31, 2016, respectively. All loans under the EWB Credit Facility mature on August 24, 2017. On October 8, 2015, the Company entered into a second revolving credit agreement with East West Bank (the EWB II Credit Facility). The borrowing base of the EWB II Credit Facility is $9.9 million and may be adjusted from time to time subject to the lenders underwriting with respect to the real property collateral. The EWB II Credit Facility is secured by the Ashford Crossing and Skymark Tower properties. The EWB II Credit Facility note bears interest at the greater of 3.75% per annum or the banks prime rate plus 0.50%. The interest rate was 4.5% and 4.25% per annum as of June 30, 2017 and as of December 31, 2016, respectively. The Company and East West Bank have agreed to a one-year extension and modification of the EWB Credit Facility and the EWB II Credit Facility. As modified the EWB Credit Facility and the EWB II Credit Facility will mature on August 24, 2018. The aggregate outstanding balance under the EWB Credit Facility and EWB II Credit Facility was $21,900,000 as of June 30, 2017 and December 31, 2016. As of June 30, 2017, the aggregate amount available to be borrowed under the EWB Credit Facility and EWB II Credit Facility is $3,520,000. As of June 30, 2017, the Company was in compliance with all loan covenants under the EWB Credit Facility and EWB II Credit Facility. Loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method. Costs which have been deferred consist of the following, in thousands: June 30, 2017 December 31, 2016 Deferred loan costs $ 2,232 $ 2,160 Less: deferred loan cost accumulated amortization (934) (693) Total cost, net of accumulated amortization $ 1,298 $ 1,467 The following is a summary of the Companys notes payable schedule as of June 30, 2017, in thousands: Property/Facility Payment (1) Maturity Date Rate June 30, 2017 December 31, 2016 Richardson Heights (2) P&I July 1, 2041 4.61% $ 18,986 $ 19,200 Cooper Street (2) P&I July 1, 2041 4.61% 7,895 7,984 Bent Tree Green (2) P&I July 1, 2041 4.61% 7,895 7,984 Mitchelldale (2) P&I July 1, 2041 4.61% 11,960 12,096 Energy Plaza I & II P&I June 10, 2021 5.30% 9,911 10,007 Westway One IO June 1, 2019 3.56% 10,819 10,819 Three Forest Plaza IO December 31, 2019 3.86% 17,828 17,828 TCB Credit Facility IO May 9, 2018 5.00% 8,050 7,800 EWB Credit Facility IO August 24, 2018 4.50% 12,000 12,000 EWB II Credit Facility IO August 24, 2018 4.50% 9,900 9,900 $ 115,244 $ 115,618 Less unamortized deferred loan costs (1,298) (1,467) $ 113,946 $ 114,151 (1) Principal and interest (P&I) or interest only (IO). (2) Each promissory note contains a call option wherein the holder of the promissory note may declare the outstanding balance due and payable on either July 1, 2024, July 1, 2029, July 1, 2034, or July 1, 2039. Interest expense incurred for the three months ended June 30, 2017 and 2016 was $1,481,000 and $890,000, respectively, which includes amortization expense of deferred loan costs. Interest expense incurred for the six months ended June 30, 2017 and 2016 was $2,864,000 and $1,736,000, respectively. Interest expense of $289,000 and $224,000 was payable as of June 30, 2017 and December 31, 2016, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. |
Loss Per Share
Loss Per Share | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Loss Per Share | Loss Per Share Basic loss per share is computed using net loss attributable to common stockholders and the weighted average number of common shares outstanding. Diluted earnings per share reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share, in thousands except per share data. Three months ended June 30, Six months ended June 30, 2017 2016 2017 2016 Numerator: Net loss attributable to common stockholders $(2,793) $(2,484) $(4,552) $(4,453) Denominator: Basic and diluted weighted average common shares outstanding 18,126 17,910 18,147 16,500 Basic and diluted loss per common share: $(0.15) $(0.14) $(0.25) $(0.27) |
Income Taxes
Income Taxes | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Income Taxes | Income Taxes Federal income taxes are not provided for because we qualify as a REIT under the provisions of the Internal Revenue Code and because we have distributed and intend to continue to distribute all of our taxable income to our stockholders. Our stockholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our stockholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. For the three months ended June 30, 2017 and 2016, the Company incurred a net loss of $2,810,000 and $2,434,000, respectively. For the six months ended June 30, 2017 and 2016, the Company incurred a net loss of $4,505,000 and $4,403,000 respectively. The Company formed one taxable REIT subsidiary which may generate future taxable income which may be offset by the net loss carry forward. The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded considering the net loss carry forward would be properly offset by an equal valuation allowance in that no material current or future taxable income is expected. Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the consolidated financial statements. The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Management has reviewed the Companys tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination. Accordingly, the Company has not recognized a liability related to uncertain tax positions. Taxable income (loss) differs from net income (loss) for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and amortization and rental revenue. |
