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EX-32.2 - EXHIBIT 32.2 - Strategic Realty Trust, Inc.exhibit322-09302016.htm
EX-32.1 - EXHIBIT 32.1 - Strategic Realty Trust, Inc.exhibit321-09302016.htm
EX-31.2 - EXHIBIT 31.2 - Strategic Realty Trust, Inc.exhibit312-09302016.htm
EX-31.1 - EXHIBIT 31.1 - Strategic Realty Trust, Inc.exhibit311-09302016.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-54376
_________________________________
STRATEGIC REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
_________________________________
Maryland
90-0413866
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
66 Bovet Road, Suite 100
San Mateo, California, 94402
(650) 343-9300
(Address of Principal Executive Offices; Zip Code)
(Registrant’s Telephone Number, Including Area Code)
_________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨   (Do not check if a smaller reporting company)
Smaller reporting company
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
As of October 31, 2016, there were 10,975,614 shares of the Registrant’s common stock issued and outstanding.




STRATEGIC REALTY TRUST, INC.
INDEX
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


2



PART I
FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2016, have been prepared by Strategic Realty Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2015, as filed with the SEC on March 30, 2016 (the “2015 Annual Report on Form 10-K”). The condensed consolidated financial statements herein should also be read in conjunction with the Notes to Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2016, are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.


3



ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
(unaudited)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Investments in real estate
 
 
 
Land
$
18,904

 
$
15,981

Building and improvements
63,063

 
56,158

Tenant improvements
3,611

 
3,676

 
85,578

 
75,815

Accumulated depreciation
(11,931
)
 
(10,068
)
Investments in real estate, net
73,647

 
65,747

Properties under development and development costs
 
 
 
Land
25,851

 

Buildings
605

 

Development costs
3,030

 

Properties under development and development costs
29,486

 

Cash and cash equivalents
3,893

 
8,793

Restricted cash
5,724

 
2,693

Prepaid expenses and other assets, net
1,021

 
731

Tenant receivables, net
1,282

 
1,664

Investments in unconsolidated joint ventures
5,997

 
6,902

Lease intangibles, net
4,478

 
4,290

Assets held for sale

 
9,769

Deferred financing costs, net
351

 
579

TOTAL ASSETS
$
125,879

 
$
101,168

LIABILITIES AND EQUITY
 
 
 
LIABILITIES
 
 
 
Notes payable, net
$
68,831

 
$
34,052

Accounts payable and accrued expenses
1,922

 
1,486

Amounts due to affiliates
2

 
49

Other liabilities
1,978

 
1,479

Liabilities related to assets held for sale

 
6,909

Below-market lease liabilities, net
3,337

 
3,303

Deferred gain on sale of properties to unconsolidated joint venture
1,227

 
1,225

TOTAL LIABILITIES
77,297

 
48,503

Commitments and contingencies (Note 13)


 


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

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 10,975,614 and 11,037,948 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
111

 
111

Additional paid-in capital
96,270

 
96,684

Accumulated deficit
(49,607
)
 
(46,124
)
Total stockholders’ equity
46,774

 
50,671

Non-controlling interests
1,808

 
1,994

TOTAL EQUITY
48,582

 
52,665

TOTAL LIABILITIES AND EQUITY
$
125,879

 
$
101,168

See accompanying notes to condensed consolidated financial statements.

4



STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Rental and reimbursements
$
2,647

 
$
3,967

 
$
7,837

 
$
12,692

 
 
 
 
 
 
 
 
Expense:
 
 
 
 
 
 
 
Operating and maintenance
949

 
1,350

 
2,787

 
4,498

General and administrative
623

 
1,023

 
1,691

 
2,548

Depreciation and amortization
907

 
913

 
2,628

 
3,943

Transaction expense
165

 
134

 
445

 
134

Interest expense
550

 
1,358

 
1,660

 
4,406

 
3,194

 
4,778

 
9,211

 
15,529

Operating loss
(547
)
 
(811
)
 
(1,374
)
 
(2,837
)
 
 
 
 
 
 
 
 
Other income (loss):
 
 
 
 
 
 
 
Equity in income (loss) of unconsolidated joint ventures
16

 
(296
)
 
318

 
(186
)
Net gain on disposal of real estate

 
18

 
614

 
4,900

Other expense

 
(42
)
 

 
(42
)
Loss on extinguishment of debt

 

 
(966
)
 
(200
)
Income (loss) before income taxes
(531
)
 
(1,131
)
 
(1,408
)
 
1,635

Income taxes
(19
)
 
(2
)
 
(153
)
 
(80
)
Net income (loss)
(550
)
 
(1,133
)
 
(1,561
)
 
1,555

Net income (loss) attributable to non-controlling interests
(21
)
 
(40
)
 
(58
)
 
206

Net income (loss) attributable to common stockholders
$
(529
)
 
$
(1,093
)
 
$
(1,503
)
 
$
1,349

 
 
 
 
 
 
 
 
Earnings (loss) per common share - basic and diluted
$
(0.05
)
 
$
(0.10
)
 
$
(0.14
)
 
$
0.12

 
 
 
 
 
 
 
 
Weighted average shares outstanding used to calculate earnings (loss) per common share - basic and diluted
11,007,864

 
10,891,714

 
11,017,654

 
10,942,802

See accompanying notes to condensed consolidated financial statements.

5



STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in thousands, except shares)
(unaudited)
 
Number of
Shares
 
Par Value
 
Additional
Paid-in Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Non-controlling
Interests
 
Total
Equity
BALANCE — December 31, 2015
11,037,948

 
$
111

 
$
96,684

 
$
(46,124
)
 
$
50,671

 
$
1,994

 
$
52,665

Conversion of OP units to common shares
9,588

 

 
52

 

 
52

 
(52
)
 

Redemption of common shares
(71,922
)
 

 
(466
)
 

 
(466
)
 

 
(466
)
Quarterly distributions

 

 

 
(1,980
)
 
(1,980
)
 
(76
)
 
(2,056
)
Net loss

 

 

 
(1,503
)
 
(1,503
)
 
(58
)
 
(1,561
)
BALANCE — September 30, 2016
10,975,614

 
$
111

 
$
96,270

 
$
(49,607
)
 
$
46,774

 
$
1,808

 
$
48,582

See accompanying notes to condensed consolidated financial statements.

6



STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,561
)
 
$
1,555

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Net gain on disposal of real estate
(614
)
 
(4,900
)
Loss on extinguishment of debt
966

 
200

Equity in (income) loss of unconsolidated joint ventures
(318
)
 
186

Straight-line rent
(102
)
 
(97
)
Amortization of deferred costs and notes payable premium/discount
824

 
415

Depreciation and amortization
2,628

 
3,943

Amortization of above and below-market leases
(147
)
 
(127
)
Bad debt expense
23

 
(1
)
Interest income on note receivable

 
(265
)
Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
(290
)
 
260

Tenant receivables
462

 
243

Accounts payable and accrued expenses
438

 
(752
)
Amounts due to affiliates
(47
)
 
327

Other liabilities
483

 
855

Net change in restricted cash for operational expenditures
(554
)
 
(1,272
)
Net cash provided by operating activities
2,191

 
570

 
 
 
 
Cash flows from investing activities:
 
 
 
Net proceeds from the sale of real estate
8,737

 
53,066

Acquisition of real estate
(10,225
)
 

Investment in properties under development and costs of development
(29,486
)
 

Improvements, capital expenditures, and leasing costs
(289
)
 
(674
)
Investments in unconsolidated joint ventures

 
(7,630
)
Issuance of note receivable

 
(7,000
)
Distributions from unconsolidated joint ventures
1,223

 
273

Principal payment received on note receivable

 
4,500

Net change in restricted cash from investments in consolidated variable interest entities
(3,458
)
 

Net change in restricted cash for capital expenditures
981

 
702

Net cash provided by (used in) investing activities
(32,517
)
 
43,237

 
 
 
 
Cash flows from financing activities:
 
 
 
Redemption of member interests

 
(2,102
)
Redemption of common shares
(466
)
 
(554
)
Quarterly distributions
(2,058
)
 
(2,106
)
Proceeds from notes payable
38,400

 

Repayment of notes payable
(8,823
)
 
(37,309
)
Payment of penalties associated with early repayment of notes payable
(839
)
 

Payment of loan fees and financing costs
(788
)
 

Net cash provided by (used in) financing activities
25,426

 
(42,071
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(4,900
)
 
1,736

Cash and cash equivalents – beginning of period
8,793

 
3,211

Cash and cash equivalents – end of period
$
3,893

 
$
4,947

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Distributions declared but not paid
$
684

 
$
680

Special distribution declared but not paid

 
2,248

Cash paid for interest, net of amounts capitalized
1,121

 
4,854

See accompanying notes to condensed consolidated financial statements.

