Attached files
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EX-31 - EXHIBIT 31.1 - TALON REAL ESTATE HOLDING CORP. | exhibit311.htm |
EX-32 - EXHIBIT 32.1 - TALON REAL ESTATE HOLDING CORP. | exhibit321.htm |
EX-10 - EXHIBIT 10.1 - TALON REAL ESTATE HOLDING CORP. | exhibit101.htm |
EX-31 - EXHIBIT 31.2 - TALON REAL ESTATE HOLDING CORP. | exhibit312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: September 30, 2015
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-53917
TALON REAL ESTATE HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
Utah |
| 26-1771717 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
5500 Wayzata Boulevard, Suite 1070, Minneapolis, MN 55416
(Address of Principal Executive Offices, Including Zip Code)
(612) 604-4600
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, 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.
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | Non-Accelerated Filer | ¨ | Smaller Reporting Company | x |
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| (Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrants common stock, par value $0.001 per share, outstanding at November 13, 2015 was 17,057,680 shares.
TALON REAL ESTATE HOLDING CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION |
|
3 | |
Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014 | 4 |
5 | |
6 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 7 |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 27 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 36 |
36 | |
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|
PART II. OTHER INFORMATION |
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37 | |
37 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 37 |
37 | |
37 | |
37 | |
37 | |
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38 |
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
In this Quarterly Report on Form 10-Q, references to Company, we, us, our and words of similar import refer to Talon Real Estate Holding Corp. and its subsidiaries, unless the context requires otherwise.
This Quarterly Report on Form 10-Q contains forward-looking statements regarding us, our business prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under the heading Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on March 31, 2015. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Commission that advise interested parties of the risks and factors that may affect our business.
2
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
TALON REAL ESTATE HOLDING CORP.
Minneapolis, Minnesota
FINANCIAL STATEMENTS
TABLE OF CONTENTS
As of and for the three and nine months ended September 30, 2015 and 2014
| Page |
Condensed Consolidated Financial Statements |
|
4 | |
5 | |
6 | |
7 |
3
TALON REAL ESTATE HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2015 and December 31, 2014
See accompanying notes to condensed consolidated financial statements.
4
TALON REAL ESTATE HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2015 and 2014
(unaudited)
See accompanying notes to condensed consolidated financial statements.
5
TALON REAL ESTATE HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2015 and 2014
(unaudited)
| Nine months ended September 30, | ||||
| 2015 |
| 2014 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
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|
|
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Net loss | $ | (5,082,916) |
| $ | (2,459,517) |
Adjustments to reconcile net loss to net cash flows from operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 3,945,500 |
|
| 1,585,361 |
Amortization of deferred financing costs |
| 875,285 |
|
| 112,295 |
Stock-based compensation expense |
| 135,685 |
|
| 555,604 |
Provision for doubtful accounts |
| 78,298 |
|
| - |
Changes in operating assets and liabilities: |
|
|
|
|
|
Rents and other receivables |
| (60,729) |
|
| (372,777) |
Deferred rent receivable |
| - |
|
| 35,824 |
Prepaid expenses and other assets |
| 292,457 |
|
| 99,332 |
Deferred leasing costs |
| (76,686) |
|
| - |
Accounts payable |
| 100,983 |
|
| 1,069,862 |
Accrued expenses and other liabilities |
| 268,040 |
|
| 623,387 |
Tenant security deposits |
| (12,390) |
|
| 13,017 |
Deferred rent revenue |
| 123,785 |
|
| 98,967 |
Prepaid rent |
| (5,535) |
|
| (789,985) |
Accrued interest |
| 150,486 |
|
| 228,332 |
Net cash flows from operating activities |
| 732,263 |
|
| 799,702 |
|
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|
|
|
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CASH FLOWS FROM INVESTING ACTIVITIES |
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|
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|
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Payments for acquisition or improvements of real estate assets |
| (1,007,853) |
|
| (17,000) |
Deposits made for future acquisitions |
| (320,000) |
|
| (75,000) |
Deposits to restricted escrows and reserves |
| (2,298,682) |
|
| (1,078,029) |
Payments from restricted escrows and reserves |
| 1,721,929 |
|
| 107,472 |
Cash received upon settlement of acquisition |
| - |
|
| 58,472 |
Net cash flows from investing activities |
| (1,904,606) |
|
| (1,004,085) |
|
|
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|
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CASH FLOWS FROM FINANCING ACTIVITIES |
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|
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|
Proceeds from notes payable |
| 3,000,000 |
|
| 620,000 |
Principal payments on notes payable |
| (1,393,071) |
|
| (370,856) |
Proceeds of related party notes |
| - |
|
| 600,000 |
Principal payments on related party notes |
| - |
|
| (200,000) |
Cash paid for financing costs |
| (424,850) |
|
| - |
Operating partnership and common stock issuance costs |
| - |
|
| (4,969) |
Net cash flows from financing activities |
| 1,182,079 |
|
| 644,175 |
|
|
|
|
|
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Net Change in Cash |
| 9,736 |
|
| 439,792 |
|
|
|
|
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CASH - BEGINNING OF PERIOD |
| 147,157 |
|
| 83,522 |
CASH - END OF PERIOD | $ | 156,893 |
| $ | 523,314 |
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
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|
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Real estate assets acquired through the issuance of operating partnership units and assumption of debt | $ | - |
| $ | 58,935,611 |
Escrows and reserves funded through the issuance of debt |
| - |
|
| 1,129,691 |
Purchases of building and land improvements included in accounts payable and tenant improvement allowance |
| 9,165,924 |
|
| - |
Leasing and financing fees included in accounts payable and other liabilities |
| 2,209,343 |
|
| 849,120 |
Issuance of common stock included in financing costs |
| 575,000 |
|
| - |
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
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|
Cash paid during the period for interest on mortgages and Operating Partnership preferred units | $ | 2,378,976 |
| $ | 782,931 |
See accompanying notes to condensed consolidated financial statements
6
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
Organization
We were incorporated as Guide Holdings, Inc. (Guide) in the State of Utah on November 1, 2007, for the sole purpose of becoming the holding company of Guidebook, which converted from a Utah limited liability company to a Utah corporation on November 1, 2007. Guidebook was organized in the State of Utah as a limited liability company on June 16, 2003. Guide focused on providing do-it-yourself instructional manuals for residential electrical, plumbing, and remodeling applications.
On June 7, 2013, we entered into a series of transactions (collectively, the Formation Transactions) that changed our business organization. On June 7, 2013, we changed our name to Talon Real Estate Holding Corp. (TREHC, or the Company) and issued 13,540,190 shares of our common stock for the contributions from the holders of a 49% interest in 5130 Industrial Street, LLC (5130 LLC) and all the interest in Talon Real Estate, LLC (Talon RE) which holds a purchase agreement to acquire the remaining 51% interest in 5130 LLC, for 2,820,810 shares. 5130 LLC was incorporated in the state of Delaware on November 23, 2005 to purchase real estate. Talon RE was incorporated in the state of Minnesota on December 20, 2012 and began operations in 2013 for the purpose of acquiring real estate properties and preparing the Formation Transactions. On June 3, 2013, we entered into a limited partnership agreement of Talon OP, L.P. (Talon OP), which we refer to as our Operating Partnership. On June 7, 2013 we contributed our interest in 5130 LLC and Talon RE into Talon OP for equivalent general partnership units as part of the Formation Transactions. 5130 LLC owns an industrial complex consisting of approximately 171,639 square feet located in the Minneapolis-St. Paul metropolitan area. We acquired such interest in this entity in June 2013 from certain parties, including the MG Kaminski Revocable Trust (The Kaminski Trust), the beneficiaries of which are the children of MG Kaminski, our Chief Executive Officer. The Kaminski Trust owns the remaining 51% interest in the industrial complex. Talon RE, a wholly owned subsidiary of our Operating Partnership, entered into a contribution agreement to acquire the remaining interest in the entity from The Kaminski Trust, subject to receiving consent to the transfer from the entitys lender. On June 7, 2013, we entered into a stock purchase agreement pursuant to which our company divested ourselves of our historic do-it-yourself instruction manual business by selling all the outstanding shares of The Guidebook Company, Inc., a Utah Corporation and wholly owned subsidiary primarily engaged in such business (Guidebook). Guide had 1,600,032 shares of common stock issued and outstanding prior to the Formation Transactions. These shares, along with the shares issued in the Formation Transactions on June 7, 2013, represent the shares issued and outstanding immediately after formation of Talon Real Estate Holding Corp. with a combined total of 15,140,222 shares.
Talon Real Estate Holding Corp, as the general partner of Talon OP, has management responsibility for all the activities of the Operating Partnership. TREHC owned approximately 65% of the Operating Partnership as of September 30, 2015 and December 31, 2014, respectively. The Operating Partnership owned 49% of 5130 Industrial Street, LLC, 100% of Talon Bren Road, LLC, and 100% of Talon First Trust, LLC as of September 30, 2015. Talon Bren Road, LLC, and Talon First Trust, LLC both limited liability companies organized under the laws of the state of Delaware, were formed on May 9, 2014 and April 21, 2014, respectively, to purchase real estate.
Basis of Presentation
We are the sole general partner of the Operating Partnership, and, as such, we generally have the exclusive power to manage and conduct the business and affairs of the Operating Partnership, subject to certain limited approval and voting rights of the limited partners. Guidebook, which was sold in connection with the Formation Transactions, is no longer included in our financial statements. The contributions that constitute the Formation Transactions were accounted for as a reverse acquisition and recapitalization, and Talon OP was considered to be the accounting acquirer. Therefore, the historical presentation of our financial statements for periods prior to the Formation Transactions are that of Talon Real Estate Holding Corp. and its subsidiaries on a consolidated basis including the Operating Partnership with its subsidiaries. Historical presentation of shareholders equity of TREHC was restated for common stock issued in the Formation Transactions and retained earnings of TREHC, formerly Guide, in periods prior to the formation were eliminated.
The accompanying condensed consolidated financial statements include the accounts of TREHC and its interest in the Operating Partnership. The limited partners in the Operating Partnership have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, the Company has the choice of redeeming the limited partners' interests ("Units") for TREHC common shares of stock on a one-for-one basis, or making a cash payment to the unit holder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units subject to volume restrictions.
7
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION (continued)
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2014, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheet as of September 30, 2015 and condensed consolidated statements of operations for the three and nine months ended September 30, 2015, and condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2015 and our condensed consolidated statements of operations for the three and nine months ended September 30, 2015, and our condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014, as applicable. These adjustments are of a normal recurring nature.