Related Party Transactions
Related Party Transactions | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Related Party Transactions | Related Party Transactions The Advisor is a Texas limited liability company owned 70% by Allen R. Hartman individually and 30% by the Property Manager. The Advisor is a variable interest entity which consolidates for financial reporting purposes with Hartman Income REIT, Inc. and subsidiaries, of which Allen R. Hartman, our Chief Executive Officer and Chairman of the Board of Directors, owns approximately 16% of the voting common stock. For the three months ended June 30, 2017 and 2016 the Company incurred $440,000 and $347,000, respectively, for asset management fees payable to the Advisor. For the six months ended June 30, 2017 and 2016 the Company incurred $880,000 and $680,000, respectively, for asset management fees payable to the Advisor. Acquisition fees paid to Advisor were $0 and $541,000 for the three months and six months ended June 30, 2017 and 2016. Property operating expenses include property management fees and reimbursements due to the Property Manager of $977,000 and $784,000 for the three months ended June 30, 2017 and 2016, respectively, and $1,969,000 and $1,571,000 for six months ended June 30, 2017 and 2016, respectively. June 30, 2017 and 2016 June 30, 2017 and 2016 As of June 30, 2017, and December 31, 2016, respectively, the Company had a net balance due (from) to the Property Manager of ($935,000) and due to $518,000. The Company had a balance due from an affiliate, Hartman Short Term Income Properties XIX, Inc. (Hartman XIX), of $4,665,000 and $4,474,000 as of June 30, 2017 and December 31, 2016, respectively. The balance due from Hartman XIX includes a loan from the Company to Hartman XIX in the original amount of $4,500,000, which is not evidenced by a promissory note. Interest has been accrued on the loan amount at an annual rate of 6%. The amount was advanced to Hartman XIX in connection with the affiliate stock purchase described below in this note. The $465,000 and $274,000 balance due from Hartman XIX as of June 30, 2017 and December 31, 2016, respectively, is included in Due to related parties, and the principal balance of the affiliate loan of $4,200,000 and is included in Notes receivable related party, in the accompanying consolidated balance sheets. The Company recognized interest income on the affiliate note in the amount of $63,000 and $67,000 for the three months ended June 30, 2017 and 2016 and $126,000 and $135,000 for the six months ended June 30, 2017 and 2016, respectively, which is included in interest and dividend income in the accompanying consolidated statements of operations. The Company owed the Advisor $155,000 and $243,000 for asset management fees as of June 30, 2017 and December 31, 2016, respectively. These fees are monthly fees equal to one-twelfth of 0.75% of the sum of the higher of the cost or value of each asset. On January 26, 2016, the Companys board of directors approved the acquisition by the Company of up to $13.0 million in shares of common stock of Hartman Income REIT, Inc. (HIREIT), an affiliate of the Company, in connection with a tender offer by Hartman XIX to acquire for its account up to $2.0 million in shares of HIREIT common stock. On February 5, 2016, the Company advanced $5,250,000 to Hartman XIX in connection with the contemplated acquisition of HIREIT shares. The Company acquired 1,561,523 shares of the common stock of HIREIT for $8,978,000. The shares were acquired by the Company in connection with a tender offer for shares of the common stock of HIREIT by Hartman XIX. The Companys investment in the affiliate is accounted for under the cost method, ownership interest at 11% in HIREIT is less than a controlling stake, and is reflected as Investment in Affiliate on the accompanying consolidated balance sheets. The Company received dividend distributions from HIREIT of $107,000 and $71,000 for the three months ended June 30, 2017 and 2016, respectively, and $177,000 and $71,000 for the six months ended June 30, 2017 and 2016, respectively which is included in interest and dividend income in the accompanying consolidated statements of operations. On May 17, 2016, the Company, through its taxable REIT subsidiary, Hartman TRS, Inc. (TRS), loaned $7,231,000 pursuant to a promissory note in the face amount of up to $8,820,000 to Hartman Retail II Holdings Company, Inc. (Retail II Holdings), an affiliate of the Advisor and the Property Manager, in connection with the acquisition of a retail shopping center by Hartman Retail II DST, a Delaware statutory trust sponsored by the