SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q – QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

(Mark One)

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2017

 

Or

 

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________

 

 

Commission File Number:

0-8952

 

SB PARTNERS
(Exact name of registrant as specified in its charter)
New York		13-6294787
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1 New Haven Avenue, Suite 102A, Milford, CT.		06460
(Address of principal executive offices)		(Zip Code)

 

(203) 283-9593

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

 

 

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. [X] Yes [ ] 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ X ] Yes [ ] No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

[ ] large accelerated filer     [ ] accelerated filer    [X] non-accelerated filer     [ ] small reporting company    [ ] emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). [ ] Yes [X] No

 

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No

Not Applicable

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Not Applicable

 

 

SB PARTNERS

 

INDEX

 

Part I	Financial Information
Item 1	Financial Statements
	Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 (audited)	1
	Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2017 and 2016	2
	Consolidated Statements of Changes in Partners' Equity (Deficit) (unaudited) for the six months ended June 30, 2017	3
	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2017 and 2016	4
	Notes to Consolidated Financial Statements (unaudited)	5 – 8
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	9 – 11
Item 3	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4T	Controls and Procedures	12
Part II	Other Information	12
	Signatures	13
	Exhibit 31	14-15
	Exhibit 32	16

 

 

1

ITEM 1. FINANCIAL STATEMENTS

SB PARTNERS
(A New York Limited Partnership)
CONSOLIDATED BALANCE SHEETS

 

		June 30,				December 31,
		2017 (Unaudited)				2016 (Audited)
Assets:
Investments -
Real estate, at cost
Land		$	470,000			$	470,000
Buildings, furnishings and improvements			5,016,185				5,016,185
Less - accumulated depreciation			(2,006,016	)			(1,927,326	)
			3,480,169				3,558,859
Investment in Sentinel Omaha, LLC, net of reserve for fair value of $13,251,109 and $13,575,238 at June 30, 2017 and December 31, 2016, respectively			30,919,252				25,211,157
			34,399,421				28,770,016
Other Assets -
Cash and cash equivalents			1,348,302				1,327,197
Cash in escrow			502,493				501,145
Other			1,121				7,363
Total assets		$	36,251,337			$	30,605,721
Liabilities:
Loan payable, net of unamortized deferred finance costs of $18,198 and $29,118 at June 30, 2017 and December 31, 2016, respectively		$	5,708,392			$	5,731,355
Accounts payable			408,291				419,755
Tenant security deposit			100,015				98,616
Accrued expenses			2,689,839				2,460,857
Total liabilities			8,906,537				8,710,583
Partners' Equity (Deficit):
Units of partnership interest without par value;
Limited partner - 7,753 units			27,359,709				21,910,750
General partner - 1 unit			(14,909	)			(15,612	)
Total partners' equity			27,344,800				21,895,138
Total liabilities and partners' equity		$	36,251,337			$	30,605,721

 

See notes to consolidated financial statements

 

 

2

SB PARTNERS
(A New York Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2017				2016				2017				2016
Revenues:
Base rental income		$	178,772			$	173,492			$	357,544			$	346,984
Other rental income			87,452				88,238				174,904				176,476
Interest income			1,576				1,051				2,730				1,633
Total revenues			267,800				262,781				535,178				525,093
Expenses:
Real estate operating expenses			68,704				62,610				135,832				150,337
Amortization of deferred financing costs			5,460				5,460				10,920				10,920
Depreciation			39,345				39,336				78,690				78,672
Real estate taxes			30,882				31,666				61,763				63,331
Management fees			221,718				217,136				442,101				433,330
Other			31,785				33,634				64,305				67,984
Total expenses			397,894				389,842				793,611				804,574
Loss from operations			(130,094	)			(127,061	)			(258,433	)			(279,481	)
Equity in net income of investment			1,934,067				3,289,592				5,383,966				5,262,392
Reserve for value of investment			1,531,594				(1,644,796	)			324,129				(2,631,195	)
Net income			3,335,567				1,517,735				5,449,662				2,351,716
Income allocated to general partner			430				196				703				303
Income allocated to limited partners		$	3,335,137			$	1,517,539			$	5,448,959			$	2,351,413
Income per unit of limited partnership interest (basic and diluted)
Net income		$	430.23			$	195.76			$	702.91			$	303.33
Weighted Average Number of Units of Limited Partnership Interest Outstanding			7,753				7,753				7,753				7,753