NOTE 2 INVESTMENT IN REAL ESTATE PROPERTIES AND ENTITIES
The Company acquired real estate property through its subsidiary, Talon First Trust, LLC, located at 180 5th Street East, St. Paul, MN on July 2, 2014. The building is primarily leased to tenants for commercial and government use. The property totals 656,875 net rentable square feet. As of September 30, 2015, the Company had tenants occupying approximately 66% of the rentable space. In April 2015, the Company executed a lease for a significant new tenant that would increase the occupancy by over 21% in the St. Paul building upon completion of tenant improvements.
The Company acquired real estate property through its subsidiary, Talon Bren Road, LLC, located on 20 acres of land at 10301 Bren Road West, Minnetonka, MN on May 29, 2014. This property is primarily leased to tenants who are wholesale product sales representatives. These leases are subject to a master lease agreement entered into between Talon Bren Road, LLC and Upper Midwest Allied Gifts Association, Inc., a Minnesota nonprofit corporation (UMAGA). This property has 164,472 net rentable square feet. As of September 30, 2015, the Company had tenants occupying approximately 90% of the rentable space.
The Company owns and operates the following real estate properties through its subsidiary, 5130 LLC:
5130 Industrial Street, Maple Plain, MN
1350 Budd Ave, Maple Plain, MN
The properties are primarily leased to tenants for mixed commercial and industrial usage. The properties have a combined 171,639 net rentable square feet. As of September 30, 2015, the Company had tenants occupying approximately 80% of the rentable space.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Significant items subject to such estimates and assumptions include determination of the useful life of property and other long-lived assets, valuation and impairment analysis of property and other long-lived assets, and valuation of the allowance for doubtful accounts. It is at least reasonably possible that these estimates could change in the near term.
8
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation
We evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810, Consolidation. In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions, contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity for which we are the primary beneficiary. The accompanying condensed consolidated financial statements include the accounts of Talon Real Estate Holding Corp. (TREHC) and Talon OP, our Operating Partnership, and all subsidiaries in which it maintains a controlling interest. Talon OP also consolidates 5130 LLC, an entity in which it has a 49% ownership interest, based on its ability to control the operating and financial decisions of 5130 LLC. All significant intercompany balances have been eliminated in consolidation.
Cash
The Company considers short-term investments with original maturities of 90 days or less to be cash equivalents. The Company believes it is not exposed to any significant credit risk on cash.
Restricted Escrows and Reserves
The Company is required to hold cash in restricted escrow accounts for insurance, real estate taxes and a replacement reserve. The escrows are used to pay periodic charges of real estate taxes and assessments, tenant improvements, and leasing commissions. The balances in the escrow accounts were $2,470,405 and $1,893,652 as of September 30, 2015 and December 31, 2014, respectively.
Rents and other Receivables
Rents receivable and deferred rent are recorded at their estimated net realizable value. The Company follows a policy of providing an allowance for doubtful accounts, which is based on a review of outstanding receivables, historical collection information, and existing economic conditions. The Company does not require collateral and accounts are considered past due if payment is not made on a timely basis in accordance with our credit terms. Accounts considered uncollectible are written off. Receivables have been reduced by an allowance for doubtful accounts of $71,560 and $10,784 as of September 30, 2015 and December 31, 2014, respectively.
Revenue Recognition
Base rental income is recognized on a straight-line basis over the terms of the related lease agreement, inclusive of leases which provide for scheduled rent increases or rent concessions. Differences between rent income earned and base rent amounts due per the respective lease agreements are credited or charged to deferred rent revenue or deferred rent receivable as applicable. When the Company enters into lease modifications or extensions with current tenants, the deferred rent at the time of the extension is amortized over the remaining term of the lease, and the revised terms are considered a new lease.
Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance and other operating expenses are billed monthly based on current year estimated operating costs for applicable expenses. An additional billing or a refund is made to tenants in the following year after actual operating expenses are determined.
9
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Leasing Costs and Tenant Allowance
Direct and indirect costs, including estimated internal costs and leasing commissions, associated with the leasing of real estate investments owned by the Company are capitalized as deferred leasing costs and amortized on a straight-line basis over the term of the related lease as amortization expense. Unamortized costs are charged to expense upon the early termination of the lease. Costs associated with unsuccessful leasing opportunities are expensed.
In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If the Company is considered the owner of the leasehold improvements for accounting purposes, the Company capitalizes the amount of the tenant allowance as building improvements and depreciates it over the shorter of the useful life of the leasehold improvements or the related lease term. For tenant allowances committed at lease inception and recorded as building improvements but not yet performed or completed, the corresponding liability will be recorded as tenant improvement allowance payables. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, for accounting purposes, the tenant allowance is considered to be a lease incentive and is capitalized as a deferred leasing cost and is amortized over the lease term as a reduction of rental revenue on a straight-line basis. The Company had amortization expense for tenant allowances of $272,852 and $779,461 for the three and nine months ended September 30, 2015, respectively, and $264,642 and $281,068 for the three and nine months ended September 30, 2014. The Company had accumulated amortization for tenant allowances of $1,454,151 and $674,691 as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015, the Company had deferred leasing costs and tenant allowances recorded as building improvements of $10,867,112 that did not have amortization expense in the three months and nine months ended September 30, 2015 due to lease terms that have not commenced as of that date.
Derivative Instruments
The Company records all derivative instruments on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. If the Company does not apply hedge accounting, all changes in the fair value of derivatives are recognized directly in earnings in the period of change. Currently, the Company has not elected hedge accounting treatment and all changes in fair value of the Companys derivatives are recognized in current period earnings.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and are being amortized on a straight-line basis over the financing term and are included in interest expense. The Company had amortization expense of $325,531 and $875,285 for the three and nine months ended September 30, 2015, respectively, and $101,694 and $112,295 for the three and nine months ended September 30, 2014. The Company had accumulated amortization of $1,117,365 and $302,080 as of September 30, 2015 and December 31, 2014, respectively.
10
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real Estate Property and Fixed Assets
Investment in real estate and fixed assets with a useful life of longer than one year are carried at cost less accumulated depreciation and amortization. Property such as land, building and improvements includes cost of acquisitions, development, and construction and tenant allowances and improvements. We allocate the cost of an acquisition, including the assumption of liability, to the acquired tangible assets (including land, buildings and personal property) determined by valuing the property as if it were vacant, and identifiable intangibles based on their relative fair values. Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to managements assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired which are subject to adjustment as additional information is obtained up to one year after the date of acquisition. Managements fair value assessment includes the use of readily accepted fair value techniques such as discounted cash flow analysis and comparable sales analysis including managements reliance on independent market analysis.
The Company finalized the purchase price fair value allocation of the First Trust acquisition during the nine months ended September 30, 2015 and has recorded certain measurement period adjustments that have impacted the previously reported consolidated balance sheet (see note 13).
Depreciation is provided using the straight-line method over the estimated useful life of the assets for buildings and land improvements, and the term of the lease for tenant improvements. The estimated useful lives being used are as follows:
Land Improvements | 3-15 years |
Buildings | 25-30 years |
Building Improvements | 10-20 years |
Tenant Improvements | 1-12 years |
Furniture and Equipment | 3 years |
Repair and maintenance costs are expensed as incurred, whereas expenditures that improve or extend the service lives of assets are capitalized. Disposal and abandonment of improvements are recognized at occurrence as a charge to depreciation.
Intangible Assets or Liabilities
Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets and any significant intangible assets and liabilities (such as above- and below-market leases and value of acquired in-place leases), and any assumed liabilities, and allocates the purchase price based on these fair value assessments. The Company records intangible assets and liabilities acquired at their estimated fair value apart from goodwill for acquisitions of real estate. The Company amortizes identified intangible assets and liabilities based on the period over which the assets and liabilities are expected to affect the future cash flows of the real estate property acquired. Lease intangibles (such as in-place or above- and below-market leases) are amortized over the term of the related lease. Above and below-market leases are amortized as a reduction in (addition to) rent revenue. The Company amortized $48,415 and $166,954 to rent revenue for above and below-market leases for the three and nine months ended September 30, 2015, respectively, and $74,505 for both the three and nine months ended September 30, 2014, respectively. Amortization of other intangibles is recorded in depreciation and amortization expense.
Impairment of Long-Lived Assets
Long-lived assets, such as real estate property, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use and eventual disposition of the asset are less than the carrying amount of that asset. The Company did not recognize any impairment losses for either of the three and nine months ended September 30, 2015 or 2014.
11
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company accounts for income taxes under FASB ASC 740-10-30 which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carry forwards are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is more likely than not that some component or all of the benefits of deferred tax assets will not be realized.
The Company's policy of accounting for uncertain tax positions is to recognize the tax effects from an uncertain tax position in the financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its consolidated balance sheet.
The Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2011. The Company is not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, the Company has elected to record the income tax penalties as general and administrative expense and any related interest as interest expense in the Company's consolidated statements of operations.
Stock-based Compensation
The Company has granted restricted stock to employees under an approved employee equity incentive plan and to Directors under a director compensation plan. Granted shares are considered issued and outstanding as of the date of the grants. Stock-based compensation is expensed on a straight-line basis over the vesting period and is valued at the fair value on the date of the grant. The Company has recognized $38,285 and $135,685 of compensation expense for the three and nine months ended September 30, 2015, respectively, and $49,741 and $555,604 for the three and nine months ended September 30, 2014, respectively.
The Company may also issue common stock in exchange for goods or services of non-employees. These shares are either fully vested at date of grant or vest over a certain period during which services are provided. The Company expenses the fair market value of the services over the period in which they are received.
On February 10, 2015, the Company issued common stock valued at $575,000 to an unrelated party in exchange for such partys guaranty of a loan which was obtained in the three months ended March 31, 2015. The value of the stock issued has been included as deferred financing costs in the consolidated balance sheet as of September 30, 2015. Financing costs of $143,750 and $383,333 related to this stock issuance was amortized to interest expense for the three and nine months ended September 30, 2015, respectively. No stock was issued in exchange for goods or services of non-employees in the nine months ended September 30, 2014.
12
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Noncontrolling Interest
Interests in the Operating Partnership held by limited partners are represented by partnership common units of the Operating Partnership. The Company's interest in the Operating Partnership was 65.0% of the common units of the Operating Partnership as of September 30, 2015 and 64.5% as of December 31, 2014. The Operating Partnerships income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the Operating Partnership agreement.