Property Manager. Pursuant to the terms of the promissory note, TRS will receive a two percent (2%) origination fee of amounts advanced under the promissory note, and interest at ten percent (10%) per annum on the outstanding principal balance. The outstanding principal balance of the promissory note will be repaid as investor funds are raised by Hartman Retail II DST. The maturity date of the promissory note is May 17, 2019. For the three months ended June 30, 2017 and 2016, respectively, interest and dividend income in the accompanying consolidated statements of operations, includes $180,000 and $0 of interest income. For the six months ended June 30, 2017 and 2016, respectively, interest and dividend income in the accompanying consolidated statements of operations, includes $361,000 and $0 of interest income. As of June 30, 2017 and December 31, 2016, respectively, the balance due from to TRS by Retail II Holdings is $44,000 and $144,000, respectively. Variable interest entities (VIEs) are defined as entities with a level of invested equity that is not sufficient to fund future operations on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For identified VIEs, an assessment must be made to determine which party to the VIE, if any, has both the power to direct the activities of the VIE that most significantly impacts the performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company is not deemed to be the primary beneficiary of Retail II Holdings, which qualifies as a VIE. Accordingly, the assets and liabilities and revenues and expenses of Retail II Holdings have not been included in the accompanying consolidated financial statements. As of June 30, 2017, the Company had a net balance due to Hartman vREIT XXI and Hartman Village Pointe, LLC of $200,000 and $64,000, respectively. |
Real Estate Held For Dispositio
Real Estate Held For Disposition | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Real Estate Held For Disposition | Real Estate Held for Disposition Pursuant to the terms of a membership unit purchase agreement between the Operating Partnership and Hartman vREIT XXI, Hartman vREIT XXI had the option to acquire from time to time up to all of the membership interest of the Operating Partnership in Hartman Village Pointe at a price equal to the Operating Partnerships investment cost. As of February 8, 2017, the Operating Partnership sold all its interest in the joint venture for $3,675,000, of which $2,425,000 was received during the three and six months ended June 30, 2017. The Companys investment in the Village Pointe property joint venture is presented as real estate held for disposition in the accompanying consolidated balance sheets at December 31, 2016. The Companys share of operations for the three and six months ended June 30, 2017 is presented as loss from discontinued operations in the accompanying consolidated statements of operations. Loss from discontinued operations with respect to the Village Pointe Property is as follows, in thousands: Six months ended June 30 2017 2016 Total revenues $ 44 $ - Property operating expenses 6 - Real estate taxes and insurance 8 - Asset management fees 3 - General and administrative 1 - Interest expense 7 - Total expenses 25 - Loss on disposition (27) - Net loss from discontinued operations $ (8) $ - Property operating expenses include $2,000 in property management fees and reimbursements earned by the Property Manager. Asset management fees were earned by Advisor. On April 11, 2017, the Operating Partnership entered into a membership interest purchase agreement with vREIT XXI, a related party, pursuant to which vREIT XXI may acquire up to $10,000,000 of the Operating Partnerships equity ownership in Hartman Three Forest Plaza LLC. As of June 30, 2017 vREIT XXI had acquired an approximately 30% equity interest in Hartman Three Forest Plaza LLC for $5,450,000. On July 19, 2017, vREIT XXI acquired and an additional 6% equity interest for $1,000,000 bringing its total equity interest to approximately 36%. The Three Forest Plaza property is not currently classified as Real Estate Held for Disposition. |
Stockholders' Equity
Stockholders' Equity | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Stockholders' Equity | Stockholders Equity Common Stock Shares of common stock entitle the holders to one vote per share on all matters which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Companys board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights. Under the Companys articles of incorporation, the Company has authority to issue 750,000,000 shares of common stock, $0.001 par value per share, and 200,000,000 shares of preferred stock, $0.001 par value per share. Preferred Stock Under the Companys articles of incorporation, the Companys board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors shall have the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares. As of June 30, 2017, and December 31, 2016, respectively, the Company has issued 1,000 shares of convertible preferred stock to the Advisor at a price of $10.00 per share. Common Stock Issuable