 

See notes to consolidated financial statements

 

3

SB PARTNERS

(A New York Limited Partnership)

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)

 

For the Six Months Ended June 30, 2017 (Unaudited)

 

Limited Partners:
		Units of Partnership Interest
		Number				Amount				Cumulative Cash Distributions				Accumulated Income				Total
Balance, January 1, 2017			7,753			$	119,968,973			$	(111,721,586	)		$	13,663,363			$	21,910,750
Net income for the period			-				-				-				5,448,959				5,448,959
Balance, June 30, 2017			7,753			$	119,968,973			$	(111,721,586	)		$	19,112,322			$	27,359,709

 

 

 

 

General Partner:
		Units of Partnership Interest
		Number				Amount				Cumulative Cash Distributions				Accumulated (Losses)				Total
Balance, January 1, 2017			1			$	10,000			$	(26,364	)		$	752			$	(15,612	)
Net income for the period			-				-				-				703				703
Balance, June 30, 2017			1			$	10,000			$	(26,364	)		$	1,455			$	(14,909	)

 

See notes to consolidated financial statements.

 

 

4

SB PARTNERS

(A New York Limited Partnership)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		For the Six Months Ended June 30,
		2017				2016
Cash Flows From Operating Activities:
Net income		$	5,449,662			$	2,351,716
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net (income) of investment			(5,383,966	)			(5,262,392	)
Reserve for fair value of investment			(324,129	)			2,631,195
Depreciation and amortization			89,610				89,592
Net decrease in operating assets			6,242				12,100
Net (decrease) in accounts payable			(11,464	)			(18,112	)
Net increase in tenant security deposit			1,399				1,399
Net increase in accrued expenses			228,982				220,209
Net cash provided by operating activites			56,336				25,707
Cash Flows From Investing Activities:
Interest earned on capital reserve escrow acount			(1,348	)			(308	)
Net cash (used in) investing activites			(1,348	)			(308	)
Cash Flows From Financing Activities:
Repayment of loan payable			(33,883	)			(226,415	)
Decrease in restricted cash			-				200,000
Net cash (used in) financing activities			(33,883	)			(26,415	)
Net change in cash and cash equivalents			21,105				(1,016	)
Cash and cash equivalents at beginning of period			1,327,197				1,206,899
Cash and cash equivalents at end of period		$	1,348,302			$	1,205,883

 

See notes to consolidated financial statements

 

 

5

SB PARTNERS

Notes to Consolidated Financial Statements (Unaudited)

 

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

SB Partners, a New York limited partnership, and its subsidiaries (collectively, the "Partnership" or the “Registrant”), have been engaged since April 1971 in acquiring, operating, and holding for investment a varying portfolio of real estate interests. SB Partners Real Estate Corporation (the "General Partner") serves as the general partner of the Partnership.

 

The consolidated financial statements included herein are unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Partnership’s latest annual report on Form 10-K.

 

The results of operations for the three and six months period ended June 30, 2017 are not necessarily indicative of the results to be expected for a full year.

 

For a discussion of the significant accounting and financial reporting policies of the Partnership, refer to the Annual Report on Form 10–K for the year ended December 31, 2016.

 

(2) INVESTMENTS IN REAL ESTATE

As of June 30, 2017, the Partnership owns an industrial flex property in Maple Grove, Minnesota. The following is the cost basis and accumulated depreciation of the real estate investment owned by the Partnership at June 30, 2017 and December 31, 2016.

 

 

		No. of				Year of					Real Estate at Cost
Type		Prop.				Acquisition			Description		6/30/2017				12/31/2016
Industrial flex property			1				2002		60,345 sf		$	5,486,185			$	5,486,185
Less: Accumulated depreciation												(2,006,016	)			(1,927,326	)
Investment in real estate											$	3,480,169			$	3,558,859

 

 

(3) ASSETS MEASURED AT FAIR VALUE

 

The accounting guidance for fair value measurements establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in determining fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level of input that is significant to the fair value measurement.

 

Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on the assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

 

The three levels of fair value hierarchy are described below:

 

●

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;

 

●

Level 2 - Quoted prices in active markets for similar assets and liabilities or quoted prices in less active dealer or broker markets;

 

●

Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and are unobservable.