The portion of membership interests in 5130 LLC not held by Talon OP is reported as noncontrolling interest. Capital contributions, distributions, and profits and losses are allocated to the noncontrolling interest based on membership percentages and terms of the operating agreement.
Net Income (Loss) or Earnings Per Share
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average common and potential dilutive common shares outstanding in accordance with the treasury stock method.
The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the periods presented:
|
| Three Months Ended September 30, |
| Nine months ended September 30, | ||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
Weighted average common shares outstanding - basic |
| 16,716,934 |
| 16,010,997 |
| 16,578,942 |
| 15,867,615 |
Plus potentially dilutive common shares: |
|
|
|
|
|
|
|
|
Unvested restricted stock |
| 5,384 |
| 47,713 |
| 57,143 |
| 311,018 |
Contingent shares (note 8) |
| - |
| - |
| - |
| - |
Weighted average common shares outstanding - diluted |
| 16,722,318 |
| 16,058,710 |
| 16,636,085 |
| 16,178,633 |
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. The reclassifications had no impact on net loss or shareholders equity.
Recent Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). This newly issued accounting standard amends the definition of a discontinued operation in ASC 205-20 and requires an entity to provide additional disclosures about disposal transactions that do not meet the discontinued-operations criteria. ASU 2014-08 is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted; and was adopted by the Company effective January 1, 2014. The adoption of this standard did not have a material impact on the Companys financial position, results of operation or cash flows.
13
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will eliminate all industry-specific guidance and replace all current U.S. GAAP guidance on the topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact on the Companys consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic 205-40). The amendments in this Update provide guidance in U.S. GAAP about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures.
The amendments require management to assess an entitys ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of managements plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company currently has disclosed certain matters relative to going concern in Note 15 but presently has not yet adopted the new guidance.
In April 2015, the FASB issued ASU No. 2015-03 InterestImputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require 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 this update. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). This amends ASC 810, Consolidation (ASC "810"), to improve targeted areas of consolidation guidance by simplifying the requirements of consolidation and placing more emphasis on risk of loss when determining a controlling financial interest. ASU 2015-02 is effective for the annual period ending after December 15, 2015, and subsequent interim and annual periods with early adoption permitted. The adoption of ASU 2015-02 is not expected to have a material impact on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU 201516, Simplifying the Accounting for Measurement Period Adjustments. To simplify the accounting for adjustments made to provisional amounts, ASU 201516 requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The provisions of ASU 201516 are effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. We will adopt this ASU should we report provisional amounts for items in a business combination.
14
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 4 TENANT LEASES
The Company leases various commercial and industrial space to tenants over terms ranging from month-to-month to twelve years. Some of the leases have renewal options for additional terms. The leases expire at various dates from September 2015 to December 2027. Some leases provide for base monthly rentals and reimbursements for real estate taxes and common area maintenance.
The Company has the following future minimum base rentals on non-cancellable leases, including leases entered into subsequent to September 30, 2015:
2015 |
| $ | 1,831,961 |
2016 |
|
| 7,222,489 |
2017 |
|
| 6,784,807 |
2018 |
|
| 6,634,360 |
2019 |
|
| 5,860,926 |
Thereafter |
|
| 14,860,123 |
|
| $ | 43,194,666 |
NOTE 5 NOTES PAYABLE
The following table summarizes the Companys notes payable.
(1)
This note replaces the previous Talon Bren Road, LLC Mortgage 2 note that matured December 31, 2014 and is secured by the same property.
(2)
Related Party promissory note (see Note 6).
(3)
On January 12, 2015 and May 19, 2015, respectively, the Company entered into two separate $500,000 unsecured promissory notes with the same unrelated party. The notes bore interest at 14% annually and had an original maturity date of June 30, 2015 and July 18, 2015, respectively. In 2015, the Company extended the maturity dates of both notes to September 30, 2015 and subsequently to December 31, 2015. The notes bore interest of 20% annually from July 1, 2015 and July 19, 2015, respectively, through October 31, 2015. The notes will bear interest of 24% annually from November 1, 2015 through maturity.
15
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 5 NOTES PAYABLE (continued)
The Company is required to make the following principal payments on our outstanding notes payable for each of the five succeeding fiscal years and thereafter as follows:
|
| Amount | |
2015 |
| $ | 1,588,081 |
2016 |
|
| 2,368,422 |
2017 |
|
| 36,576,384 |
2018 |
|
| 324,614 |
2019 |
|
| 10,537,151 |
|
| $ | 51,394,652 |
The Company is required to periodically fund and maintain escrow accounts to make future real estate tax and insurance payments, as well as to fund certain capital expenditures.
The Companys mortgage assumed by Talon Bren Road, LLC in connection with the acquisition of the property at Bren Road includes a restrictive covenant that requires Talon Bren Road, LLC to maintain a minimum debt service coverage (DSCR) before distributions of 1.35:1.00 and after distributions of 1:05:1.00 as of the last day of each calendar year. As of December 31, 2014, Talon Bren Road LLC was out of compliance with the DSCR test. The Company made an additional principal payment of $258,857 on September 25, 2014 which caused the DSCR to fall below the required ratio. Had the DSCR been calculated using only scheduled monthly principal and interest due excluding the additional pay down of debt, the DSCR would have been in compliance with a ratio of 1.78 for the year ended December 31, 2014. Failure to meet the debt service coverage ratio covenant allows the lender to declare an event of default under the terms of the loan agreement. The lender has provided the Company a waiver of default.
The Companys mortgage entered into by Talon First Trust, LLC in connection with the property at 180 5th Street East, St. Paul, Minnesota includes a financial covenant that requires the Company to maintain a net worth that equals or exceeds $30 million and cash and marketable securities equal to or greater than $3 million after December 31, 2015 and throughout the remaining term of the loan, but allows the Company 30 days following any failure in which to satisfy this financial covenant or provide an individual or entity acceptable to lender as another guarantor on the loan and of the environmental indemnity obligations. Failure to satisfy the covenant would constitute an event of default under the terms of the loan. The Company does not expect to satisfy these Covenants without incurring additional debt and/or equity and is in the process of pursuing refinancing alternatives. The Company (as well as its subsidiary, Talon OP, L.P.) is a guarantor of the loan entered into by Talon First Trust, LLC and an indemnitor of Talon First Trust, LLCs environmental obligations in connection with the property at 180 5th Street East, St. Paul, Minnesota.
NOTE 6 TRANSACTIONS WITH RELATED PARTIES
On August 12, 2014, the Company entered into a $500,000 unsecured promissory note with one of its directors. The note bore interest at 14% annually and had an original maturity date of February 8, 2015. Proceeds from this note paid off additional notes entered into on December 30, 2013 and March 7, 2014, respectively, for $100,000 each, with the same party. In 2015, the Company extended the maturity date of the note to June 30, 2015, and subsequently extended to September 30, 2015 and then December 31, 2015. The note bore interest at 20% annually from July 1, 2015 through September 30, 2015. The note will bear interest of 24% annually from October 1, 2015 through maturity. Accrued interest on the note was $87,151 and $27,233 as of September 30, 2105 and December 31, 2014, respectively. The Company did not pay any interest on the note for the nine months ended September 30, 2015 and 2014, respectively. The note agreement provides that the Company will not make any distributions, dividends or payments to any of their equity shareholders other than to preferred unit holders.
16
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 7 CONCENTRATIONS
The Company has three tenants that rent approximately 31% of the Companys total rentable space as of September 30, 2015 with base rent representing 61% and 62% of total base rent revenues for the three and nine months ended September 30, 2015, respectively. For the same period in 2014, three tenants rented approximately 30% of the space, with base rent representing 59% and 50% of the total base rent revenues for the three and nine months ended September 30, 2014, respectively. The largest tenant currently rents approximately 12% of the Companys rentable space. The Company had two parties who accounted for 85% of the total rent and other receivables balance as of September 30, 2015. The Company had one tenant who accounted for 72% of the total rent and other receivables balance as of December 31, 2014.
NOTE 8 COMMITMENTS AND CONTINGENCIES
On June 7, 2013, prior to the Formation Transactions, Talon RE, entered into a contribution agreement with the remaining interest holder of 5130 LLC pursuant to which it will acquire the remaining 51% interest in 5130 LLC in exchange for 2,820,810 shares of our common stock, subject to receiving consent to the transfer from 5130 LLCs lender.
The Company entered into a property lease agreement relating to rental of office space. This non-cancellable lease has a remaining term of 57 months. The lease is subject to periodic adjustments for operating expenses. The future net minimum rental payments for this lease are as follows:
Years ending December 31, | |||
2015 |
| $ | 18,159 |
2016 |
|
| 51,629 |
2017 |
|
| 67,690 |
2018 |
|
| 84,664 |
2019 |
|
| 89,187 |
Thereafter |
|
| 45,876 |
|
| $ | 357,205 |
The Company entered into a Contribution Agreement dated May 29, 2014 with Bren Road, LLC, the contributor of the property acquired through our subsidiary, Talon Bren Road, LLC. The agreement provides for any deficit in achieving $1,560,000 of net operating income (NOI) per year for the first three years to be funded by Bren Road, LLC. The Company recognized $(22,904) and $128,068 of income under this agreement for the three and nine months ended September 30, 2015, respectively, and $82,266 of income under this agreement for both the three and nine months ended September 30, 2014.
The Company entered into a consulting agreement dated May 29, 2014 with Gerald Trooien (Consultant). This agreement provides for consulting services to Talon Bren Road, LLC for $43,750 per month payable beginning August 15, 2014 and continuing for 59 months thereafter. The agreement will terminate upon the occurrence of any of the following:
a.
redemption or conversion of all limited partnership units held by Bren Road, LLC,
b.
sale by Bren Road of any of its partnership units in Talon OP, L.P.,
c.
payment to Bren Road of any dividends in respect to Bren Roads interest in Talon, and
d.
the Company qualifies as a real estate investment trust (REIT).
The Company incurred $131,250 and $393,750 of consulting expenses for the three and nine months ended September 30, 2015, respectively, and $0 for both the three and nine months ended September 30, 2014. The Company had amounts due of $0 and $43,750 as of September 30, 2015 and December 31, 2014, respectively.
17
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 8 COMMITMENTS AND CONTINGENCIES (continued)
The Company entered into a Property Management Agreement dated July 2, 2014 with Swervo Management Division, LLC (Property Manager). This agreement provides for management and other leasing duties for Talon First Trust, LLC for monthly payments of 7.5% of the monthly gross rental receipts at the property beginning July 2, 2014 and continuing for 59 months thereafter. The agreement will terminate upon the occurrence of any of the following:
a.
the sale of property by the property owner,
b.
any non-monetary breach of any term or condition in the Property Management Agreement by either party not cured within 60 days of written notice of breach, and
c.
the date the principal and interest on the property note in aggregate principal amount of $33,000,000 by RCC Real Estate Inc, has been paid in full.