7



STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS
Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008, as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations.
Since the Company’s inception, its business has been managed by an external advisor. The Company has no direct employees and all management and administrative personnel responsible for conducting the Company’s business are employed by its advisor. Currently, the Company is externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed in August 2014, August 2015 and August 2016. The current term of the Advisory Agreement terminates on August 10, 2017. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (the “OP”). During the Company’s initial public offering (“Offering”), as the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the initial public offering to the OP as a capital contribution. The Company is the sole general partner of the OP. As of September 30, 2016 and December 31, 2015, the Company owned 96.3% and 96.2%, respectively, of the limited partnership interest in the OP.
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders, and investments in unconsolidated joint ventures as well as development of properties. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.
The Company invests in and manages a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on grocery anchored multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. During the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development.
As of September 30, 2016, in addition to the development projects, the Company’s portfolio of properties was comprised of 11 properties with approximately 697,000 rentable square feet of retail space located in 6 states. As of September 30, 2016, the rentable space at the Company’s retail properties was 89% leased.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (“the SEC”), including the instructions to Form 10-Q and Regulation S-X.
The unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows have been included.
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture

8

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


or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of September 30, 2016, the Company held ownership interests in two unconsolidated joint ventures. Refer to Note 4, “Investments in Unconsolidated Joint Ventures” for additional information. As of September 30, 2016, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 5, “Variable Interest Entities” for additional information.
Properties Under Development
The initial cost of properties under development includes the acquisition cost of the property, direct development costs and borrowing costs directly attributable to the development. Borrowing costs associated with direct expenditures on properties under development are capitalized. The amount of capitalized borrowing costs is determined by reference to borrowings specific to the project, where relevant. Borrowing costs are capitalized from the commencement of the development until the date of practical completion where the property is substantially ready for its intended use. Capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. Practical completion is when the property is capable of operating in the manner intended by management.
Interest on projects is based on interest rates in place during the development period, and is capitalized until the project is ready for its intended use. The amount of interest capitalized during the nine months ended September 30, 2016, was approximately $2.0 million.
Reclassifications
Certain prior period amounts have been reclassified to conform with current period’s presentation. The reclassifications had no effect on the Company’s financial condition, results of operations, or cash flows.
As of September 30, 2016, in respect to the Company’s adoption of Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), the Company classified deferred financing costs, net of accumulated amortization, as a contra-liability to notes payable on the condensed consolidated balance sheet. ASU 2015-03 requires retrospective application, wherein the balance sheet of each period presented should be adjusted to reflect the effects of the new guidance. Accordingly, for comparative purposes herein, the Company reclassified the December 31, 2015 balance of $0.3 million of deferred financing costs, net of accumulated amortization, as a contra-liability to notes payable in the condensed consolidated balance sheet, and $0.1 million of deferred financing costs, net of accumulated amortization, as a contra-liability to liabilities held for sale on the condensed consolidated balance sheet.
Newly Adopted Accounting Pronouncements
The Company adopted ASU 2015-03 on a retrospective basis, effective with the quarter ended March 31, 2016. The amendments in ASU 2015-03 require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU 2015-03 is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. The adoption of ASU 2015-03 changes the presentation of debt issuance costs as the Company presents debt issuance costs as deferred financing costs, net on the accompanying condensed consolidated balance sheets. ASU 2015-03 does not address how debt issuance costs related to line-of-credit arrangements should be presented on the balance sheet or amortized. Given this absence of authoritative guidance within ASU 2015-03, the FASB issued ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which clarifies that the SEC Staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Effective January 2016, the Company presents deferred financing costs, net, as a contra-liability in periods when there is an associated debt liability on the balance sheet, rather than as a deferred asset. If no associated debt liability is recorded on the balance sheet, deferred financing costs are presented as a deferred asset. The adoption of ASU 2015-03 did not have a material impact on the Company’s condensed consolidated financial statements.
The Company adopted ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustment (“ASU 2015-16”) effective with the quarter ended March 31, 2016. The amendments in ASU 2015-16 require an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Further, the acquirer is required to record, in the financial statements for the same period, 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

9

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


acquisition date. Entities must also present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by the 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. This guidance should be applied prospectively and early adoption is permitted. The adoption of ASU 2015-16 had no impact on the Company’s condensed consolidated financial statements.
Recent Accounting Pronouncements
The FASB issued the following Accounting Standards Updates (“ASUs”) which could have potential impact to the Company’s consolidated financial statements:
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 will require adoption on a retrospective basis. The Company is currently evaluating the impact the application of ASU 2016-15 will have on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Adjustments resulting from adopting ASU 2016-13 shall be applied through a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the guidance on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. The guidance retains a distinction between finance leases and operating leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous guidance. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. The amendments in this guidance are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of the guidance on its condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively defers the adoption of ASU 2014-09 to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may apply either a full retrospective or a modified retrospective approach to adopt this guidance. In 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-09 and ASU No. 2016-12, which provide interpretive clarifications on the new guidance in Topic 606. The Company is currently evaluating the transition methods and the impact of the guidance on its condensed consolidated financial statements.
3. REAL ESTATE INVESTMENTS
Acquisition of Properties
On September 8, 2016, the Company paid a deposit in the amount of approximately $0.2 million toward the acquisition of a 100% ownership interest in certain property located at 388 Fulton Street in San Francisco, California (“388 Fulton”). The deposit was included in prepaid expenses and other assets, net on the condensed consolidated balance sheets. The seller is not affiliated with the Company or the Advisor. 388 Fulton is comprised of two leased commercial condominiums with an aggregate of 1,902 square feet of retail space. The purchase of this retail property is expected to close in early 2017.
On July 27, 2016, the Company purchased a 100% ownership interest in Fulton Street Shops located in San Francisco, California (“Fulton Shops”). The seller was not affiliated with the Company or the Advisor. Fulton Shops is comprised of five high-quality street retail condominiums with an aggregate of 3,758 square feet of retail space. The aggregate purchase price of Fulton Shops was approximately $4.6 million subject to customary closing costs and proration adjustments. The Company drew down $4.7 million on the KeyBank credit facility to fund this acquisition. Refer to Note 8. “Notes Payable, Net” for details.

10

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


On June 14, 2016, the Company, through an indirect subsidiary, purchased a 100% ownership interest in two retail properties located in San Francisco, California (the “San Francisco Properties”) from each of Octavia Gateway Holdings, LLC and Grove Street Hayes Valley, LLC, each a Delaware limited liability company and each a subsidiary of DDG Partners LLC. The sellers were not affiliated with the Company or the Advisor. The San Francisco Properties encompass four retail condominiums with an aggregate of 5,640 square feet of retail space. The aggregate purchase price of the San Francisco Properties was approximately $5.6 million subject to customary closing costs and proration adjustments. The Company funded the purchase price using borrowings under the Amended and Restated Credit Facility (“KeyBank credit facility”). Refer to Note 8. “Notes Payable, Net” for details.
In conjunction with the acquisition of the San Francisco Properties, on May 4, 2016, the Company, through an indirect subsidiary, entered into a purchase agreement to acquire a retail property from Hayes Street Hayes Valley LLC, a Delaware limited liability company and a subsidiary of DDG Partners LLC. The Company paid a deposit in the amount of approximately $0.6 million toward the acquisition of a 100% ownership interest in certain property located at 450 Hayes Street in San Francisco, California (“450 Hayes”). The seller is not affiliated with the Company or its external advisor. The purchase of this retail property is expected to close later in 2016.
The following table summarizes the estimated fair values of the acquired tangible and intangible assets and assumed liabilities as of the acquisition date (amounts in thousands):
 