Upon Conversion of Convertible Preferred Stock The convertible preferred stock issued to the Advisor will convert to shares of the Companys common stock if (1) the Company has made total distributions on then outstanding shares of the Companys common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of the Companys common stock plus the aggregate market value of the Companys common stock (based on the 30-day average closing meets the same 6% performance threshold, or (3) the Companys advisory agreement with the Advisor expires without renewal or is terminated (other than because of a material breach by the Advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Companys enterprise value and prior distributions and, at or subsequent to the expiration or termination, the stockholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Companys enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all. Stock-Based Compensation The Company awards shares of restricted common stock to non-employee directors as compensation in part for their service as members of the board of directors of the Company. These shares are fully vested when granted. These shares may not be sold while an independent director is serving on the board of directors. For the three months ended June, 2017 and 2016, respectively, the Company granted 1,500 and 1,500 shares of restricted common stock to independent directors as compensation for services. The Company recognized $20,000 and $15,000 as stock-based compensation expense for the three months ended June 30, 2017 and 2016, respectively, and $40,000 and $30,000 for six months ended June 30, 2017 based upon the estimated fair value per share. Stock-based compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations. Distributions The following table reflects the total distributions the Company has paid, including the total amount paid and amount paid per common share, in each indicated quarter: Quarter Paid Distributions per Common Share Total Distributions 2017 2 nd $ 0.175 $ 3,159 1st Quarter 0.175 3,134 Total 2017 year to date $ 0.350 $ 6,293 2016 4 th $ 0.175 $ 3,173 3 rd 0.175 3,213 2 nd 0.175 3,042 1 st 0.175 2,478 Total 2016 $ 0.700 $ 11,906 |
Incentive Award Plan
Incentive Award Plan | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Incentive Award Plan | Incentive Award Plan The Company has adopted an incentive plan (the Omnibus Stock Incentive Plan or the Incentive Plan) that provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards within the meaning of Internal Revenue Code Section 422, or any combination of the foregoing. The Company has initially reserved 5,000,000 shares of the Companys common stock for the issuance of awards under the Companys stock incentive plan, but in no event more than ten (10%) percent of the Companys issued and outstanding shares. The number of shares reserved under the Companys stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in the Companys capitalization. Generally, shares that are forfeited or canceled from awards under the Companys stock incentive plan also will be available for future awards. The Compensation Committee of the Board of Directors also approved an award of 1,000 shares of restricted common stock issued to each of two executives of the Property Manager during the six months ended June 30, 2017. We recognized stock-based compensation expense of $0 and $0 and $0 and $20,000 with respect to these awards based on the offering price of $10 per share for the three and six months ended June 30, 2017 and 2016, respectively. Incentive Plan compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations. |
Commitments and Contingencies
Commitments and Contingencies | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Commitments and Contingencies | Commitments and Contingencies Economic Dependency The Company is dependent on the Property Manager and the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties, management of the daily operations of the Companys real estate portfolio, and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other providers. Litigation The Company is subject to various claims and legal actions that arise in the ordinary course of business. Management of the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position of the Company. |
Subsequent Events
Subsequent Events | 6 Months Ended |
Jun. 30, 2017 | |
Notes | |
Subsequent Events | Subsequent Events On July 21, 2017, the Company and Hartman Short Term Income Properties XIX, Inc. (Hartman XIX), entered into an agreement and plan of merger (the XIX Merger Agreement) and (ii) the Company, the Operating Partnership, Hartman Income REIT, Inc. (HIREIT) and Hartman Income REIT Operating Partnership LP, the operating partnership of HIREIT, (HIROP), entered into an agreement and plan of merger (the HIREIT Merger Agreement, and together with the XIX Merger Agreement, the Merger Agreements). See Note 1. |
Summary of Significant Accounti
Summary of Significant Accounting Policies (Policies) | 6 Months Ended |
Jun. 30, 2017 | |