 

 

6

The following major categories of assets were measured at fair value as of June 30, 2017 and December 31, 2016, respectively:

 

		Level 3:				June 30,
		Significant				2017
		Unobservable				(Unaudited)
		Inputs				Total
Assets
Investment in Sentinel Omaha, LLC		$	44,170,361			$	44,170,361
Reserve for fair value of investment			(13,251,109	)			(13,251,109	)
Total assets		$	30,919,252			$	30,919,252

 

		Level 3:				December 31,
		Significant				2016
		Unobservable				(Audited)
		Inputs				Total
Assets
Investment in Sentinel Omaha, LLC		$	38,786,395			$	38,786,395
Reserve for fair value of investment			(13,575,238	)			(13,575,238	)
Total assets		$	25,211,157			$	25,211,157

 

The following is a reconciliation of the beginning and ending balances for assets measured at fair value using significant unobservable inputs (Level 3) during the periods ended June 30, 2017 and December 31, 2016:

 

 

		Investment in				Reserve for
		Sentinel				fair value
		Omaha, LLC				of investment				Total
Balance at January 1, 2016		$	28,891,652			$	(14,445,826	)		$	14,445,826
Equity in net income of investment			9,894,743				-				9,894,743
Decrease in reserve			-				870,588				870,588
Balance at December 31, 2016			38,786,395				(13,575,238	)			25,211,157
Equity in net income of investment			5,383,966				-				5,383,966
Decrease in reserve			-				324,129				324,129
Balance at June 30, 2017		$	44,170,361			$	(13,251,109	)		$	30,919,252

 

On September 30, 2015, Omaha refinanced six properties which had been encumbered by a single secured credit facility with a high fixed interest rate. Previously, a refinancing of the secured credit facility would have required significant prepayment penalties which made a refinancing cost prohibitive. On September 30, 2015, the prepayment penalties were reduced enough that combined with stronger valuation rates, each property’s borrowing capacity was sufficient to support a new separate mortgage with enough combined proceeds to pay off the credit facility and the prepayment penalties. The six new mortgages have lower interest rates although the new interest rates are floating rates, which are subject to changes in the credit markets. Omaha is precluded from making distributions to its investors until its unsecured loan is paid in full. However, based on a review of the 2015 property operations and applying the terms of the new mortgages and barring any unforeseen downturn in the real estate and capital markets, the Partnership anticipated Omaha has a more likely than not chance to improve the operations of the real estate assets, sell the assets at values sufficient to pay off the mortgages and after paying off the unsecured bank loan, make distributions to its investors for a portion of the original capital invested. Therefore, the Partnership as of the year ended December 31, 2015 had recognized a value in the Omaha investment equal to the Partnership’s 30% portion of the equity reported on Omaha’s balance sheet as of December 31, 2015 less a 50% reserve. During 2016, the net operating income reported for Omaha’s properties continued to improve which led to an increase in its real estate valuation. Omaha continued to make payments on its unsecured loan. However, Omaha’s mortgages and unsecured loan are encumbered with floating interest rates which began to increase near the end of 2016. As of the period ended December 31, 2016 the Partnership had recognized a value in the Omaha investment equal to the Partnership’s 30% portion of the equity reported on Omaha’s balance sheet as of December 31, 2016 less a 35% reserve. Omaha’s unsecured loan which as of June 30, 2017 has a balance of $27,034,322 has a maturity date of December 31, 2017 with one option to extend the maturity date to June 30, 2018. It is unlikely Omaha will be able to pay off the unsecured loan from net operating cash flow or refinancing proceeds. Omaha will have to sell one or more of its properties which will reduce its net cash flow from operations which could be available for distribution to its investors after the unsecured loan is paid off. During the three months ended June 30, 2017 Omaha sold one property located in Daytona, Florida and two properties located in Fayetteville, North Carolina. Net sales proceeds in each transaction were used to first pay off each property’s secured mortgage and remaining net sales proceeds were used to pay down Omaha’s unsecured loan. As of the period ended June 30, 2017 the Partnership has recognized a value in the Omaha investment equal to the Partnership’s 30% portion of the equity reported on Omaha’s balance sheet as of June 30, 2017 less a 30% reserve.