 
San Francisco Properties
 
Fulton Shops
Land
 
$
1,737

 
$
1,187

Building and improvements
 
3,660

 
3,254

Lease intangibles, net
 
376

 
257

Below-market lease liabilities, net
 
(143
)
 
(103
)
Estimated fair value of net assets acquired
 
$
5,630

 
$
4,595

During the three months ended September 30, 2016, the Company finalized the allocations of the purchase prices and made certain measurement period adjustments. These allocation adjustments did not impact the condensed consolidated statements of operations.
Lease intangibles and below-market lease liabilities generally relate to commercial leases. As of September 30, 2016, the remaining weighted-average amortization period of lease intangibles and below-market lease liabilities related to the acquired properties was 9.5 years and 9.6 years, respectively.
For the three and nine months ended September 30, 2016, the Company incurred $0.1 million and $0.4 million, respectively, of acquisition-related costs in connection with the acquisition of the San Francisco Properties and the Fulton Shops. These costs are included in transaction expenses in the condensed consolidated statements of operations.
2016 Sale of Properties
On April 4, 2016, the Company consummated the disposition of Bloomingdale Hills, located in Riverside, Florida, for a sales price of approximately $9.2 million in cash, a portion of which was used to pay off the related $5.3 million mortgage loan and $3.0 million of which was used to pay down the line of credit under its KeyBank credit facility. The sale of the property did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and its results of operations were not reported as discontinued operations on the Company’s condensed consolidated financial statements. The disposition of Bloomingdale Hills resulted in a gain of $0.6 million, which was included on the Company’s condensed consolidated statement of operations. The Company’s condensed consolidated statements of operations include net operating income of approximately $73,000 for the nine months ended September 30, 2016, and $71,000 for both the three and nine months ended September 30, 2015.

11

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


2015 Sale of Properties
On March 11, 2015, the Company sold the following three properties for the aggregate gross sales price of $53.6 million (amounts in thousands):
Property
 
Location
 
Acquisition Date
 
Gross
Sales Price
 
Original
Purchase Price (1)
Osceola Village (2)
 
Kissimmee, Florida
 
10/11/2011
 
$
22,000

 
$
21,800

Constitution Trail
 
Normal, Illinois
 
10/21/2011
 
23,100

 
18,000

Aurora Commons
 
Aurora, Ohio
 
3/20/2012
 
8,500

 
7,000

Total
 
 
 
 
 
$
53,600

 
$
46,800

(1)
The original purchase price amounts do not include acquisition fees.
(2)
The original purchase price for Osceola Village included an additional pad which was sold for approximately $0.9 million prior to this transaction.
The sale of the three properties did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and, as a result, was not included in discontinued operations for the nine months ended September 30, 2015. The Company’s condensed consolidated statements of operations include net operating income of approximately $7,000 and net operating loss of approximately $0.3 million, respectively, for the three and nine months ended September 30, 2015, relating to the results of operations for the three sold properties.
The sale of Osceola Village, Constitution Trail and Aurora Commons (the “SGO Properties”) was completed in connection with the formation of the SGO Joint Venture. The three properties were sold to the SGO Joint Venture, and the closing of the sale was conditioned on the Company receiving a 19% membership interest in the SGO Joint Venture. In exchange for this 19% membership interest, the Company contributed $4.5 million to the SGO Joint Venture, which amount was credited against the Company’s proceeds from the sale of the three properties to the SGO Joint Venture. Of the net sales proceeds from the sale of the aforementioned properties, $36.4 million was used by the Company to retire the debt associated with the sold properties. Since the sale of the SGO Properties did not represent a strategic shift that would have a major effect on the Company’s operations and financial results, their results of operations were not reported as discontinued operations on the Company’s financial statements.
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
On September 30, 2015, the Company, through wholly-owned subsidiaries, formed a joint venture (the “SGO MN Joint Venture”) with MN Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree Real Estate Opportunities Fund V.I. L.P. (“Oaktree”) and GLB SGO MN, LLC, a wholly-owned subsidiary of Glenborough Property Partners, LLC (“GPP”). GPP is an affiliate of the Advisor and the Company’s property manager. On March 11, 2015, the Company, through a wholly-owned subsidiary, formed a joint venture (the “SGO Joint Venture”) with Grocery Retail Grand Avenue Partners, LLC, a subsidiary of Oaktree, and GLB SGO, LLC, a wholly-owned subsidiary of GPP. These joint ventures own property types similar to properties that are directly owned by the Company.
The following table summarizes the Company’s investments in unconsolidated joint ventures as of September 30, 2016, and December 31, 2015 (amounts in thousands):
 
 
 
 
Ownership Interest
 
Investment
Joint Venture
 
Date of Investment
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
SGO Retail Acquisitions Venture, LLC
 
3/11/2015
 
19
%
 
19
%
 
$
3,702

 
$
4,098

SGO MN Retail Acquisitions Venture, LLC
 
9/30/2015
 
10
%
 
10
%
 
2,295

 
2,804

Total
 
 
 
 
 
 
 
$
5,997

 
$
6,902

The Company’s off-balance sheet arrangements consist primarily of investments in the joint ventures as set forth in the table above. The joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture members, and do not represent a liability of the members other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of September 30, 2016, the Company has provided carve-out guarantees in connection with the two aforementioned unconsolidated joint ventures; in connection with those carve-out guarantees, the Company has certain rights of recovery from the joint venture members.

12

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


5. VARIABLE INTEREST ENTITIES
The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in (i) a joint venture with the Gelson’s Joint Venture and the 3032 Wilshire Joint Venture (both as defined below). The Company has consolidated the accounts of these variable interest entities. For further information, refer to Note 2. “Summary of Significant Accounting Policies,” under “Principles of Consolidation and Basis of Presentation.”
Gelson’s Joint Venture
On January 7, 2016, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture Agreement”) to form a joint venture (the” Gelson’s Joint Venture”) with Sunset & Gardner LA, LLC (“S&G LA” and together with the Company the “Gelson’s Members”), a subsidiary of Cadence Capital Investments, LLC (“Cadence”).
The Gelson’s Joint Venture Agreement provides for the ownership and operation of certain real property by the Gelson’s Joint Venture, in which the Company owns a 100% capital interest and a 50% profits interest. In exchange for ownership in the Gelson’s Joint Venture, the Company has agreed to contribute cash in an amount up to $7.0 million in initial capital contributions and $0.7 million in subsequent capital contributions to the Gelson’s Joint Venture. S&G LA contributed its rights to acquire the real property, its interest under a 20 year lease with Gelson’s Markets (the “Gelson’s Lease”) and agreed to provide certain management and development services.
On January 28, 2016, the Gelson’s Joint Venture used the capital contributions of the Company, together with the proceeds of a loan from Buchanan Mortgage Holdings, LLC in the amount of $10.7 million, to purchase property located at the corner of Sunset Boulevard and Gardner in Hollywood, California for a build to suit grocery store for Gelson’s Markets (the “Gelson’s Property”) from a third party seller, for a total purchase price of approximately $13.0 million. The Gelson’s Joint Venture intends to proceed with obtaining all required governmental approvals and entitlements to replace the existing improvements on the property with a build-to-suit grocery store for Gelson’s Markets with an expected size of approximately 38,000 square feet. Gelson’s Markets was founded in 1951 and is recognized as one of the nation’s premier supermarket chains. Gelson’s Markets currently has 24 locations throughout Southern California.
Pursuant to the Gelson’s Joint Venture Agreement, S&G LA will manage and conduct the day-to-day operations and affairs of the Gelson’s Joint Venture, subject to certain major decisions set forth in the Gelson’s Joint Venture Agreement that require the consent of all the Gelson’s Members. Income, losses and distributions will generally be allocated based on the Gelson’s Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Gelson’s Joint Venture Agreement, the Company may be required to make additional capital contributions to the Joint Venture, in proportion to the Gelson’s Members’ respective ownership interests. Until the Company has received back its capital contribution and specified preferred returns, all distributions go to the Company; thereafter, the Gelson’s Joint Venture will distribute the profits 50% to the Company and 50% to S&G LA.
3032 Wilshire Joint Venture
On December 21, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture Agreement”) to form a joint venture (the “Wilshire Joint Venture”) with 3032 Wilshire SM, LLC, a subsidiary of Cadence (together with the Company, the “Wilshire Members”).
On December 14, 2015 and January 5, 2016, the Company paid deposits in the amounts of $0.5 million and $0.1 million, respectively, toward the acquisition of certain property located at 3032 Wilshire Boulevard and 1210 Berkeley Street in Santa Monica, California (the “Wilshire Property”). The Wilshire Joint Venture intends to redevelop, reposition and re-lease the Wilshire Property. On March 7, 2016, the Company contributed $5.7 million to the Wilshire Joint Venture. The Wilshire Joint Venture Agreement provides for the ownership and operation of certain real property by the Wilshire Joint Venture, in which the Company owns a 100% capital interest and a 50% profits interest.
On March 8, 2016, the Wilshire Joint Venture used the deposits and capital contribution of the Company, together with the proceeds of a loan from Buchanan Mortgage Holdings, LLC in the amount of $8.5 million, to acquire the Wilshire Property from a third party seller, for a total purchase price of $13.5 million. The Wilshire Joint Venture intends to reposition and re-lease the existing improvements on the property.
Pursuant to the Wilshire Joint Venture Agreement, 3032 Wilshire SM will manage and conduct the day-to-day operations and affairs of the Wilshire Joint Venture, subject to certain major decisions set forth in the Wilshire Joint Venture Agreement that require the consent of all the Wilshire Members. Income, losses and distributions will generally be allocated based on the Wilshire Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Wilshire Joint Venture Agreement, the Company may be required to make additional capital contributions to the Wilshire Joint Venture, in proportion to the Wilshire Members’ respective ownership interests. Until the Company has received back its capital