Policies | |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2016 are derived from our audited consolidated financial statements as of that date. The unaudited consolidated financial statements as of June 30, 2017 have been prepared by the Company in accordance with accounting principles generally accepted in the United States (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X, on a basis consistent with the annual audited consolidated financial statements. The consolidated financial statements presented herein reflect all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the financial position of the Company as of June 30, 2017, and the results of consolidated operations for the three and six months ended June 30, 2017 and 2016, the consolidated statement of stockholders equity for the six months ended June 30, 2017 and the consolidated statements of cash flows for the six months ended June 30, 2017 and 2016. The results of the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017. The consolidated financial statements herein are condensed and should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2016. These unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications The Company has reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on the previously reported working capital or results of operations. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Cash and cash equivalents as of June 30, 2017 and December 31, 2016 consisted of demand deposits at commercial banks. Restricted Cash Restricted cash represents cash for which the use of funds is restricted by certain loan documents. As of June 30, 2017 and December 31, 2016, the Company had a restricted cash balance of $2,371,000, which represents amounts set aside as impounds to be disbursed to the Company upon achieving incremental occupancy and gross income thresholds at the Richardson Heights Property and the Bent Tree Green Property. Pursuant to a reserve agreement among the Company and the lender, the Companys right to draw upon restricted funds expired on December 31, 2016. The lender has the right to draw any of the remaining funds and apply the same to the outstanding loans at the lenders sole discretion. The Companys right to draw upon the restricted funds expires June 30, 2018 subject to the draw provisions of the original loan agreements. Financial Instruments The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accrued rent and accounts receivable, note receivable, accounts payable and accrued expenses, notes payable and due from (to) related parties. The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its notes payable approximates fair value. Revenue Recognition The Companys leases are accounted for as operating leases. Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases. Revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space. When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in accrued rent and accounts receivable, net. In accordance with Accounting Standards Codification (ASC) 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement and other revenues in the period the related costs are incurred. Real Estate Allocation of Purchase Price of Acquired Assets Upon the acquisition of real properties, it is the Companys policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings). The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases. The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and managements consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in real estate assets in the consolidated balance sheets and are being amortized to expense over the remaining term of the respective leases. The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Companys reported net loss. Depreciation and amortization Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements. Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. In-place leases are amortized using the straight-line method over the weighted average years remaining calculated on terms of all of the leases in-place when acquired. Impairment The Company reviews its real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. The Company determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of June 30, 2017 and December 31, 2016. Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the propertys future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income. Fair Value Measurement Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets. Level 2: Directly or indirectly observable inputs, other than quoted prices in active markets. Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on one or more of the following valuation techniques: Market Approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Cost Approach: Amount required to replace the service capacity of an asset (replacement cost). Income Approach: Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models). The Companys estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Accrued Rent and Accounts Receivable Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rent and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Deferred Leasing Commission Costs Leasing commissions are amortized using the straight-line method over the term of the related lease agreements. Goodwill GAAP requires the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired. The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test. In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. No goodwill impairment has been recognized in the accompanying consolidated financial statements. Organization and Offering Expenses The Company has incurred certain organization and offering expenses in connection with the organization of the Company and the offering of the Companys shares of common stock in the Companys public offering. These costs principally relate to professional and filing fees. For the three months ended June 30, 2017 and 2016, such costs totaled $0 and $206,000, respectively. For the six months ended June 30, 2017 and 2016, such costs totaled $0, and ($44,000), respectively. Organization and offering expenses of the Company are paid directly by the Company or incurred by Advisor on behalf of the Company and reimbursed by the Company to the Advisor (subject to certain limitations). Pursuant to the Advisory Agreement, organization and offering expenses will be reimbursed by the Advisor to the Company following the completion of a public offering of the Company to the extent that total organization and offering expenses incurred by the Company in connection with such public offerings (excluding selling commissions and dealer manager fees) exceed 1.5% of gross offering proceeds from the completed public offerings. As of June 30, 2017, and December 31, 2016, respectively, the amount of offering and organizational expenses incurred in excess of 1.5% of gross offering proceeds was cumulatively $858,000 for the Companys initial and follow-on public offerings, respectively. The Company terminated the offer and sale of its common stock to the public in its follow-on offering on March 31, 2016. The Company recorded a receivable from the Advisor and recorded a contra expense of $858,000 resulting in a net credit for organization and offering expenses of ($44,000) during the six months ended June 30, 2016. Real Estate Held for Disposition and Discontinued Operations The Company considers a commercial property to be held for sale when it meets all of the criteria established under ASC 205, Presentation of Financial Statements. For commercial properties classified as held for sale, assets and liabilities are presented separately for all periods presented. In accordance with ASC 205, a discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component of an entity or group of components of an entity is classified as held for sale, disposed of by sale or disposed of other than by sale, respectively. In addition, ASC 205 requires us to provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not meet the criteria for a discontinued operation. Noncontrolling Interests Noncontrolling interests is the portion of equity in a subsidiary not attributable to a parent. The ownership interests not held by the parent are considered noncontrolling interests. Accordingly, the Company has reported noncontrolling interests in equity on the consolidated balance sheets but separate from the Company's equity. On the consolidated statements of operations, subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. The consolidated statement of changes in equity is included for quarterly financial statements, including beginning balances, activity for the period and ending balances for shareholders' equity, noncontrolling interests and total equity. Stock-Based Compensation The Company follows ASC 718, Compensation-Stock Compensation (ASC 718) with regard to issuance of stock in payment of services. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements. The compensation cost is measured based on the fair value of the equity or liability instruments issued. Stock-based compensation expense is included in general and administrative expense in the accompanying consolidated statements of operations. Advertising The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses in the accompanying consolidated statements of operations. Advertising costs totaled $38,000 and $40,000 for the three months ended June 30, 2017 and 2016, respectively. Advertising costs totaled $93,000 and $90,000 for the six months ended June 30, 2017 and 2016, respectively. Income Taxes The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with its taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Companys 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 Companys net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT. For the three months ended June 30, 2017 and 2016, the Company incurred a net loss of $2,810,000 and $2,434,000, respectively. For the six months ended June 30, 2017 and 2016, the Company incurred a net loss of $4,505,000 and $4,403,000, respectively. The Company has formed a taxable REIT subsidiary which may generate future taxable income, which may be offset by the net loss carry forward. The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance. Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the accompanying consolidated financial statements. The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Management has reviewed the Companys tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination. Accordingly, the Company has not recognized a liability related to uncertain tax positions. Loss Per Share The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. The Companys potentially dilutive securities include preferred shares that are convertible into the Companys common stock. As of June 30, 2017 and 2016, there were no shares issuable in connection with these potentially dilutive securities. These potentially dilutive securities were excluded from the computations of diluted net loss per share for the three and six months ended June 30, 2017 and 2016 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive. Concentration of Risk The Company maintains cash accounts in two U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts may exceed the federally insured limits. No losses have been incurred in connection with these deposits. The geographic concentration of the Companys real estate assets makes it susceptible to adverse economic developments in the State of Texas. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition or any other changes, could adversely affect the Companys operating results and its ability to make distributions to stockholders Major tenants are defined as those tenants which individually comprise more than 10% of the Companys total rental revenues. No tenant represents more than 10% of total rental revenues for three months and six months ended June 30, 2017 and 2016. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We have begun to evaluate each of our revenue streams under the new model. Based on preliminary assessments, we do not expect the adoption of ASU No. 2014-09 to have a material effect on our consolidated financial position or our consolidated results of operations. ASU 2015-03, Interest Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. We have adopted this guidance for all periods presented. In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which enhances the reporting requirements surrounding the measurement of financial instruments and requires equity securities to be measured at fair value with changes in the fair value recognized through net income for the period. ASU No. 2016-01 is effective for our fiscal year commencing on January 1, 2018. Based on preliminary assessments, we do not expect the adoption of ASU No. 2016-01 to have a material effect on our consolidated financial position or our consolidated results of operations. In February 2016, the FASB issued ASU No. 2016-02, Leases, which changes lessee accounting to reflect the financial liability and right-of-use asset that are inherent to leasing an asset on the balance sheet. ASU No. 2016-02 is effective for our fiscal year commencing on January 1, 2019, but early adoption is permitted. Based on preliminary assessments, we do not expect the adoption of ASU No. 2016-02 to have a material effect on our consolidated financial position or our consolidated results of operations. In October 2016, the FASB issued ASU No. 2016-17, Interest Held Through Related Parties That Are Under Common Control, which amends the accounting guidance when determining the treatment of certain VIEs to include the interest of related parties under common control in a VIE when considering whether or not the reporting entity is the primary beneficiary of the VIE when considering consolidation. We have adopted this guidance for all periods presented. Adoption of this guidance has no material effect on our consolidated financial position or our consolidated results of operations. In November 2016, the FASB issued ASU No. 2016-18, Classification of Restricted Cash, which addresses the Statement of Cash Flow classification and presentation of restricted cash transactions. ASU No. 2016-18 is effective for our fiscal year commencing on January 1, 2018. The effect of this amendment is to be applied retrospectively and early adoption is permitted. We expect to adopt ASU No. 2016-18 for our fiscal year commencing on January 1, 2018. Based on preliminary assessments, we do not expect the adoption of ASU No. 2016-18 to have a material effect on our consolidated financial position or our consolidated results of operations. In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as an acquisition of assets or a business. Based on preliminary assessments, we do not expect the adoption of ASU No. 2017-01 to have a material effect on our consolidated financial position or our consolidated results of operations. |
Real Estate_ Real Estate Proper
Real Estate: Real Estate Properties (Tables) | 6 Months Ended |
Jun. 30, 2017 | |
Tables/Schedules | |
Real Estate Properties | June 30, 2017 December 31, 2016 Land $62,320 $62,320 Buildings and improvements 131,215 127,206 In-place lease value intangible 63,573 63,573 257,108 253,099 Less accumulated depreciation and amortization (61,970) (49,872) Total real estate assets $195,138 $203,227 |