 

 

7

 

(4) INVESTMENT IN SENTINEL OMAHA, LLC

In 2007, the Partnership made an investment in the amount of $37,200,000 in Sentinel Omaha, LLC (“Omaha”). Omaha is a real estate investment company which as of June 30, 2017 owns 11 multifamily properties in 8 markets. Omaha is an affiliate of the Registrant’s general partner. The investment represents a 30% ownership interest in Omaha.

 

The following are the condensed financial statements (000’s omitted) of Omaha as of and for the periods ended June 30, 2017 and December 31, 2016.

 

		(Unaudited)				(Audited)
Balance Sheet		June 30, 2017				December 31, 2016
Investment in real estate, net		$	353,100			$	378,460
Other assets			13,106				10,749
Debt			(215,024	)			(254,913	)
Other liabilities			(3,947	)			(5,008	)
Net assets		$	147,235			$	129,288

 

		(Unaudited)
Statement of Operations		June 30, 2017
Rent and other income		$	21,750
Real estate operating expenses			(11,094	)
Other expenses			(3,463	)
Net realized losses			(20,794	)
Net unrealized income			31,548
Net increase in net assets		$	17,947

 

(5) LOAN PAYABLE

       Loan payable consists of the following:

 

							Annual								Net Carrying Amount
		Interest					Installment				Amount Due				June 30,				December 31,
Property		Rate			Maturity Date		Payments				at Maturity				2017				2016
Bank Loan (a):
Note B			0.000	%	Apr-18			-				5,726,590			$	5,726,590			$	5,760,473
Less: unamortized finance costs																(18,198	)			(29,118	)
Loan payable															$	5,708,392			$	5,731,355

 

 

(a)	On September 17, 2007, the Partnership entered into a bank loan (the “Loan”) with a bank (“Holder”) in the amount of $22,000,000, which matured on October 1, 2008. On April 29, 2011 the Partnership and Holder executed a new loan agreement (“Loan Agreement”) on the following terms:

 

1)

In connection with the execution of the Loan Agreement, the Partnership was required to make an immediate payment to Holder of $11,930,430, reducing the balance due under the unsecured credit facility to $10,069,570. The payment was made from proceeds resulting from the sale of 175 Ambassador Drive. Additional proceeds from the sale were used to pay Holder’s legal and appraisal costs and to fund a reserve account for future tenant improvement and leasing costs, as needed. The remaining outstanding obligation in the amount of $10,069,570 was divided into two notes (“Note A” and “Note B;” together, the “Notes”).

 

 

8

2)

Note A which had a balance of $3,768,751 as of September 18, 2015 was paid off in full using proceeds from the sale of Lino Lakes.

 

3)

Note B in the amount of $5,726,590 has a maturity date of April 29, 2018. The Partnership has three one-year options to extend the maturity date if certain conditions are satisfied. Note B previously accrued interest at an annual fixed rate of 5% but only until all interest and principal had been paid in full on Note A. Thereafter Note B does not accrue any interest. Except as discussed below, payments of principal are deferred until Registrant’s investment in Sentinel Omaha LLC (“Omaha”) pays distributions to the Partnership or the Partnership sells Eagle Lake Business Center IV or its investment in Omaha. Distributions from Omaha or net proceeds from the sale of Eagle IV or Omaha would be used first to pay the outstanding principal balance of Note B. If there are no distributions from Omaha prior to the Note B maturity, principal is due at maturity, subject to the above mentioned extensions.

 

4)

Note B may be voluntarily prepaid upon notice to the Holder, subject to certain requirements as to the application of payments. The Partnership’s obligations under the Notes may be accelerated upon default.

 

5)

On September 17, 2015, the Partnership sold Lino Lakes. An amount of $200,000 of net sales proceeds had been held in reserve pending the expiration of the representations and warranties period as stipulated in the sales contract. On March 15, 2016, the representation and warranties period expired. There were no charges made against this reserve, therefore in March 2016, the $200,000 was used to further pay down the principal balance of the Note B in accordance with the terms of the Loan Agreement. Until the Partnership’s obligations under Note B is satisfied in full, the Partnership is required to pay a portion of its net operating income (after payment of certain permitted expenses), and the net proceeds from the sale, transfer or refinancing of its remaining properties and investments, toward Note B while retaining the other portion to increase cash reserves. On May 16, 2016, the partnership paid $26,415 to the Holder to pay down a portion of the outstanding balance of Note B. On May 26, 2017, the partnership paid $33,883 to the Holder to pay down a portion of the outstanding balance of Note B. While the obligation under Note B is outstanding, the Partnership is precluded from making distributions to its partners.