13

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


contribution and specified preferred returns, all distributions go to the Company; thereafter, the Wilshire Joint Venture will distribute the profits 50% to the Company and 50% to 3032 Wilshire SM.
The following reflects the assets and liabilities of the Gelson’s Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of September 30, 2016 (amounts in thousands):
 
September 30, 2016
ASSETS
 
Properties under development and development costs:
 
Land
$
25,851

Buildings
605

Development costs
3,030

Properties under development and development costs
29,486

Restricted cash
2,293

Cash and cash equivalents
365

Prepaid expenses and other assets, net
18

Tenant receivables, net
37

TOTAL ASSETS (1)
$
32,199

 
 
LIABILITIES
 
Notes payable, net (2)
$
18,923

Accounts payable and accrued expenses
366

Amounts due to affiliates
148

Other liabilities
33

TOTAL LIABILITIES
$
19,470

(1)
The assets of the Gelson’s Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures.
(2)
Includes reclassification of $0.3 million of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the consolidated joint ventures are not guaranteed by the Company.
6. FUTURE MINIMUM RENTAL INCOME
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2016, the leases at the Company’s properties have remaining terms (excluding options to extend) of up to 20 years with a weighted-average remaining term (excluding options to extend) of 5 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying condensed consolidated balance sheets and totaled approximately $0.2 million as of September 30, 2016 and December 31, 2015, respectively.

14

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


As of September 30, 2016, the future minimum rental income from the Company’s properties under non-cancelable operating leases, was as follows (amounts in thousands):
Remainder of 2016
$
1,922

2017
7,479

2018
6,616

2019
6,023

2020
4,990

Thereafter
12,826

Total
$
39,856

7. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of September 30, 2016 and December 31, 2015, the Company’s acquired lease intangibles and below-market lease liabilities were as follows (amounts in thousands):
 
Lease Intangibles
 
Below-Market Lease Liabilities
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Cost
$
8,649

 
$
8,089

 
$
(4,593
)
 
$
(4,463
)
Accumulated amortization
(4,171
)
 
(3,799
)
 
1,256

 
1,160

Total
$
4,478

 
$
4,290

 
$
(3,337
)
 
$
(3,303
)
The Company’s amortization of lease intangibles and below-market lease liabilities for the three and nine months ended September 30, 2016 and 2015, were as follows (amounts in thousands): 
 
Lease Intangibles
 
Below-Market Lease Liabilities
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Amortization
$
(248
)
 
$
(286
)
 
$
74

 
$
77

 
Lease Intangibles
 
Below-Market Lease Liabilities
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Amortization
$
(734
)
 
$
(1,236
)
 
$
214

 
$
289

 
8. NOTES PAYABLE, NET
As of September 30, 2016 and December 31, 2015, the Company’s notes payable, net, consisted of the following (amounts in thousands):
 
Principal Balance
 
Interest Rates At
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
KeyBank credit facility (1)
$
16,200

 
$

 
3.14
%
Secured term loans
24,387

 
24,701

 
5.10
%
Mortgage loans
9,576

 
9,690

 
5.63
%
Mortgage loans secured by properties under development (2)
19,200

 

 
9.5% - 10.0%

Deferred financing costs, net (3)
(532
)
 
(339
)
 
n/a

 
$
68,831

 
$
34,052

 
 

(1)
The KeyBank credit facility is a revolving credit facility with an initial maximum aggregate commitment of $30.0 million (the “Facility Amount”). Subject to certain terms and conditions contained in the loan documents, the Company may request that the Facility Amount be increased to a maximum of $60.0 million. The KeyBank credit

15

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


facility matures on August 4, 2017. Each loan made pursuant to the Key Bank credit facility will be either a LIBOR rate loan or a base rate loan, at the election of the Company, plus an applicable margin, as defined. Monthly payments are interest only with the entire principal balance and all outstanding interest due at maturity. The Company will pay KeyBank an unused commitment fee, quarterly in arrears, which will accrue at 0.30% per annum, if the usage under the KeyBank credit facility is greater than 50% of the Facility Amount. The Company is providing a guaranty of all of its obligations under the KeyBank credit facility and all other loan documents in connection with the KeyBank credit facility. As of September 30, 2016, the KeyBank credit facility was secured by Pinehurst Square, Topaz Marketplace, 8 Octavia Street, 400 Grove Street and the Fulton Shops. For information regarding recent draws under the Key Bank credit facility, see “– Recent Financing Transactions KeyBank Credit Facility.”
(2)
Comprised of $10.7 million and $8.5 million associated with the Company’s investment in the Gelson’s Joint Venture and the Wilshire Joint Venture, respectively.
(3)
Reclassification of deferred financing costs, net of accumulated amortization, as a contra-liability in accordance with ASU 2015-03.
During the three and nine months ended September 30, 2016, the Company incurred and expensed approximately $0.6 million and $1.7 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.1 million and $0.4 million, respectively. During the three and nine months ended September 30, 2015, the Company incurred and expensed approximately $1.4 million and $4.4 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.1 million and $0.4 million, respectively. Also during the three and nine months ended September 30, 2016, the Company incurred and capitalized approximately $0.8 million and $2.0 million, respectively, of interest expense related to the variable interest entities, which included the amortization of deferred financing costs of approximately $0.2 million and $0.4 million, respectively.
As of September 30, 2016 and December 31, 2015, interest expense payable was approximately $0.4 million and $0.2 million, respectively, including an amount related to the variable interest entities of approximately $0.2 million as of September 30, 2016.
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of September 30, 2016 (amounts in thousands): 
Remainder of 2016
$
150

2017
45,385

2018
473

2019
23,355

   Total (1)
$
69,363

(1)
Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $0.5 million deferred financing costs, net.
Recent Financing Transactions
KeyBank Credit Facility
On March 7, 2016, the Company drew $6.0 million under the Key Bank credit facility and used the proceeds to invest in the Wilshire Joint Venture (as defined in Note 5. “Variable Interest Entities”).
On June 9, 2016, the Company drew $7.5 million under the Key Bank credit facility and used the majority of the proceeds to acquire 8 Octavia Street and 400 Grove Street from Octavia Gateway Holdings, LLC and Grove Street Hayes Valley, LLC, respectively. Refer to Note 3 “Real Estate Investments” for additional information.
On July 25, 2016, the Company drew $4.7 million under the Key Bank credit facility and used the majority of the proceeds to acquire the Fulton Shops. Refer to Note 3 “Real Estate Investments” for additional information.
On September 29, 2016, the Company drew $1.0 million under the Key Bank credit facility to be used for working capital.
Mortgage Loans Secured by Properties Under Development
In connection with the Company’s investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property (as defined in Note 5. “Variable Interest Entities”), the Company has consolidated borrowings of $8.5 million (the “Wilshire Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and 3032 Wilshire Investors, LLC (as the borrower). The Wilshire Loan bears interest at a rate of 10.0% per annum, payable monthly, commencing on April 1, 2016. The loan matures on March 7, 2017, with an option for an additional six-month period, subject to certain conditions as stated in the loan