Real Estate_ In-place lease int
Real Estate: In-place lease intangible asset and accumulated amortization (Tables) | 6 Months Ended |
Jun. 30, 2017 | |
Tables/Schedules | |
In-place lease intangible asset and accumulated amortization | The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows, in thousands: June 30, 2017 December 31, 2016 In-place lease value intangible $ 63,573 $ 63,573 In-place leases accumulated amortization (42,855) (34,635) Acquired lease intangible assets, net $ 20,718 $ 28,938 |
Notes Payable_ Notes payable sc
Notes Payable: Notes payable schedule (Tables) | 6 Months Ended |
Jun. 30, 2017 | |
Tables/Schedules | |
Notes payable schedule | The following is a summary of the Companys notes payable schedule as of June 30, 2017, in thousands: Property/Facility Payment (1) Maturity Date Rate June 30, 2017 December 31, 2016 Richardson Heights (2) P&I July 1, 2041 4.61% $ 18,986 $ 19,200 Cooper Street (2) P&I July 1, 2041 4.61% 7,895 7,984 Bent Tree Green (2) P&I July 1, 2041 4.61% 7,895 7,984 Mitchelldale (2) P&I July 1, 2041 4.61% 11,960 12,096 Energy Plaza I & II P&I June 10, 2021 5.30% 9,911 10,007 Westway One IO June 1, 2019 3.56% 10,819 10,819 Three Forest Plaza IO December 31, 2019 3.86% 17,828 17,828 TCB Credit Facility IO May 9, 2018 5.00% 8,050 7,800 EWB Credit Facility IO August 24, 2018 4.50% 12,000 12,000 EWB II Credit Facility IO August 24, 2018 4.50% 9,900 9,900 $ 115,244 $ 115,618 Less unamortized deferred loan costs (1,298) (1,467) $ 113,946 $ 114,151 |
Real Estate Held For Disposit23
Real Estate Held For Disposition: Village Pointe Property (Tables) | 6 Months Ended |
Jun. 30, 2017 | |
Tables/Schedules | |
Village Pointe Property | Six months ended June 30 2017 2016 Total revenues $ 44 $ - Property operating expenses 6 - Real estate taxes and insurance 8 - Asset management fees 3 - General and administrative 1 - Interest expense 7 - Total expenses 25 - Loss on disposition (27) - Net loss from discontinued operations $ (8) $ - |
Stockholders' Equity_ Distribut
Stockholders' Equity: Distributions schedule (Tables) | 6 Months Ended |
Jun. 30, 2017 | |
Tables/Schedules | |
Distributions schedule | Quarter Paid Distributions per Common Share Total Distributions 2017 2 nd $ 0.175 $ 3,159 1st Quarter 0.175 3,134 Total 2017 year to date $ 0.350 $ 6,293 2016 4 th $ 0.175 $ 3,173 3 rd 0.175 3,213 2 nd 0.175 3,042 1 st 0.175 2,478 Total 2016 $ 0.700 $ 11,906 |
Advertising (Details)
Advertising (Details) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2017 | Jun. 30, 2016 | Jun. 30, 2017 | Jun. 30, 2016 | |
Details | ||||
Advertising cost | $ 38,000 | $ 40,000 | $ 93,000 | $ 90,000 |
Real Estate_ Real Estate Prop26
Real Estate: Real Estate Properties (Details) - USD ($) | Jun. 30, 2017 | Dec. 31, 2016 |
Details | ||
Land | $ 62,320 | $ 62,320 |
Buildings and Improvements, Gross | 131,215 | 127,206 |
In-place lease value intangible | 63,573 | 63,573 |
Accumulated Depreciation, Depletion and Amortization, Property, Plant, and Equipment | $ (61,970) | $ (49,872) |
Real Estate (Details)
Real Estate (Details) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2017 | Jun. 30, 2016 | Jun. 30, 2017 | Jun. 30, 2016 | |
Details | ||||
Depreciation expense | $ 2,067,000 | $ 1,505,000 | $ 3,878,000 | $ 2,964,000 |
Amortization expense of in-place lease value | 3,873,000 | 3,878,000 | 8,220,000 | 7,721,000 |
Acquisition fees | $ 440,000 | $ 347,000 | 0 | 541,000 |
Asset management fee | $ 880,000 | $ 680,000 |
Real Estate_ In-place lease i28
Real Estate: In-place lease intangible asset and accumulated amortization (Details) - USD ($) | Jun. 30, 2017 | Dec. 31, 2016 |
Details | ||
In-place leases - accumulated amortization | $ (42,855) | $ (34,635) |
Accrued Rent and Accounts Rec29
Accrued Rent and Accounts Receivable, Net (Details) - USD ($) | 6 Months Ended | ||
Jun. 30, 2017 | Jun. 30, 2016 | Dec. 31, 2016 | |
Details | |||
Tenant receivables | $ 3,257 | $ 2,889 | |
Accrued Rent, Current | 4,660 | 3,583 | |
Allowance for Doubtful Accounts Receivable | (1,395) | $ (1,206) | |
Bad debt allowance | 189,000 | $ 285,000 | |
Bad debt write-off | $ 0 | $ 40,000 |
Deferred Leasing Commission C30
Deferred Leasing Commission Costs, Net (Details) - USD ($) | Jun. 30, 2017 | Dec. 31, 2016 |
Details | ||
Deferred Leasing Commissions | $ 7,725 | $ 6,116 |
Deferred Costs, Leasing, Accumulated Amortization | $ (1,930) | $ (1,341) |
Notes Payable (Details)
Notes Payable (Details) - USD ($) | Jun. 30, 2017 | Dec. 31, 2016 |
Details | ||
Loan costs | $ 2,232 | $ 2,160 |
Loan cost accumulated amortization | $ (934) | $ (693) |
Related Party Transactions (Det
Related Party Transactions (Details) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2017 | Jun. 30, 2016 | Jun. 30, 2017 | Jun. 30, 2016 | |
Details | ||||
Property management fees and reimbursements | $ 977,000 | $ 784,000 | $ 1,969,000 | $ 1,571,000 |
Leasing commissions | 787,000 | 1,121,000 | 1,608,000 | 1,489,000 |
Construction fees | $ 78,000 | $ 87,000 | $ 165,000 | $ 139,000 |