The Company incurred $180,580 and $464,984 of expenses for the three and nine months ended September 30, 2015, respectively, and $158,080 for both the three and nine months ended September 30, 2014. The Company had amounts due of $332,156 and $54,633 as of September 30, 2015 and December 31, 2014, respectively.
On January 23, 2015, Talon OP entered into a purchase agreement with Hoopeston I, L.L.C. and Broadmoor Place Associates, LLC to acquire a building and certain other assets located at 5799 Broadmoor Street, Mission, Kansas for a purchase price of $11,580,000. The property consists of a building of approximately 115,811 rentable square feet. The Company has terminated the contract with the seller and has expensed $0 and $145,000 of non-refundable deposits in the three and nine months ended September 30, 2015, respectively.
On April 9, 2015, the Company entered into a significant lease arrangement with a new tenant. As part of the lease agreement, the Company incurred an obligation for lease incentives up to approximately $8.2 million. As of September 30, 2015, the Company had recorded $7,834,068 to building improvements and tenant improvement allowance payable related to this commitment.
On August 31, 2015, the Company amended a lease arrangement with an existing tenant. As part of the lease agreement, the Company incurred an obligation for lease incentives up to approximately $252,000. As of September 30, 2015, the Company had recorded leasing costs of $247,800 to accrued expenses and other liabilities related to this commitment.
NOTE 9 RESTRICTED STOCK
The Company has granted restricted stock to employees under an approved employee equity incentive plan and to Directors under a director compensation plan. The 2013 Equity Incentive Plan dated June 7, 2013 (the Plan) allows up to 1,500,000 shares to be issued and granted to employees, non-employee directors, and consultants and automatically increases on January 1 of each year by three percent of the outstanding shares of common stock as of December 31 of the immediately preceding year. Employee awards granted in 2013 vest monthly over 36 months provided the recipient remains an employee or consultant of the Company. Awards granted in 2014 vest either immediately, monthly over a three year period, or monthly over a five year period. The Non-Employee Director Compensation Plan allows shares of restricted common stock to be granted to board members and is included under the Plan. The 2013 board member awards vest one-third of the shares on the date of grant, one-third on January 1 of the year following the date of grant, and one-third on January 1 of the second year following the date of grant, provided the recipient remains a member of the board as of the vesting date. The 2014 awards vested immediately in March of 2014.
18
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 9 RESTRICTED STOCK (continued)
As of September 30, 2015, the Company had granted 775,458 shares to employees and 360,000 shares to Directors under the Plan.
The following table sets forth a summary of restricted stock for the three months ended September 30, 2015:
Total Restricted Stock |
| Number of Restricted Shares |
| Weighted-average Grant Date Fair Value | |
Granted and not vested, June 30, 2015 |
| 358,659 |
| $ | 1.18 |
Granted |
| - |
|
| - |
Vested |
| (35,826) |
|
| 1.07 |
Forfeited or rescinded |
| - |
|
| - |
Granted and not vested, September 30, 2015 |
| 322,833 |
| $ | 1.19 |
The following table sets forth a summary of restricted stock for the nine months ended September 30, 2015:
Total Restricted Stock |
| Number of Restricted Shares |
| Weighted-average Grant Date Fair Value | |
Granted and not vested, December 31, 2014 |
| 652,817 |
| $ | 1.08 |
Granted |
| - |
|
| - |
Vested |
| (184,142) |
|
| .93 |
Forfeited or rescinded |
| (145,842) |
|
| 1.25 |
Granted and not vested, September 30, 2015 |
| 322,833 |
| $ | 1.19 |
Total unrecognized compensation expense related to the outstanding restricted stock as of September 30, 2015 was $384,018, which is expected to be recognized over a weighted average period of 13 months. The Company recognized $38,283 and $135,685 of stock-based compensation expense for the three and nine months ended September 30, 2015, respectively, and $49,741 and $555,604 for the three and nine months ended September 30, 2014, respectively, that is included in salary and compensation expense in the consolidated statements of operations. The Company used 0% for both the discount factor and forfeiture rate for determining the fair value of restricted stock. The Company has limited history to determine forfeiture trends and the Company considers the discount rate to be immaterial.
2013 Equity Incentive Plan Restricted Stock |
| Number of Restricted Shares |
Authorized but not granted or issued, December 31, 2014 |
| 691,567 |
Authorized increase in Plan shares |
| 502,306 |
Granted |
| - |
Forfeited or rescinded |
| 145,842 |
Authorized but not granted or issued, September 30, 2015 |
| 1,339,715 |
19
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 10 INTANGIBLE ASSETS AND LIABILITIES
The Company's identified intangible assets and liabilities at September 30, 2015 and December 31, 2014 were as follows:
| September 30, 2015 |
| December 31, 2014 | ||
Identified intangible assets: |
|
|
|
|
|
In-place leases | $ | 10,078,055 |
| $ | 10,078,055 |
Above-market leases |
| 1,832,939 |
|
| 1,832,939 |
Accumulated amortization |
| (3,368,249) |
|
| (1,488,770) |
Net carrying amount | $ | 8,542,745 |
| $ | 10,422,224 |
|
|
|
| ||
| September 30, 2015 |
| December 31, 2014 | ||
Identified intangible liabilities: |
|
|
|
|
|
Below-market leases |
| 507,746 |
|
| 507,746 |
Accumulated amortization |
| (174,263) |
|
| (69,705) |
Net carrying amount | $ | 333,483 |
| $ | 438,041 |
The effect of amortization of acquired intangible assets and liabilities was $562,698 and $1,774,922 for the three and nine months ended September 30, 2015, respectively, and $707,174 and $724,862 for the similar periods in 2014, respectively. Above-market leases, included in intangible assets, are amortized as a reduction of rent revenue and totaled $83,268 and $271,512 for the three and nine months ended September 30, 2015, respectively, and $109,358 for both similar periods in 2014. Amortization of below-market leases as an addition to rent revenue was $34,853 and $104,558 for the three and nine months ended September 30, 2015, respectively, and $34,853 for both similar periods in 2014. Amortization of in-place leases was $514,283 and $1,607,967 for the three and nine months ended September 30, 2015, respectively, and $632,669 and $650,357 for the similar periods in 2104, respectively. In-place leases, and above and below-market leases had a weighted average amortization period of 4.5 years in the year acquired.
The estimated annual amortization of acquired intangible assets and liabilities for each of the five succeeding fiscal years is as follows:
Years ending December 31, |
|
|
|
|
|
| |
|
| Assets |
| Liabilities | |||
2015 |
|
| $ | 597,551 |
| $ | 34,853 |
2016 |
|
|
| 2,323,170 |
|
| 127,154 |
2017 |
|
|
| 2,288,309 |
|
| 119,285 |
2018 |
|
|
| 1,695,727 |
|
| 42,225 |
2019 |
|
|
| 1,215,964 |
|
| 5,436 |
Thereafter |
|
|
| 422,024 |
|
| 4,530 |
|
|
| $ | 8,542,745 |
| $ | 333,483 |
NOTE 11 HEDGING ACTIVITIES
The Company may use derivative instruments as part of its interest rate risk management strategy to minimize significant unanticipated earnings fluctuations that may arise from variable interest rates associated with existing borrowings. On July 2, 2014, the Company entered into an interest rate cap contract for the notional amount of $33 million with a strike rate of 2.5% on one month LIBOR as a hedge for a floating rate debt entered into on that date. The interest rate cap expires on July 5, 2016. The interest rate cap was issued at approximate market terms and thus no fair value adjustment was recorded at inception and the rate cap had no value as of September 30, 2015. The Company did not elect hedge accounting treatment for the rate cap and as such, changes in fair value are recorded directly to earnings.
20
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 12 MANDATORILY REDEEMABLE PREFERRED OPERATING PARTNERSHIP UNITS
On July 2, 2014, the Company issued 30,000 preferred units, at a price of $100 per unit, totaling $3,000,000. These preferred unit holders are entitled to distributions at a rate of 6% per annum of their liquidation preference amount of $100 per unit which are cumulative from the date of issuance and are payable monthly (to the extent there are sufficient distributable proceeds). On and after July 2, 2020, the Company shall redeem the units, in whole, at the liquidation preference price of $100 per unit, plus accrued and unpaid distributions. There were no accumulated, undeclared preferred payments outstanding as of September 30, 2015. The preferred units have been classified as a liability in the consolidated balance sheet as the preferred liquidation preference amount is mandatorily redeemable in specific amounts at specific dates in the future. The liquidation preference amount totaled $3,000,000 as of September 30, 2015.
NOTE 13 ACQUISITIONS
Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to managements assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired. The process of allocating property costs to its components involves a considerable amount of subjective judgments to be made by Company management and preliminary estimates of fair values of assets and liabilities acquired are subject to adjustment as additional information is obtained and finalized by management up to one year after the date of acquisition. The company will finalize the amounts recognized as information necessary to complete the analysis is obtained. Amounts for certain contingent liabilities, and certain tangible and intangible assets and liabilities remain subject to change. These estimates were based on assumptions the Company believes to be reasonable, however, actual results may differ from these estimates.
On May 29, 2014, Talon OP entered into a contribution agreement with Bren Road, LLC and acquired through Talon Bren Road, LLC, a Delaware limited liability company that is wholly owned by Talon OP, the Minneapolis Mart building and certain other assets located at 10301 Bren Road West, Minnetonka, MN. The consideration for this property consists of (i) the assumption by Talon Bren Road, LLC of a secured loan of Bren Road, LLC with an aggregate principal amount of $11.5 million and a fixed interest rate of 4.65% which matures on May 28, 2019, and (ii) 5,200,000 common units of Talon OP. The acquisition closed on May 29, 2014. The Company recognized $1,951,002 in revenue and $1,011,650 in net income before interest, depreciation and amortization expense from this property for the nine months ended September 30, 2015. The Company recognized $903,601 in revenue and $525,965 in net income before interest, depreciation and amortization expense for this property for the same period in 2014.