16

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


agreement. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.
In connection with the Company’s investment in the Gelson’s Joint Venture (as defined in Note 5. “Variable Interest Entities” to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q) and the acquisition of the Gelson’s Property (defined in Note 5. “Variable Interest Entities” to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q), the Company has consolidated borrowings of $10.7 million (the “Gelson’s Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and Sunset and Gardner Investors, LLC (as the borrower). The Gelson’s Loan bears interest at a rate of 9.5% per annum, payable monthly, commencing on April 1, 2016. The loan matures on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Gelson’s development project and other joint venture collateral as defined in the loan agreement.
9. FAIR VALUE DISCLOSURES
Certain financial assets and liabilities are measured at fair value on a recurring basis. The Company determines fair value using the following hierarchy:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 - prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement.
The Company believes the total carrying values reflected on its condensed consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and amounts due to affiliates reasonably approximate their fair values due to their short-term nature.
The fair value of the Company’s notes payable is estimated using a present value technique based on contractual cash flows and management’s observations of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. The Company significantly reduces the amount of judgment and subjectivity in its fair value determination through the use of cash flow inputs that are based on contractual obligations. Discount rates are determined by observing interest rates published by independent market participants for comparable instruments. The Company classifies these inputs as Level 2 inputs.
The following table provides the carrying values and fair values of the Company’s notes payable related to continuing operations as of September 30, 2016 and December 31, 2015 (amounts in thousands):
 
Carrying Value (1)
 
Fair Value (1) (2)
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Notes payable, net
$
68,831

 
$
34,052

 
$
69,301

 
$
34,760

 
(1)
The carrying value of the Company’s notes payable represents the outstanding principal as of September 30, 2016, and December 31, 2015. The carrying values and fair values of the notes payable include the reclassification of deferred financing costs, net, of approximately $0.5 million and approximately $0.3 million, as a contra-liability, as of September 30, 2016 and December 31, 2015, respectively.
(2)
The estimated fair value of the notes payable is based upon the indicative market prices of the Company’s notes payable based on prevailing market interest rates.
10. EQUITY
Share Redemption Program
On April 1, 2015, the Company’s board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “SRP”). Under the SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder are eligible for repurchase by the Company. The number of shares to be redeemed is limited to the lesser of (i) a total of $2.0 million for redemptions sought upon a stockholder’s death and a total of $1.0 million for redemptions

17

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


sought upon a stockholder’s qualifying disability, and (ii) 5% of the number of shares of the Company’s common stock outstanding during the prior calendar year. Share repurchases pursuant to the SRP are made at the sole discretion of the Company. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.
The redemption price for shares that are redeemed is 100% of the Company’s most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or disability, unless such death or disability occurred between January 15, 2013 and April 1, 2015, when the share redemption program was suspended. Redemption requests due to the death or disability of a Company stockholder that occurred during such time period, were required to be submitted on or before April 1, 2016.
The SRP provides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If the Company cannot honor all redemption requests received in a given quarter, all requests, including death and disability redemptions, will be honored on a pro rata basis. If the Company does not completely satisfy a redemption request in one quarter, it will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. The Company may increase or decrease the amount of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
The other material terms of the SRP are consistent with the terms of the share redemption program that was in effect immediately prior to January 15, 2013.
On August 7, 2015, the board of directors approved the amendment and restatement of the SRP (the “First A&R SRP”). Under the First A&R SRP, the redemption date with respect to third quarter 2015 redemptions was November 10, 2015 or the next practicable date as the Chief Executive Officer determined so that redemptions with respect to the third quarter of 2015 were delayed until after the payment date for the Special Distribution. With this revision, stockholders who were to have 100% of their shares redeemed were not left holding a small number of shares from the Special Distribution after the date of the redemption of their shares. The other material terms of the First A&R SRP are consistent with the terms of the SRP.
On August 10, 2016, the board of directors authorized management of the Company to prepare and implement an amendment and restatement of the SRP (the “Second A&R SRP”) to revise the definition of disability under the SRP. The Second A&R SRP became effective August 26, 2016. Under the Second A&R SRP, a person is deemed to be disabled and therefore eligible to redeem shares pursuant to the Second A&R SRP if they are disabled pursuant to the definition of “disability” in the Internal Revenue Code of 1986, as amended, at the time that the person’s written redemption request is received by the Company. The other material terms of the Second A&R SRP are consistent with the terms of the First A&R SRP.
On October 5, 2016, the board of directors approved, pursuant to Section 3(a) of SRP, an additional $0.5 million of funds available for the redemption of shares in connection with the death of a stockholder. 
The following table summarizes share redemption activity during the three and nine months ended September 30, 2016 and 2015 (amounts in thousands, except shares):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Shares of common stock redeemed
33,054

 
77,916

 
71,922

 
77,916

Purchase price
$
210

 
$
554

 
$
466

 
$
554

Cumulatively, through September 30, 2016, the Company has redeemed 437,825 shares sold in its initial public offering and/or the dividend reinvestment plan for $3.5 million.
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.

18

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


Under the terms of the Key Bank credit facility, the Company may pay distributions to its investors so long as the total amount paid does not exceed 100% of the cumulative Adjusted Funds From Operations provided, however, that the Company is not restricted from making any distributions necessary in order to maintain its status as a REIT. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
The following tables set forth the quarterly distributions declared to the Company’s common stockholders and Common Unit holders for the nine months ended September 30, 2016, and the year ended December 31, 2015 (amounts in thousands, except per share amounts):
 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2016
3/31/2016
 
4/29/2016
 
$
0.06

 
$
660

 
$
26

 
$
686

Second Quarter 2016
7/7/2016
 
7/29/2016
 
0.06

 
661

 
25

 
686

Third Quarter 2016
9/30/2016
 
10/31/2016
 
0.06

 
659

 
25

 
684

Total
 
 
 
 
 
 
$
1,980

 
$
76

 
$
2,056

 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2015
3/31/2015
 
4/30/2015
 
$
0.06

 
$
658

 
$
26

 
$
684

Second Quarter 2015
6/30/2015
 
7/30/2015
 
0.06

 
654

 
26

 
680

Third Quarter 2015
9/30/2015
 
10/31/2015
 
0.06

 
654

 
26

 
680

Fourth Quarter 2015
12/31/2015
 
1/30/2016
 
0.06

 
661

 
25

 
686

Total
 
 
 
 
 
 
$
2,627

 
$
103

 
$
2,730

 
11. EARNINGS PER SHARE
Earnings per share (“EPS”) is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. There was no unvested stock as of September 30, 2016. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.

19

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


The following table sets forth the computation of the Company’s basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2016 and 2015 (amounts in thousands, except shares and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator - basic and diluted
 
 
 
 
 
 
 
Net income (loss)
$
(550
)
 
$
(1,133
)
 
$
(1,561
)
 
$
1,555

Net income (loss) attributable to non-controlling interests
(21
)
 
(40
)
 
(58
)
 
206

Net income (loss) attributable to common shares
$
(529
)
 
$
(1,093
)
 
$
(1,503
)
 
$
1,349

Denominator - basic and diluted
 
 
 
 
 
 
 
Basic weighted average common shares
11,007,864

 
10,891,714

 
11,017,654

 
10,942,802

Effect of dilutive securities

 

 

 

Common Units (1)

 

 

 

Diluted weighted average common shares
11,007,864

 
10,891,714

 
11,017,654

 
10,942,802

Earnings (loss) per common share - basic and diluted
 
 
 
 
 
 
 
Net earnings (loss) attributable to common shares
$
(0.05
)
 
$
(0.10
)
 
$
(0.14
)
 
$
0.12

(1)
The effect of 422,308 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive.
12. RELATED PARTY TRANSACTIONS
On August 7, 2013, the Company entered into the Advisory Agreement with the Advisor. On August 10, 2016, the Advisory Agreement with the Advisor was renewed for an additional twelve months, beginning on August 10, 2016. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.
On July 9, 2013, SRT Manager, an affiliate of the Advisor, acquired an initial 12% membership interest in SRT Holdings, the Company’s wholly-owned subsidiary. Following OP’s additional contribution to SRT Holdings on August 4, 2014, SRT Manager’s membership interests in SRT Holdings decreased to 8.33%. In March 2015, SRT Holdings paid SRT Manager $2.1 million in full redemption of SRT Manager’s 8.33% membership interest in SRT Holdings.
On March 11, 2015, the Company, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC to form the SGO Joint Venture. On September 30, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC to form the SGO MN Joint Venture. For additional information regarding the SGO Joint Venture and the SGO MN Joint Venture, refer to Note 4. “Investments in Unconsolidated Joint Ventures.”