The consideration for the acquisition of the property located at Bren Road as of the acquisition date consisted of the following:
Item | |||
Assumption of loan from Bren Road, LLC |
| $ | 11,500,000 |
Issuance of 5,200,000 common units of Talon OP |
|
| 6,500,000 |
Contingent liability included in accrued expenses |
|
| 131,250 |
Total purchase price |
| $ | 18,131,250 |
21
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 13 ACQUISITIONS (continued)
The Company has allocated the total cost of the acquisition as follows:
Item | |||
Tangible Assets: |
|
|
|
Land |
| $ | 4,700,000 |
Building |
|
| 12,444,250 |
|
|
|
|
Intangible Assets: |
|
|
|
In Place Leases |
|
| 987,000 |
Total Assets Acquired |
| $ | 18,131,250 |
|
|
|
|
Liabilities Assumed/Incurred: |
|
|
|
Debt |
| $ | 11,500,000 |
Contingent liability |
|
| 131,250 |
Net Assets Acquired |
| $ | 6,500,000 |
On July 2, 2014, Talon OP, L.P. (Talon OP) entered into a contribution agreement with various parties and acquired the First Trust Center building and certain other assets located at 180 5th Street East, St. Paul, MN through Talon First Trust, LLC, a wholly-owned subsidiary of Talon OP. The consideration for this property consisted of (i) $32 million of cash, financed via a mortgage loan (ii) 30,000 preferred units of Talon OP and (iii) 4 million common units of Talon OP. The acquisition closed on July 2, 2014. The Company recognized $6,443,772 in revenue and $2,415,278 in net income before interest, depreciation and amortization expense from this property for the nine months ended September 30, 2015. The Company recognized $2,067,513 in revenue and $746,113 in net income before interest, depreciation and amortization expense for this property for the same period in 2014.
The consideration for the acquisition of the property located at 180 5th Street East as of the acquisition date consisted of the following:
Item | |||
Mortgage loan |
| $ | 32,000,000 |
Issuance of 4,000,000 common units of Talon OP |
|
| 5,000,000 |
Issuance of 30,000 preferred units of Talon OP |
|
| 3,000,000 |
Assumption of accrued expenses and other liabilities |
|
| 804,361 |
Total purchase price |
| $ | 40,804,361 |
22
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 13 ACQUISITIONS (continued)
The Company has allocated the total cost of the acquisition as follows:
Item | |||
Tangible Assets: |
|
|
|
Land |
| $ | 3,000,000 |
Building |
|
| 21,258,346 |
Building improvements |
|
| 804,361 |
Tenant improvements |
|
| 4,192,699 |
Leasing costs |
|
| 1,132,707 |
Intangible Assets: |
|
|
|
In-Place leases |
|
| 9,091,055 |
Above-market leases |
|
| 1,832,939 |
Total Assets Acquired |
| $ | 41,312,107 |
|
|
|
|
Liabilities Assumed/Incurred: |
|
|
|
Other liabilities |
| $ | 804,361 |
Intangible liabilities: below-market leases |
|
| 507,746 |
Debt |
|
| 32,000,000 |
|
|
|
|
Net Assets Acquired |
| $ | 8,000,000 |
As noted in our 2014 Annual Report, the preliminary fair value estimates for the assets acquired and liabilities assumed were based upon preliminary calculations, valuations and assumptions that were subject to change as the Company obtained additional information during the measurement period. During the nine months ended September 30, 2015, the company obtained the additional information necessary to support a final allocation of the total cost of the acquisition, and accordingly, recorded certain measurement period adjustments that have impacted the previously reported 2014 consolidated balance sheet. The net impact of these measurement period adjustments on previously reported selected consolidated balance sheet line items are as follows:
| As originally reported December 31, 2014 |
| Adjustments |
| As adjusted December 31, 2014 | |||
Assets |
|
|
|
|
|
|
|
|
Land | $ | 8,397,000 |
| $ | (447,000) |
| $ | 7,950,000 |
Building & improvements |
| 41,113,139 |
|
| 1,465,406 |
|
| 42,578,545 |
Accumulated depreciation |
| (2,718,096) |
|
| (466,536) |
|
| (3,184,632) |
Deferred financing and leasing costs, net |
| 1,227,558 |
|
| 991,693 |
|
| 2,219,251 |
Intangible assets, net |
| 11,614,284 |
|
| (1,192,060) |
|
| 10,422,224 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
| 422,425 |
|
| 804,361 |
|
| 1,226,786 |
Below-market leases, net |
| 309,787 |
|
| 128,254 |
|
| 438,041 |
|
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
Accumulated Loss |
| (4,364,853) |
|
| (374,836) |
|
| (4,739,689) |
Noncontrolling interests - Operating Partnership |
| 10,733,180 |
|
| (206,276) |
|
| 10,526,904 |
The net impact of these adjustments to the previously reported 2014 consolidated balance sheet was an increase in assets of $351,503, an increase in liabilities of $932,615, and a decrease in shareholders equity of $581,112. Because accounting principles generally accepted in the United States require that comparative information for prior periods be revised for measurement period adjustments, the Companys previously reported net loss for the three and nine months ended September 30, 2014 were as follows:
23
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 13 ACQUISITIONS (continued)
| For the Three Months Ended September 30, 2014 | |||||||
| As originally reported |
| Adjustments |
| As adjusted | |||
REVENUE | $ | 2,919,485 |
| $ | (37,595) |
| $ | 2,881,890 |
EXPENSES |
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 1,180,480 |
|
| 159,404 |
|
| 1,339,884 |
NET LOSS |
| (970,381) |
|
| (298,693) |
|
| (1,269,074) |
Net loss attributable to noncontrolling interest - Operating Partnership |
| 334,396 |
|
| 106,125 |
|
| 440,521 |
NET LOSS ATTRIBUTABLE TO TALON REAL ESTATE HOLDING CORP. |
| (606,766) |
| $ | (192,568) |
|
| (799,334) |
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted | $ | (0.04) |
|
|
|
| $ | (0.05) |
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2014 | |||||||
| As originally reported |
| Adjustments |
| As adjusted | |||
REVENUE | $ | 3,407,433 |
| $ | (37,595) |
| $ | 3,369,838 |
EXPENSES |
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 1,362,054 |
|
| 148,803 |
|
| 1,510,857 |
NET LOSS |
| (2,160,824) |
|
| (298,693) |
|
| (2,459,517) |
Net loss attributable to noncontrolling interest - Operating Partnership |
| 364,857 |
|
| 106,125 |
|
| 470,982 |
NET LOSS ATTRIBUTABLE TO TALON REAL ESTATE HOLDING CORP. |
| (1,668,624) |
| $ | (192,568) |
|
| (1,861,192) |
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted | $ | (0.11) |
|
|
|
| $ | (0.12) |
Adjustments included in the tables above include $101,694 and $112,295 of previously reported depreciation and amortization expense that has been reclassified as interest expense to conform with the classifications included in the companys current results of operations for the three and nine months ended September 30, 2015, respectively.
The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisitions of the properties located at Bren Road and 180 5th Street East had occurred at January 1, 2014, the beginning of the earliest period presented. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisitions been completed on the dates indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or operating results of the Company after completion of the acquisition.
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| 2015 |
| 2014 |
| 2015 |
| 2014 | ||||
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) | ||||
Revenue | $ | 2,840,214 |
| $ | 2,881,890 |
| $ | 8,799,233 |
| $ | 8,656,154 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) | $ | (1,838,644) |
| $ | (1,269,074) |
| $ | (5,082,916) |
| $ | (4,500,845) |
Net income (loss) attributable to Talon Real Estate Holding Corp. | $ | (1,172,025) |
| $ | (799,334) |
| $ | (3,242,387) |
| $ | (2,802,540) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share basic and diluted | $ | (0.07) |
| $ | (0.05) |
| $ | (0.20) |
| $ | (0.18) |
Basic and diluted weighted average shares outstanding |
| 16,716,934 |
|
| 16,010,997 |
|
| 16,578,942 |
|
| 15,867,615 |
(1) Net income (loss) includes the effects of depreciation and amortization expense of $1,639,328 and $4,820,785 for the three and nine months ended September 30, 2015, respectively, and $1,516,082 and $4,628,286 for the three and nine months ended September 30, 2014, respectively, based on allocations of the purchase price to managements assessment of the fair value of tangible and intangible assets and any assumed liabilities in connection with the acquisitions.
24
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 14 SUBSEQUENT EVENTS
The Company has evaluated subsequent events for matters that require recognition or disclosure in the Companys financial statements through the date these financial statements were issued.
NOTE 15 GOING CONCERN
Liquidity is a measure of our ability to meet potential cash requirements, including commitments to repay borrowings, fund and maintain our operations and assets, acquire properties, make distributions to our shareholders and other general business needs. In the short-term, we have incurred significant capital and leasing expenses related to our growth strategy at our existing properties as well as expenses related to our acquisition strategy, which has created a cash shortfall from operations.
Our short-term liquidity requirements consist primarily of funds needed to pay for operating expenses and other expenditures directly associated with our properties, meet debt service requirements, and to pursue our strategy of near-term growth through acquisition of properties as well as general and administrative expenses operating as a public company.
We currently do not have available cash and cash flows from current operations to provide us with adequate liquidity for the foreseeable future. Our current liabilities exceed our unrestricted cash and we have very limited cash flow from current operations. As of September 30, 2015, we had unrestricted cash of $156,893 and current liabilities including accounts payable, accrued expenses, and payments due on borrowings substantially in excess of the available cash. Prior to September 30, 2015, the Company entered into a significant lease arrangement with a new tenant. As part of the lease agreement, the Company incurred an obligation for tenant allowances of which approximately $7.8 million was included as building improvements as of September 30, 2015. The Company also plans to spend approximately $1.5-$2 million to complete immediate capital improvements on our buildings including tenant space and general building improvements. The Company expects to finance these tenant allowances and capital improvements through issuance of debt and/or equity. We will require additional capital and/or increased cash flow from future operations to fund our ongoing business.
Although we plan to aggressively pursue acquisitions to grow our business, there is no assurance that we will be able to acquire additional properties in the future or obtain the necessary financing to acquire such properties.
Since our available cash and cash flows from current operations do not provide us with adequate cash to satisfy current liabilities and do not provide us with adequate liquidity for the foreseeable future, we anticipate that we will undertake future debt or equity financings in 2015.
There is no guarantee that we will be able to raise any of the required additional capital or generate sufficient cash flow from our current and future operations to fund our ongoing business. If the amount of capital we are able to raise together with our income from operations is not sufficient to satisfy our capital needs, we may be required to cease our operations or alter our growth plans. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment.