20

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


Summary of Related Party Fees
Summarized separately below are the Advisor related party costs incurred and payable by the Company for the periods presented (amounts in thousands):
 
 
Incurred
 
Payable as of
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
September 30,
 
December 31,
Expensed
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Acquisition fees
 
$
46

 
$
79

 
$
104

 
$
79

 
$

 
$

Financing coordination fees
 

 
55

 

 
87

 

 

Asset management fees
 
227

 
317

 
673

 
847

 

 
19

Reimbursement of operating expenses
 
49

 
63

 
146

 
194

 

 
27

Property management fees
 
99

 
149

 
319

 
500

 
2

 
3

Disposition fees
 

 

 
115

 
525

 

 

Guaranty fees (1)
 

 

 

 
1

 

 

Total
 
$
421

 
$
663

 
$
1,357

 
$
2,233

 
$
2

 
$
49

 
 
 
 
 
 
 
 
 
 
 
 
 
Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees
 
$

 
$

 
$
273

 
$

 
$

 
$

Leasing fees
 
49

 
28

 
152

 
94

 

 

Legal leasing fees
 
12

 
41

 
45

 
97

 

 

Construction management fees
 

 
1

 
2

 
16

 

 

Total
 
$
61

 
$
70

 
$
472

 
$
207

 
$

 
$

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

21

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


Reimbursement of Operating Expenses
The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described below) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors.
For the three and nine months ended September 30, 2016 and 2015, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fees
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive property management fees calculated at a maximum of up to 4% of the properties’ gross revenue. The property management agreements with Glenborough have been renewed for an additional twelve months, beginning on August 10, 2016.
Disposition Fees
Under the Advisory Agreement, if the Advisor or its affiliates provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, the Advisor or its affiliates may be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold.
Guaranty Fees
In connection with certain acquisition financings, the Company’s former chairman and former co-chief executive officer and/or Thompson National Properties, LLC had executed certain guaranty agreements to the respective lenders. As consideration for such guaranty, the Company entered into a reimbursement and fee agreement to provide for an upfront payment and an annual guaranty fee payment for the duration of the guarantee period. In March 2015, the Company retired the outstanding notes payable related to Osceola Village resulting in the expiration of the remaining guaranty agreement.
Leasing Fees
Under the property management agreements, Glenborough is entitled to receive a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.
Legal Leasing Fees
Under the property management agreements, Glenborough is entitled to receive a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.
Construction Management Fees
In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and is entitled to receive a fee equal to 5% of the hard costs for the project in question.

22

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


Related-Party Fees Paid by the Unconsolidated Joint Ventures
The unconsolidated joint ventures are party to certain agreements with Glenborough for services related to the investment of funds and management of the joint ventures’ investments, as well as the day-to-day management, operation and maintenance of the properties owned by the joint ventures. The joint ventures pay fees to Glenborough for these services. For the three and nine months ended September 30, 2016, the SGO Joint Venture recognized related party fees and reimbursements of $0.1 million and $0.4 million, respectively. For the three and nine months ended September 30, 2015, the SGO Joint Venture recognized related-party fees and reimbursements of $0.1 million and $0.2 million, respectively. For the three and nine months ended September 30, 2016, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.3 million and $0.8 million, respectively. The SGO MN Joint Venture began operations on September 30, 2015 and therefore incurred insignificant related-party fees for the three and nine months ended September 30, 2015. The related-party amounts consist of property management, asset management, leasing commission, legal leasing, construction management fees and salary reimbursements.
13. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
14. SUBSEQUENT EVENTS
On October 27, 2016, the Company, through an indirect subsidiary, entered into a Purchase and Sale Agreement with an unrelated third party purchaser (the “Purchaser”) for the sale of an approximately 114,000 square foot retail property located in Bismarck, North Dakota (“Pinehurst Square East”). The contractual sale price of Pinehurst Square East is $19.2 million. Pursuant to the Purchase and Sale Agreement, the Purchaser would be obligated to purchase the property and the Company would be obligated to sell the property only after satisfaction of agreed upon closing conditions. There can be no assurance that the Company will complete the sale.

23



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, or SEC, on March 30, 2016, which we refer to herein as our “2015 Annual Report on Form 10-K.” As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock. 
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor’s compensation arrangements with us and conflicts in allocating time among us and other programs and business activities.
Our initial public offering has terminated and we are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected.
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders.
Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders.
Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our 2015 Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements

24



are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 2015 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.
Overview
We are a Maryland corporation that was formed on September 18, 2008, to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we intend to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership.
Since our inception, our business has been managed by an external advisor. We no longer have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed in August 2014, August 2015 and August 2016. The current term of the Advisory Agreement terminates on August 10, 2017. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Property Portfolio
As of September 30, 2016, our property portfolio included 11 retail properties, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of 697,406 square feet of single- and multi-tenant, commercial retail space located in 6 states. We purchased our properties for an aggregate purchase price of approximately $97.9 million. As of September 30, 2016 and December 31, 2015, there was approximately $34.0 million and approximately $39.8 million of indebtedness on our properties, respectively. As of September 30, 2016 and December 31, 2015, approximately 89% and 90% of our portfolio was leased (based on rentable square footage), respectively, with weighted-average remaining lease terms of approximately 5 years as of both period ends.
(dollars in thousands)
 
Rentable Square
Feet (1)
 
Percent
Leased (2)
 
Effective
Rent (3)
(Sq. Foot)
 
Anchor
Tenant
 
Date
Acquired
 
Original
Purchase
 Price (4)
 
Debt (5)
Property Name
 
Location
 
 
 
 
 
 
 
Pinehurst Square
 
Bismarck, ND
 
114,102

 
96
%
 
$
14.40

 
T J Maxx
 
5/26/2011
 
$
15,000

 
$

Cochran Bypass
 
Chester, SC
 
45,817

 
100
%
 
5.11

 
Bi-Lo Store
 
7/14/2011
 
2,585

 
1,493

Topaz Marketplace
 
Hesperia, CA
 
50,699

 
62
%
 
24.66

 
n/a
 
9/23/2011
 
13,500

 

Morningside Marketplace
 
Fontana, CA
 
76,923

 
96
%
 
16.24

 
Ralph's
 
1/9/2012
 
18,050

 
8,520

Woodland West Marketplace
 
Arlington, TX
 
175,258

 
70
%
 
9.59

 
Randall's
 
2/3/2012
 
13,950

 
9,576

Ensenada Square
 
Arlington, TX
 
62,628

 
100
%
 
7.49

 
Kroger
 
2/27/2012
 
5,025

 
2,954

Shops at Turkey Creek
 
Knoxville, TN
 
16,324

 
100
%
 
27.33

 
n/a
 
3/12/2012
 
4,300

 
2,673

Florissant Marketplace
 
Florissant, MO
 
146,257

 
100
%
 
9.83

 
Schnuck's
 
5/16/2012
 
15,250

 
8,747

400 Grove Street
 
San Francisco, CA
 
2,000

 
100
%
 
60.00

 
n/a
 
6/14/2016
 
2,890

 

8 Octavia Street
 
San Francisco, CA
 
3,640

 
100
%
 
26.16

 
n/a
 
6/14/2016
 
2,740

 

Fulton Shops
 
San Francisco, CA
 
3,758

 
100
%
 
55.07

 
n/a
 
7/27/2016
 
4,595

 

 
 
 
 
697,406

 
 
 
 
 
 
 
 
 
$
97,885

 
$
33,963

(1)
Square feet include improvements made on ground leases at the property.
(2)
Percentage is based on leased rentable square feet of each property as of September 30, 2016.