25
TALON REAL ESTATE HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three and nine months ended September 30, 2015 and 2014 (unaudited)
NOTE 15 GOING CONCERN (continued)
In the future, we may use a number of different sources to finance our liquidity needs, including cash flows from operations, issuance of debt securities or equity securities (which might be common or preferred stock), private financings (such as additional bank credit facilities, which may or may not be secured by our assets), asset sales, seller financing, property-level mortgage debt, or any combination of these sources, to the extent available to us, or other sources that may become available from time to time. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. We may incur substantial costs in pursuing future capital financing, including interest and dividend payments, investment banking fees, legal fees, accounting fees, guarantee fees, and other costs. We may also use the issuance of common equity as incentives to secure future capital which may dilute existing common shareholders. Although we have successfully raised equity capital in the past, we cannot be assured that we will be able to continue to be successful in raising capital through issuance of securities. Our ability to obtain needed financing may be impaired by such factors as the capital markets, our status as a new enterprise without significant assets or demonstrated operating history, and/or the loss of key management. There is no guarantee that we will be able to raise any required additional capital or generate sufficient cash flow from our current and proposed operations to fund our ongoing business.
26
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.
Overview
We are a real estate investment company focused on investing in office, industrial and retail properties located in the Midwest and South Central regions of the United States. We target properties located in the area bounded by Minnesota and Texas to the north and south, and by Illinois and Colorado to the east and west, although we will consider properties outside this target area if we identify attractive opportunities. We believe these markets are currently underserved in financing and market transaction options for which we can provide advantageous solutions. We believe the size and location of opportunities in this region will be a desirable fit for our real estate portfolio and can be pursued at attractive yields.
Our Current Property Interests
We currently own four properties located in and around the Minneapolis-St. Paul metropolitan area of Minnesota.
On June 7, 2013, we acquired a 49% interest in an entity that owns an industrial complex consisting of two buildings with approximately 171,639 square feet located in the Minneapolis-St. Paul metropolitan area. The buildings currently have a combined occupancy of 80%. We have entered into a contribution agreement to acquire the remaining interest in this entity, subject to receiving consent to the transfer from the entitys lender.
In 2014, we completed two acquisitions with a purchase price totaling approximately $58 million and over 1 million in gross building square feet. On May 29, 2014, we completed the acquisition of a 227,000 square foot building situated on 20 acres of land in Minnetonka, Minnesota that is currently about 90% occupied primarily by over 100 tenants who are wholesale distributors. On July 2, 2014, we completed the acquisition of a thirteen story office tower located in downtown St. Paul, Minnesota totaling 856,223 total building square feet that is currently occupied by corporate and government tenants totaling approximately 66% of rentable square feet. In April 2015, the Company executed a lease for a significant new tenant that would increase the occupancy by over 21% in the St. Paul building upon occupancy. This would increase combined occupancy for all the buildings in our portfolio from 72% to approximately 87%.
The following table sets forth information regarding our 5 largest tenants as of September 30, 2015.
Property Location (1) |
| Tenant Industry |
| Primary Use |
| Lease Expiration |
| Approx. Total Leased Square Feet |
| Percentage of Company's Rentable Square Feet |
| Base Rent for the nine months ended September 30, 2015 |
| Percentage of Companys Total Base Rent for the nine months ended September 30, 2015 | |
180 E 5th Street, St. Paul, MN |
| Health Care |
| Office |
| 4/30/2018 |
| 119,490 |
| 12% |
| $ | 1,364,382 |
| 24% |
180 E 5th Street, St. Paul, MN |
| Government |
| Office |
| 5/31/2020 |
| 83,130 |
| 8% |
| $ | 1,162,903 |
| 21% |
180 E 5th Street, St. Paul, MN |
| Retail |
| Office |
| 3/31/2020 |
| 102,577 |
| 10% |
| $ | 959,232 |
| 17% |
5130 Industrial St, Maple Plain, MN |
| Construction |
| Industrial |
| 2/28/2021 |
| 59,500 |
| 6% |
| $ | 145,106 |
| 3% |
1350 Budd Ave, Maple Plain, MN |
| Construction |
| Industrial |
| 2/28/2018 |
| 29,903 |
| 3% |
| $ | 81,533 |
| 1% |
(1)
The two properties located in Maple Plain, MN lease approximately 14% of the Companys rentable space and account for approximately 5% of the Companys total base rent revenues for the nine months ended September 30, 2015. The property located in Minnetonka, MN leases approximately 15% of the Companys rentable space and accounts for approximately 18% of the Companys total base rent revenues for the nine months ended September 30, 2015. No major tenants are located at the property in Minnetonka, MN. The property located in St. Paul, MN leases approximately 58% of the Companys rentable space and accounts for approximately 77% of the Companys total base rent revenues for the nine months ended September 30, 2015.
27
The future square feet expiring for all current leases, including leases entered into subsequent to September 30, 2015:
Years ending December 31,
| 5130 Industrial St |
| 1350 Budd Ave |
| 10301 Bren Rd |
| 180 E 5th St |
|
|
| Maple Plain, MN |
| Maple Plain, MN |
| Minnetonka, MN |
| St. Paul, MN |
| Total |
|
|
|
|
|
|
|
|
|
|
2015 | 29,206 |
| - |
| - |
| 42,161 |
| 71,367 |
2016 | 17,841 |
| - |
| 44,234 |
| 7,952 |
| 70,027 |
2017 | - |
| - |
| - |
| 25,554 |
| 25,554 |
2018 | - |
| 29,903 |
| - |
| 134,787 |
| 164,690 |
2019 | - |
| - |
| 120,238 |
| 708 |
| 120,946 |
Thereafter | 59,500 |
| - |
| - |
| 362,868 |
| 422,368 |
| 106,547 |
| 29,903 |
| 164,472 |
| 574,030 |
| 874,952 |
Factors That May Influence Our Operating Results
Acquisition Strategy. We plan to grow our business through the acquisition of new properties, initially targeting properties that meet the criteria described above under Overview and elsewhere in this report. We expect the properties we acquire will be subject to mortgage financing and other indebtedness that we will assume or refinance. Debt service on such indebtedness will have a priority over any distributions with respect to our common stock.
Rental Revenue. The amount of net rental revenue generated by our properties depends primarily on our ability to maintain the occupancy rates of currently leased space and to lease space that becomes available. As of September 30, 2015, our properties were 86% leased. Future economic downturns affecting the Minneapolis-St. Paul metropolitan area or downturns in our tenants businesses that impair our ability to renew leases or re-let space or the ability of our tenants to fulfill their lease commitments could adversely affect our revenues. In addition, growth in rental revenue primarily will depend on our ability to acquire additional properties that meet our investment criteria.
Conditions in Our Markets. Our current properties are located in the Minneapolis-St. Paul metropolitan area. Positive or negative changes in economic or other conditions in this area, or areas in our prospective properties, including employment and wage rates, natural disasters and other factors, may impact our overall performance.
Operating Expenses. Our operating expenses primarily consist of property taxes, management fees, utilities, insurance and site maintenance costs. Some of our leases require tenants to reimburse us for a share of our operating expenses. Increases or decreases in any unreimbursed operating expenses, either due to the nature of the expenses not requiring reimbursement from our tenants or due to a reduction in leased square footage requiring tenant reimbursement of a portion of our operating expenses, will impact our overall performance. As a public company, we estimate our annual general and administrative expenses will increase due to increased insurance, accounting and other expenses related to SEC reporting and other compliance matters compared to our historic operations prior to operating as a public real estate holding company. Legal fees incurred in 2015 and 2014 were significant due to the Companys acquisition activities. We expect legal fees to continue to be primarily associated with such activities and business matters customary to a public real estate company.
Interest Expense. Our interest expense will depend on the amounts we borrow as well as the interest rates charged by our lenders. Our current loan agreements are a mix of both fixed and floating rates, as well as secured and unsecured by our properties. Our aggregate interest expense may increase as we acquire properties and could fluctuate between periods based on the variable rate loan arrangements, if we do not hedge any such interest rate risk.
Critical Accounting Policies and Estimates
Our discussion and analysis of the historical financial condition and results of our operations are based upon our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP.
28
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the reporting period. Actual amounts may differ from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the condensed consolidated financial statements of our company elsewhere in this report. We have summarized below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. We evaluate these estimates on an ongoing basis, based upon information currently available and on various assumptions that we believe are reasonable as of the date hereof. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our results of operations and financial condition to those of other companies. There have been no significant changes to those policies during the nine months ended September 30, 2015.
Investments in Real Estate and Fixed Assets
Investments in real estate and fixed assets are carried at cost less accumulated depreciation and amortization. Property such as land, building and improvements includes cost of acquisitions, development, and construction and tenant allowances and improvements. Maintenance and repairs are expensed as incurred, and major improvements are capitalized. We allocate the cost of an acquisition, including the assumption of liabilities, to the acquired tangible asset and liabilities and identifiable intangible assets and liabilities based on their relative fair values. We assess fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market economic conditions.
We allocate the cost of an acquisition, including the assumption of liabilities, to the acquired tangible assets (including land, buildings and personal property) determined by valuing the property as if it were vacant, and identifiable intangibles based on their relative fair values. Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to managements assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired which are subject to adjustment as additional information is obtained up to one year after the date of acquisition.
Intangible Assets
Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets and any significant intangible assets (such as above- and below-market leases and value of acquired in-place leases), and any assumed liabilities, and allocates the purchase price based on these fair value assessments. The Company amortizes identified intangible assets and liabilities based on the period over which the assets and liabilities are expected to affect the future cash flows of the real estate property acquired. Lease intangibles (such as in-place or above- and below-market leases) are amortized over the term of the related lease. Above and below-market leases are amortized as a reduction in (addition to) rent revenue. Amortization of other intangibles is recorded in depreciation and amortization expense.
Noncontrolling Interest
Interests in the Operating Partnership held by limited partners are represented by Operating Partnership units. The Company's interest in the Operating Partnership was 65.0% of the common units of the Operating Partnership as of September 30, 2015 and 64.5% as of December 31, 2014. The Operating Partnerships income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the Operating Partnership agreement.
The portion of membership interests in 5130 LLC not held by Talon OP is reported as noncontrolling interest. Capital contributions, distributions, and profits and losses are allocated to the noncontrolling interest based on membership percentages and terms of the operating agreement.
Significant Events and Transactions during the nine months ended September 30, 2015
Summarized below are the Companys significant transactions and events during the three and nine months ended September 30, 2015.