25



(3)
Effective rent per square foot is calculated by dividing the annualized September 2016 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries.
(4)
The purchase price for Pinehurst Square and Shops at Turkey Creek includes the issuance of common units in our operating partnership to the sellers.
(5)
Debt represents the outstanding balance as of September 30, 2016, and excludes reclassification of approximately $0.3 million deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 8. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. As of September 30, 2016, the KeyBank credit facility principal balance of $16.2 million was secured by Pinehurst Square, Topaz Marketplace, 8 Octavia Street, 400 Grove Street and the Fulton Shops. For information regarding recent draws under the Key Bank credit facility, see “– Recent Financing Transactions - KeyBank Credit Facility.”
Properties Under Development
As of September 30, 2016, we had 2 properties under development. The properties are identified in the following table (dollar amounts in thousands):
Properties Under Development
 
Location
 
Estimated
Completion Date
 
Estimated
Expected
Square Feet
 
Debt (1)
Wilshire Property
 
Santa Monica, CA
 
November, 2017
 
12,500

 
$
8,500

Gelson’s Property
 
Hollywood, CA
 
March, 2018
 
37,000

 
10,700

Total
 
 
 
 
 
49,500

 
$
19,200

(1)
Debt excludes reclassification of approximately $0.3 million deferred financing costs, net, as a contra-liability.

26



Results of Operations
Comparison of the three and nine months ended September 30, 2016, versus the three and nine months ended September 30, 2015.
The following tables provide summary information about our results of operations for the three and nine months ended September 30, 2016 and 2015 (amounts in thousands):
 
Three Months Ended
September 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Rental revenue and reimbursements
$
2,647

 
$
3,967

 
$
(1,320
)
 
(33.3
)%
Operating and maintenance expenses
949

 
1,350

 
(401
)
 
(29.7
)%
General and administrative expenses
623

 
1,023

 
(400
)
 
(39.1
)%
Depreciation and amortization expenses
907

 
913

 
(6
)
 
(0.7
)%
Transaction expense
165

 
134

 
31

 
23.1
 %
Interest expense
550

 
1,358

 
(808
)
 
(59.5
)%
Operating loss
(547
)
 
(811
)
 
264

 
(32.6
)%
Other income (loss), net
16

 
(320
)
 
336

 
(105.0
)%
Income taxes
(19
)
 
(2
)
 
(17
)
 
850.0
 %
Net loss
$
(550
)
 
$
(1,133
)
 
$
583

 
(51.5
)%
 
Nine Months Ended
September 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Rental revenue and reimbursements
$
7,837

 
$
12,692

 
$
(4,855
)
 
(38.3
)%
Operating and maintenance expenses
2,787

 
4,498

 
(1,711
)
 
(38.0
)%
General and administrative expenses
1,691

 
2,548

 
(857
)
 
(33.6
)%
Depreciation and amortization expenses
2,628

 
3,943

 
(1,315
)
 
(33.4
)%
Transaction expense
445

 
134

 
311

 
232.1
 %
Interest expense
1,660

 
4,406

 
(2,746
)
 
(62.3
)%
Operating loss
(1,374
)
 
(2,837
)
 
1,463

 
(51.6
)%
Other income (loss), net
(34
)
 
4,472

 
(4,506
)
 
(100.8
)%
Income taxes
(153
)
 
(80
)
 
(73
)
 
91.3
 %
Net income (loss)
$
(1,561
)
 
$
1,555

 
$
(3,116
)
 
(200.4
)%
Our results of operations for the three and nine months ended September 30, 2016, are not necessarily indicative of those expected in future periods.
Revenue
The decrease in revenue during the three months ended September 30, 2016 compared to the same period in 2015, was primarily due to the sale of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015 and Bloomingdale Hills in April 2016.
The decrease in revenue during the nine months ended September 30, 2016, compared to the same period in 2015, was primarily due to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, Northgate Plaza, Moreno Marketplace and Summit Point in October 2015 and Bloomingdale Hills in April 2016. The sale of the three properties in March 2015 was completed in connection with the formation of the SGO Joint Venture (as described in Note 4. “Investments in Unconsolidated Joint Ventures” to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q).
Operating and maintenance expenses 
The decrease in operating and maintenance expenses during the three months ended September 30, 2016, compared to the same period in 2015, was primarily due to the sale of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015, and Bloomingdale Hills in April 2016.
The decrease in operating and maintenance expenses during the nine months ended September 30, 2016, compared to the same period in 2015, was primarily attributed to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March

27



2015, the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015, and the sale of Bloomingdale Hills in April 2016.
General and administrative expenses
The decrease in general and administrative expenses during the three months ended September 30, 2016, compared to the same period in 2015 was primarily due to a write-off in 2015 of the remaining unamortized premium of an insurance policy of approximately $0.3 million. Additionally, asset management fees decreased during the third quarter of 2016 due to sold properties.
The decrease in general and administrative expenses during the nine months ended September 30, 2016, compared to the same period in 2015 was primarily due to a write-off in 2015 of the remaining unamortized premium of an insurance policy of approximately $0.3 million. Lower legal costs also contributed to the overall decrease in general and administrative expenses, with the resolution of the class action lawsuit in 2015. Additionally, asset management fees declined in 2016 due to the sale of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015, and the sale of Bloomingdale Hills in April 2016.
Depreciation and amortization expenses
The decrease in depreciation and amortization expenses during the three months ended September 30, 2016, compared to the same period in 2015 was not significant.
The decrease in depreciation and amortization expenses during the nine months ended September 30, 2016, compared to the same period in 2015 was attributed to the sales of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015 and the sale of Bloomingdale Hills in April 2016.
Transaction expense
The increase in transaction expenses during the three months ended September 30, 2016, compared to the same period in 2015 is primarily due to our acquisition fees for our investment in the Fulton Shops. Refer to Note 3. “Real Estate Investments” to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
The increase in transaction expenses during the nine months ended September 30, 2016, compared to the same period in 2015 is primarily due to acquisition fees for our investments in 400 Grove Street, 8 Octavia Street and the Fulton Shops. Refer to Note 3. “Real Estate Investments” to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Interest expense
The decrease in interest expense during the three months ended September 30, 2016, compared to the same period in 2015 was primarily due to loan pay-offs using the proceeds from the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015, and the sale of Bloomingdale Hills in April 2016.
The decrease in interest expense during the nine months ended September 30, 2016, compared to the same period in 2015 was primarily due to loan pay-offs using the proceeds from the sales of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, the sales of Northgate Plaza, Moreno Marketplace and Summit Point in October 2015, and the sale of Bloomingdale Hills in April 2016.
Other income (loss), net
Other income, net for the three months ended September 30, 2016, primarily consisted of equity in income resulting from our investment in unconsolidated joint ventures. Other loss, net for the three months ended September 30, 2015, included approximately $0.3 million representing our share in the losses resulting from our investment in unconsolidated joint ventures, an additional accrual of an estimated interest penalty payable to the IRS related to the deficiency dividend in 2011, and an adjustment to the gain related to the March 2015 disposal of real estate.
Other loss, net for the nine months ended September 30, 2016, primarily consisted of approximately $1.0 million related to prepayment penalties on extinguishment of debt as well as the write-off of unamortized loan fees related to the sale of Bloomingdale Hills in April 2016. This was partially offset by the gain on sale of Bloomingdale Hills of approximately $0.6 million, as well as the equity in income resulting from our investment in unconsolidated joint ventures of approximately $0.3 million. Other income, net for the nine months ended September 30, 2015, primarily consisted of the net gain of approximately $4.9 million and the write-off of unamortized loan fees of approximately $0.2 million recorded in conjunction with the sale and payoff of related debt of Aurora Commons, Constitution Trail, and Osceola Village in March 2015, as well as the equity in income resulting from our investment in unconsolidated joint ventures.