29
On January 12, 2015, the Company entered into a $500,000 unsecured promissory note with an unrelated party. The note bore interest at 14% annually and had an original maturity date of June 30, 2015. Proceeds from this note paid off an additional note entered into on October 7, 2014 for $250,000, with the same party. In 2015, the Company extended the maturity date of the note to September 30, 2015 and subsequently to December 31, 2015. The note bore interest of 20% annually from July 1, 2015 through September 30, 2015. The note will bear interest of 24% annually from October 1, 2015 through maturity.
On February 10, 2015, the Company entered into a promissory note with US Income Partners, LLC, known as USIP, to borrow up to $2,000,000 in aggregate principal with an interest rate of 16% and a maturity date of February 11, 2016. The note requires monthly payments of interest only. The loan is secured by a second mortgage on the property at 10301 Bren Road West, Minnetonka, MN held by Talon Bren Road, LLC, a wholly owned subsidiary of Talon OP. The loan documents contain events of default that are customary for loans of this type. The obligations of Talon OP under the loan are guaranteed by both the Company and an unrelated party. In consideration for providing the guaranty, the Company issued the third-party guarantor 460,000 shares of its common stock. Proceeds from the USIP note were used to pay off the note referred to as Talon Bren Road, LLC Mortgage 2 in Note 5 which was secured by the same property.
On May 19, 2015, the Company entered into a $500,000 unsecured promissory note with an unrelated party. The note bore interest at 14% annually and had an original maturity date of July 18, 2015. In 2015, the Company extended the maturity date of the note to September 30, 2015 and subsequently December 31, 2015. The note will bear interest of 20% annually from July 19, 2015 through October 31, 2015 and 24% annually from November 1, 2015 through maturity.
Market Conditions and Outlook
Our recent acquisitions were accomplished utilizing a 721 Exchange tax deferral methodology or UPREIT providing several unique advantages over a 1031 exchange or selling to cash buyers. This strategy is advantageous for real estate owners seeking to mitigate and defer their immediate tax obligations, stay invested in real estate, diversify their holdings, and seek potential future growth and liquidity by accepting Talon OP common units which can later be converted 1:1 for Talon common stock under the ticker TALR and their capital gains tax obligations are deferred until the common stock is ultimately sold in the public market.
Our strategy is to continue offering these tax-deferred solutions to real estate owners as part of diversifying our shareholder base creating liquidity and shareholder value. We continue to believe office and industrial properties offer the best return on equity metrics as part of our investment strategy. Retail will also be part of our overall portfolio with an average overall target portfolio contribution of nearly 20% over the long-term.
The middle corridor of the United States continues to offer higher cap rates compared to the west and east coasts and we will continue to explore additional investment options within this region to continue our mission to provide return on equity targets of 8-15% per asset or portfolio.
Results of Operations
Our revenues and expenses have changed significantly compared to the same period in the previous year due to recent acquisitions of the property at Bren Road in Minnetonka, Minnesota on May 29, 2014 and the property at 180 5th Street East in St. Paul, Minnesota on July 2, 2014. These two properties have generated approximately $8.4 million in revenues for the nine months ended September 30, 2015. These two properties had total operating expenses of approximately $5.0 million for the nine months ended September 30, 2015. We expect our revenues, tenant reimbursements and many expenses will continue to increase on an absolute basis in the future as we seek to acquire additional properties, assume or refinance indebtedness in connection with the acquisitions and build the infrastructure necessary to grow our business. In the near term, we expect to incur higher legal and other professional fees in pursuit of potential acquisitions.
30
Three months ended September 30, 2015 compared to three months ended September 30, 2014
Revenues and Expenses
Rental revenues increased $85,329, or 4.7%, to $1,895,656 for the three months ended September 30, 2015, compared to $1,810,327 for the same period of the prior year, and tenant reimbursements decreased $53,174, or 5.5%, to $908,373 compared to $961,547 for the same period of the prior year. The net increase in rental revenues over the same period in the prior year is primarily attributable the increased leasing activity at the building in St. Paul. The net decrease in tenant reimbursements is primarily attributable to the lease termination in 2015 of a tenant, which had a significant contractual portion of reimbursements at the building in St. Paul.
General and administrative expenses increased $57,228, or 106.9%, to $110,783 for the three months ended September 30, 2015 compared to $53,555 for the same period of the prior year. The increase is primarily due to an increase in due diligence costs for potential deals and other general and administrative expense due to the growth of the Company.
Salary and compensation expenses decreased $2,306, or 1.3%, to $177,434 for the three months ended September 30, 2015 compared to $179,740 for the same period of the prior year. The minimal decrease in salary and compensation expense was attributable to the net decrease in total compensation for the period in 2015.
Professional fees increased $104,554, or 143.6%, to $177,387 for the three months ended September 30, 2015 compared to $72,833 the same period of the prior year. The increase is primarily due to the monthly consulting fees for the building located in Minnetonka being expensed in three months ended September 30, 2015 compared to having been capitalized as part of the acquisition costs in the same period of 2014.
Property operating expenses, real estate taxes and insurance increased $128,457, or 7.9%, to $1,744,455 for the three months ended September 30, 2015 compared to $1,615,998 for the same period of the prior year. The increase in these expenses is primarily attributable to the general increase in utilities, real estate taxes and allowance for doubtful accounts across all of the properties, as well as an increase in management and consulting fees at the building in St. Paul.
Depreciation and amortization expense decreased by $78,702, or 5.9%, to $1,261,182 for the three months ended September 30, 2015 compared to $1,339,884 for the same period of the prior year. The decrease is primarily attributable to certain intangible assets expiring in correlation with the applicable leases.
Interest expense increased by $318,663, or 35.8% to $1,207,617 for the three months ended September 30, 2015 compared to $888,954 for the same period of the prior year. The increase is primarily attributable to the impact of additional financing and refinancing activities completed in 2015.
Nine months ended September 30, 2015 compared to nine months ended September 30, 2014
Revenues and Expenses
Rental revenues increased $3,531,046, or 164.9%, to $5,672,192 for the nine months ended September 30, 2015, compared to $2,141,146 for the same period of the prior year, and tenant reimbursements increased $1,681,896, or 150.5%, to $2,799,242 compared to $1,117,346 for the same period of the prior year. The net increase in rental revenues and tenant reimbursements over the same period in the prior year is primarily attributable to the impact of the two acquisitions made in May and July 2014 and additionally bolstered by the 2014 operating expense and real estate tax shortfall being recorded in nine months ended September 30, 2015.
General and administrative expenses increased $239,267, or 122.6%, to $434,414 for the nine months ended September 30, 2015 compared to $195,147 for the same period of the prior year. The increase is primarily due to an increase in due diligence for potential deals and other general and administrative expense due to the growth of the Company, slightly offset by a decrease in D&O insurance expense.
Salary and compensation expenses decreased $373,353, or 39.2%, to $579,996 for the nine months ended September 30, 2015 compared to $953,349 for the same period of the prior year. The decrease in expense in 2015 was attributable to the immediate vesting of non-cash stock compensation of approximately $456,000 in 2014, offset by a net increase in total compensation for the period.
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Professional fees increased $372,022, or 182.4%, to $575,968 for the nine months ended September 30, 2015 compared to $203,946 the same period of the prior year. The increase is due to the increase in legal, accounting and consulting fees primarily attributable to the impact of the two acquisitions made in May and July 2014 and the general growth of the Company.
Property operating expenses, real estate taxes and insurance increased $3,249,736, or 174.4%, to $5,112,678 for the nine months ended September 30, 2015 compared to $1,862,942 for the same period of the prior year. The increase in these expenses is primarily attributable to the impact of the two acquisitions made in May and July 2014.
Depreciation and amortization expense increased by $2,263,489, or 149.8%, to $3,774,346 for the nine months ended September 30, 2015 compared to $1,510,857 for the same period of the prior year. The increase is primarily attributable to the impact of the two acquisitions made in May and July 2014 and the increased leasing activity in 2015.
Interest expense increased by $2,301,633, or 208.6%, to $3,404,747 for the nine months ended September 30, 2015 compared to $1,103,114 for the same period of the prior year. The increase is primarily attributable to the impact of financing the two acquisitions made in May and July 2014.
Funds from Operations and Non-GAAP Reconciliation
The National Association of Real Estate Investment Trusts, or NAREIT, defines funds from operations, or FFO, as net income (loss) available to common shareholders and operating partnership unit holders computed in accordance with GAAP, excluding gains or losses from sales of operating real estate assets and extraordinary items, plus depreciation and amortization of operating properties, and after adjustments for unconsolidated partnerships and joint ventures. We intend to calculate FFO in a manner consistent with the NAREIT definition.
Management intends to use FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income alone as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself. In addition, securities analysts, investors, and other interested parties use FFO as the primary metric for comparing the relative performance of equity REITs. There can be no assurance that FFO presented by us is comparable to similarly titled measures used by REITs.
FFO should not be considered as an alternative to net income or other measurements under GAAP as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness.
We define adjusted funds from operations, or AFFO, as FFO excluding the non-cash effects of straight-line rent and amortization of lease inducements and deferred financing costs, depreciation of non-real estate, and excluding the effects of non-cash compensation charges. U.S. GAAP requires rental revenues related to non-contingent leases that contain specified rental increases over the life of the lease to be recognized evenly over the life of the lease. This method may result in rental income in the early years of a lease that is higher than actual cash received, creating a deferred rent receivable asset or lower income than actual cash received, creating a deferred rent revenue liability included in our consolidated balance sheet. At some point during the lease, depending on its terms, cash rent payments may exceed or be lower than the straight-line rent which results in the deferred rent receivable asset or liability, respectively, decreasing to zero over the remainder of the lease term. By excluding the non-cash portion of straight-line rental revenue and amortization of lease inducement and deferred financing costs as well as non-cash compensation expense, investors, analysts and our management can compare AFFO between periods.
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Below is the calculation of FFO and AFFO and the reconciliation to net income (loss), which we believe is the most comparable GAAP financial measure:
Reconciliation of Net Income Attributable to Talon Real Estate Holding Corp. (TREHC) to Funds From Operations
(1) Noncontrolling Units of the Operating Partnership are exchangeable for cash, or at the Company's discretion, for common shares of stock on a one-for-one basis.
(2) Net income is calculated on a per share basis. FFO and AFFO are calculated on a per share and unit basis.
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Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including commitments to repay borrowings, fund and maintain our operations and assets, acquire properties, make distributions to our shareholders and other general business needs. In the short-term, we have incurred significant capital and leasing expenses related to our growth strategy at our existing properties as well as expenses related to our acquisition strategy, which has created a cash shortfall from operations.