28



Income taxes
We have elected to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal Revenue Code. A TRS is subject to federal and state income taxes. For the nine months ended September 30, 2016, income taxes primarily include taxes on our share of the gain from the second quarter sale of certain SGO MN Joint Venture properties. This is partially offset by the reversal of an over accrual of estimated alternative minimum state/federal taxes, which was accrued and included in expenses as of December 31, 2015. The over accrual was determined as a result of finalizing, in 2016, the calculation of taxes owed for 2015.
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
During the nine months ended September 30, 2016, we utilized the net proceeds from the fourth quarter 2015 disposition of our properties (remaining after paydown of debt) to invest in the Gelson’s Joint Venture and the Wilshire Joint Venture.
As of September 30, 2016, our cash and cash equivalents were approximately $3.9 million and our restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs) was approximately $5.7 million. For properties with such lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established.
Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of September 30, 2016 and December 31, 2015, our borrowings were approximately 141.2% and 65.3%, respectively, of the carrying value of our net assets.
The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows (amounts in thousands):
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
$ Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
2,191

 
$
570

 
$
1,621

Investing activities
(32,517
)
 
43,237

 
(75,754
)
Financing activities
25,426

 
(42,071
)
 
67,497

Net increase (decrease) in cash and cash equivalents
$
(4,900
)
 
$
1,736

 
 
Cash Flows from Operating Activities
The increase in cash flows from operating activities was primarily due to a decrease in operating losses and adjustments for non-cash items of approximately $0.4 million, as well as larger net deposits to restricted cash for operational expenditures in 2015 as compared to 2016.
Cash Flows from Investing Activities
The change in cash flows from investing activities was primarily due to our investments in the Wilshire and Gelson’s Joint Ventures during the first quarter of 2016, consisting of land and building under development and development costs, of approximately $29.5 million, as well as our acquisitions of 400 Grove Street and 8 Octavia Street during the three months ended June 30, 2016 and our acquisition of the Fulton Shops during the three months ended September 30, 2016, which, in aggregate, consisted of land and buildings, totaling $10.2 million. Additionally, cash flows from investing activities during the

29



nine months ended September 30, 2015 consisted of proceeds of $53.1 million, before the pay down of debt, from the sale of Aurora Commons, Constitution Trail and Osceola Village.
Cash Flows from Financing Activities
The change in cash flows from financing activities was primarily due to loan proceeds during the nine months ended September 30, 2016, of approximately $38.4 million in connection with our investments in the Wilshire and Gelson’s Joint Ventures and additional draws under our Amended and Restated Credit Facility (“Key Bank credit facility”), compared to the pay down of debt in the amount of $37.3 million during the nine months ended September 30, 2015 resulting from the sales of Aurora Commons, Constitution Trail and Osceola Village.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses, the payment of principal and interest on our outstanding indebtedness, and distributions. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties and the sale of shares of our common stock. Due to the termination of our initial public offering on February 7, 2013, we may fund our short-term operating cash needs from operations, from the sales of properties and from debt.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. Until the termination of our initial public offering on February 7, 2013, our cash needs for acquisitions were satisfied from the net proceeds of the public offering and from debt financings. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 8. “Notes Payable, Net” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness.
Recent Financing Transactions
KeyBank Credit Facility
On March 7, 2016, we drew $6.0 million under the Key Bank credit facility and used the proceeds to invest in the Wilshire Joint Venture. Refer to Note 5. “Variable Interest Entities” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
On June 9, 2016, we drew approximately $7.5 million under the Key Bank credit facility, the majority of which was used to fund the purchase of the San Francisco Properties. Refer to Note 3. “Real Estate Investments” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
On July 25, 2016, we drew $4.7 million under the Key Bank credit facility and used the majority of the proceeds to acquire the Fulton Shops. Refer to Note 3 “Real Estate Investments” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
On April 4, 2016, we consummated the disposition of Bloomingdale Hills, located in Riverside, Florida, for a sales price of approximately $9.2 million in cash, $3.0 million of which was used to pay down the line of credit under our KeyBank credit facility. Additionally, on September 29, 2016, we drew $1.0 million under the Key Bank credit facility to be used for working capital.
Mortgage Loans Secured by Properties Under Development
In connection with our investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property, we have consolidated borrowings of $8.5 million (the “Wilshire Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and 3032 Wilshire Investors, LLC (as the borrower). The Wilshire Loan bears interest at a rate of 10.0% per annum, payable monthly commencing on April 1, 2016. The loan matures on March 7, 2017, with an option for an additional six-month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.
In connection with our investment in the Gelson’s Joint Venture and the acquisition of the Gelson’s Property, we have consolidated borrowings of $10.7 million (the “Gelson’s Loan”) from Buchanan Mortgage Holdings, LLC (as the lender) and Sunset and Gardner Investors, LLC (as the borrower). The Gelson’s Loan bears interest at a rate of 9.5% per annum, payable monthly commencing on April 1, 2016. The loan matures on January 27, 2017, with an option to extend for an additional six-

30



month period, subject to certain conditions as stated in the loan agreement. The loan is secured by, among other things, a lien on the Gelson’s development project and other collateral as defined in the loan agreement.
Interim Financial Information
The financial information as of and for the period ended September 30, 2016, included in this Quarterly Report on Form 10-Q is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three and nine months ended September 30, 2016. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete consolidated financial statements. Interim results of operations are not necessarily indicative of the results to be expected for the full year; and such results may be less favorable. Our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2015 Annual Report on Form 10-K.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three and nine months ended September 30, 2016, our total operating expenses did not exceed the 2%/25% Guidelines.
Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. In 2015, we made a special distribution to stockholders to preserve our REIT status based on underreporting of federal taxable income in 2011 (the “Special Distribution”).
Quarterly Distributions
As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders.
Under the terms of the Key Bank credit facility, we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds specified in the Key Bank credit facility provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.

31



The following tables set forth the quarterly distributions declared to our common stockholders and common unit holders for the nine months ended September 30, 2016, and the year ended December 31, 2015 (amounts in thousands, except per share amounts):
 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2016
3/31/2016
 
4/29/2016
 
$
0.06

 
$
660

 
$
26

 
$
686

Second Quarter 2016
7/7/2016
 
7/29/2016
 
0.06

 
661

 
25

 
686

Third Quarter 2016
9/30/2016
 
10/31/2016
 
0.06

 
659

 
25

 
684

Total
 
 
 
 
 
 
$
1,980

 
$
76

 
$
2,056


 
Distribution Record
Date
 
Distribution
Payable
Date
 
Distribution Per Share of Common Stock /
Common Unit
 
Total Common
Stockholders
Distribution
 
Total Common
Unit Holders
Distribution
 
Total
Distribution
First Quarter 2015
3/31/2015
 
4/30/2015
 
$
0.06

 
$
658

 
$
26

 
$
684

Second Quarter 2015
6/30/2015
 
7/30/2015
 
0.06

 
654

 
26

 
680

Third Quarter 2015
9/30/2015
 
10/31/2015
 
0.06

 
654

 
26

 
680

Fourth Quarter 2015
12/31/2015
 
1/30/2016
 
0.06

 
661

 
25

 
686

Total
 
 
 
 
 
 
$
2,627

 
$
103

 
$
2,730

 
Funds From Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of a real estate company’s operating performance. The National Association of Real Estate Investment Trusts, or “NAREIT”, an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP.  FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.
We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

32



Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows (amounts in thousands, except shares and per share amounts):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
FFO
 
2016
 
2015 (2)
 
2016
 
2015 (2)
Net income (loss) (1)
 
$
(550
)
 
$
(1,133
)
 
$
(1,561
)
 
$
1,555

Adjustments:
 
 
 
 
 
 
 
 
Net income related to membership interest
 

 
400

 

 
157

Gain on disposal of assets
 

 
(119
)
 
(614
)
 
(4,720
)
Adjustment to reflect FFO of unconsolidated joint ventures
 
184

 
82

 
360

 
225

Depreciation of real estate
 
680

 
668

 
1,962

 
2,832

Amortization of in-place leases and other intangibles
 
227

 
270

 
666