Our short-term liquidity requirements consist primarily of funds needed to pay for operating expenses and other expenditures directly associated with our properties including the payoff of debts maturing in the near future. The Company requires additional financing to pay off unsecured notes with a total principal balance of $1,000,000 plus accrued interest due December 31, 2015, and a related-party loan of $500,000 plus accrued interest due December 31, 2015. During the nine months ended September 30, 2015, the Company entered into a significant lease arrangement with a new tenant. As part of the lease agreement, the Company incurred an obligation for tenant allowances of which approximately $7.8 million was included as building improvements as of September 30, 2015. The Company also plans to spend approximately $1.5-$2 million to complete additional capital improvements on our buildings including tenant space and general building improvements. The Company expects to finance these tenant allowances and capital improvements through issuance of debt and/or equity. The Company and Talon OP are also guarantors of a mortgage entered into by Talon First Trust, LLC in connection with the acquisition of the building located at 180 5th Street East in St. Paul, Minnesota. The mortgage includes a financial covenant requiring both the Company and Talon OP to maintain a certain net worth and amount of cash and marketable securities throughout the term of the loan. Complying with the terms of the financial covenant will create additional needs for liquidity and require us to raise additional capital. The Company is currently attempting to refinance this mortgage to fund its obligation to perform on lease incentives and will attempt to obtain financing with more traditional covenants; however, there is no guarantee that the Company will be able to refinance the mortgage with more favorable terms, if at all. We also require cash to pursue our strategy of near-term growth through acquisition of properties as well as pay our general and administrative expenses for operating as a public company.
We currently do not have available cash and cash flows from current operations to provide us with adequate liquidity for the foreseeable future. Our current liabilities exceed our unrestricted cash and we have insufficient cash flow from current operations to pursue our strategy without further financing. As of September 30, 2015, we had unrestricted cash of $156,893 and current liabilities including accounts payable and accrued expenses substantially in excess of the available cash. We therefore will require additional capital and/or increased cash flow from future operations to fund our ongoing business. There is no guarantee that we will be able to raise any required additional capital or generate sufficient cash flow from our current and future operations to fund our ongoing business. If the amount of capital we are able to raise together with our income from operations is not sufficient to satisfy our capital needs, we may be required to cease our operations or alter our growth plans. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment.
Our short-term liquidity requirements consist primarily of funds needed to pay for operating expenses and other expenditures directly associated with our properties and to pursue our strategy of near-term growth through acquisition of properties, including:
·
interest expense and scheduled principal payments on outstanding indebtedness,
·
general and administrative expenses,
·
professional fees,
·
salaries and compensation,
·
lease incentive costs, and
·
anticipated and unanticipated capital expenditures.
Our long-term liquidity requirements consist primarily of funds to pay for scheduled debt maturities, non-recurring capital expenditures that need to be made periodically and continued expansion of our business through acquisitions. There is no assurance that we will be able to acquire additional properties in the future.
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Since our available cash and cash flows from current operations do not provide us with adequate cash to satisfy current liabilities and are not expected to provide us with adequate liquidity for the foreseeable future, we anticipate that we will undertake future debt or equity financings during the year. Additional financing is necessary for our company to continue as a going concern.
In the future, we anticipate using a number of different sources to finance our liquidity needs, including cash flows from operations, issuance of debt securities or equity securities (which might be common or preferred stock), private financings (such as additional bank credit facilities, which may or may not be secured by our assets), asset sales, seller financing, property-level mortgage debt, or any combination of these sources, to the extent available to us, or other sources that may become available from time to time. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. Although we have successfully raised equity capital in the past, we cannot be assured that we will be able to continue to be successful in raising capital through issuance of securities. Our ability to obtain needed financing may be impaired by such factors as the capital markets, our status as a new enterprise without significant assets or demonstrated operating history, and/or the loss of key management. There is no guarantee that we will be able to raise any required additional capital or generate sufficient cash flow from our current and proposed operations to fund our ongoing business.
Outstanding Indebtedness
5130 LLC, an entity in which our Operating Partnership owns a 49% interest and that owns an industrial complex located in the Minneapolis-St. Paul metropolitan area, is party to a loan agreement secured by such industrial complex. The loan agreement provides for two term loans, the A loan and the B loan. Both loans can be accelerated under certain circumstances, including if there is an event of default under the loan agreement.
Talon Bren Road, LLC, an entity through which our Operating Partnership acquired the property located at 10301 Bren Road West, Minnetonka, MN on May 29, 2014, is party to a loan agreement secured by such property. It is also a party to two loans to fund the restricted escrow accounts available for the purpose of capital improvements at the building. This property also secures the Talon Bren Road, LLC Mortgage 2 (as defined in the table below) entered into on July 2, 2014 in connection with the acquisition of the property located at 180 5th East Street St. Paul, MN.
Talon First Trust, LLC, an entity through which our Operating Partnership acquired the property located at 180 5th Street East St. Paul, MN on July 2, 2014, is party to a loan agreement secured such property.
The following table summarizes the Companys notes payable as of September 30, 2015 and December 31, 2014:
|
|
|
|
|
|
|
| Principal Balance At | ||||
Loan Description |
| Loan Type |
| Maturity Date |
| Interest Rate |
| September 30, 2015 |
| December 31, 2014 | ||
Talon First Trust, LLC Mortgage |
| Secured floating rate interest only |
| July 5, 2017 |
| 5.75% |
| $ | 32,000,000 |
| $ | 32,000,000 |
Talon Bren Road, LLC Mortgage 1 |
| Secured fixed rate |
| May 28, 2019 |
| 4.65% |
|
| 11,188,768 |
|
| 11,378,013 |
Talon Bren Road, LLC Mortgage 2(1) |
| Secured fixed rate interest only |
| February 11, 2016 |
| 16.00% |
|
| 2,000,000 |
|
| - |
Talon Bren Road, LLC Mortgage 2 |
| Secured fixed rate |
| December 31, 2014 |
| 6.00% |
|
| - |
|
| 881,427 |
Talon Bren Road, LLC HVAC loan |
| Unsecured fixed rate |
| June 1, 2019 |
| 8.00% |
|
| 118,294 |
|
| 137,027 |
Talon Bren Road, LLC Roof loan |
| Unsecured fixed rate interest only |
| June 1, 2019 |
| 8.00% |
|
| 225,000 |
|
| 225,000 |
5130 Industrial Street, LLC Mortgage 1 |
| Secured fixed rate |
| April 8, 2017 |
| 6.05% |
|
| 4,068,208 |
|
| 4,120,952 |
5130 Industrial Street, LLC Mortgage 2 |
| Secured fixed rate |
| April 8, 2017 |
| 12.75% |
|
| 294,382 |
|
| 295,304 |
Talon OP, L.P. Promissory Note Related Party (2) |
| Unsecured fixed rate interest only |
| December 31, 2015 |
| 20.00% |
|
| 500,000 |
|
| 500,000 |
Talon OP, L.P. Promissory Notes (3) |
| Unsecured fixed rate interest only |
| December 31, 2015 |
| 20.00% |
|
| 1,000,000 |
|
| 250,000 |
|
|
|
|
|
|
|
| $ | 51,394,652 |
| $ | 49,787,723 |
(1)
This note replaces the previous Talon Bren Road, LLC Mortgage 2 note that matured December 31, 2014 and is secured by the same property.
(2)
Related Party promissory note (see Note 6).
(3)
On January 12, 2015 and May 19, 2015, respectively, the Company entered into two separate $500,000 unsecured promissory notes with the same unrelated party. The notes bore interest at 14% annually and had an original maturity date of June 30, 2015 and July 18, 2015, respectively. In 2015, the Company extended the maturity dates of both notes to September 30, 2015 and subsequently to December 31, 2015. The notes bore interest of 20% annually from July 1, 2015 and July 19, 2015, respectively, through October 31, 2015. The notes will bear interest of 24% annually from November 1, 2015 through maturity.
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Off Balance Sheet Arrangements
At September 30, 2015, we did not have any off-balance sheet arrangements.
Inflation
As of September 30, 2015, most of our leases required tenants to reimburse us for a share of our operating expenses. As result, we are able to pass on much of any increases to our property operating expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the nine months ended September 30, 2015, inflation did not have a material impact on our revenues or net income.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business plan, we expect that interest rate risk will be the primary market risk to which we will be exposed. As of September 30, 2015, all but one of our outstanding loans had a fixed rate. On July 2, 2014, we secured a $33 million loan with a current interest rate of 5.75% which is indexed monthly to the one month libor plus a spread of 5.50% per annum. In conjunction with the closing of this loan, we are party to an interest rate cap transaction with an interest rate cap of 2.50% on the $33 million. We are at risk to interest rate fluctuations on $33 million up to the interest rate cap of 2.50% until maturity on July 5, 2016. Our interest rate risk may further increase if we increase our debt in the future or refinance our existing debt.
We may become exposed to the effects of interest rate changes as a result of floating rate debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to manage overall borrowing.
Foreign Currency Exchange Risk
Our results of operations and cash flows are not materially affected by fluctuations in foreign currency exchange rates.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred during the nine months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
We are not currently subject to any material legal proceedings. From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities. Any such actions, even those that lack merit, could result in the expenditure of significant financial and managerial resources. We believe that we have obtained adequate insurance coverage or rights to indemnification in connection with potential legal proceedings that may arise.
Item 1A.
Risk Factors
There have been no material changes in our risk factors from those disclosed under the heading Risk Factors in our Current Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on March 31, 2015.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3.
Defaults Upon Senior Securities
Not Applicable.
Item 4.
Mine Safety Disclosures
Not Applicable.
Item 5.
Other Information
Not Applicable.
Item 6.
Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately following the signatures to this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 13, 2015 | TALON REAL ESTATE HOLDING CORP. |
|
|
| /s/ Eun Stowell |
| Eun Stowell |
| Chief Financial Officer (principal financial and accounting officer) |
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EXHIBIT INDEX
Exhibit Number |
| Description |
3.1 |
| Amended and Restated Articles of Incorporation (Incorporated by reference to the exhibit of the same number in our Form 8-K dated June 7, 2013, filed on June 7, 2013 (File No. 005-87490)) |
3.2 |
| Amended and Restated Bylaws (Incorporated by reference to the exhibit of the same number in our Form 8-K dated June 7, 2013, filed on June 7, 2013 (File No. 005-87490)) |
10.1 |
| Promissory Note to Curtis Marks from the Company (as amended) |
31.1 |
| Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith). |
31.2 |
| Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith). |
32.1 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
101* |
| Interactive Data Files Pursuant to Rule 405 of Regulation S-T (filed herewith). |
________________________
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability under those sections.
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