 

6)

The Partnership, its general partner and the Holder also entered into a Management Subordination Agreement accruing a portion of the investment management fee payable by the Partnership to its general partner so long as Note B remains outstanding. As of June 30, 2017 and December 31, 2016, $2,689,839 and $2,460,857, respectively of investment management fees have been accrued and are included in accrued expenses on the balance sheet.

 

	7)	As additional security for the Partnership’s payment of its obligations under the Loan Agreement, the Partnership, through its wholly-owned subsidiary Eagle IV Realty, LLC, has executed a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement (“Eagle IV Security Agreement”) and a Pledge Agreement (“Eagle IV Pledge Agreement”) in favor of Holder. The Eagle IV Security Agreement provides Holder with a security interest on the Partnership’s property located in Maple Grove, Minnesota (“Eagle IV”) of up to $5,000,000. The Eagle IV Pledge Agreement pledges to Holder the Partnership’s membership interest in Eagle IV Realty, LLC, the direct owner of Eagle IV. The Partnership has no other debt obligation secured by Eagle IV. The Loan Agreement also provides for a negative pledge on the Partnership’s remaining property and investment.

 

9

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

General

 

The consolidated financial statements for the three and six months ended June 30, 2017 and 2016 reflect the operations of one wholly owned industrial flex property located in Maple Grove, Minnesota and a 30% interest in Omaha.

 

Registrant’s wholly owned property located in Maple Grove, Minnesota is 100% leased to a single tenant whose lease expires October 31, 2019. The tenant has an ongoing option to terminate the lease under certain conditions. One of the conditions is the payment of an early termination penalty the calculation of which is based on the remaining time period in the lease. Another condition is the tenant must provide notice twelve months prior to the termination. As of June 30, 2017, Registrant has not received any notice from the tenant. The tenant pays fixed base rent which increases approximately 3% each year. The tenant pays directly or reimburses Registrant for all utilities, real estate taxes, insurance and most of the property operating expenses and property management fees.

 

Sentinel Omaha LLC’s portfolio consists of 10 garden apartment properties and one high rise apartment property. Leases generally are for one year or less. Tenants generally pay fixed rent plus utilities used by tenant.

 

Results of Operations

 

Total revenues from continuing operations for the three months ended June 30, 2017 increased $5,000 to approximately $268,000 as compared to approximately $263,000 for the three months ended June 30, 2016. Total revenues increased due to an increase in base rental income. Base rental income increased $6,000 to approximately $179,000 for the three months ended June 30, 2017 as compared to the same period in 2016 due to an increase in base rent at Registrant’s property located in Maple Grove, MN. Other rental income decreased slightly. Interest income increased slightly.

 

The Registrant reported a net loss from operations of approximately $130,000 for the three months ended June 30, 2017, an increase of $3,000 as compared to a net loss from operations of approximately $127,000 for the same period in 2016. Net loss from operations consists of net income from the Maple Grove property offset by partnership income and expenses. The increase of loss from operations was due to higher total expenses partially offset by higher total revenues. Total expenses from operations for 2017 increased $8,000 to approximately $398,000 from approximately $390,000 in 2016, due primarily to increases in real estate operating expenses and management fee expense of $6,000 and $5,000, respectively.

 

Total revenues from continuing operations for the six months ended June 30, 2017 increased $10,000 to approximately $535,000 as compared to approximately $525,000 for the six months ended June 30, 2016. Total revenues increased due to an increase in base rental income. Base rental income increased $11,000 to approximately $358,000 for the six months ended June 30, 2017 as compared to the same period in 2016 due to an increase in base rent at Registrant’s property located in Maple Grove, MN. Other rental income decreased slightly. Interest income increased slightly.

 

The Registrant reported a net loss from operations of approximately $258,000 for the six months ended June 30, 2017, an improvement of $21,000 as compared to a net loss from operations of approximately $279,000 for the same period in 2016. Net loss from operations consists of net income from the Maple Grove property offset by partnership income and expenses. The decrease of loss from operations was due to lower total expenses combined with higher total revenues. Total expenses from operations for 2017 decreased $11,000 to approximately $794,000 from approximately $805,000 in 2016, due primarily to decreases in real estate operating expenses and professional fees. This decrease was partially offset by an increase in management fee expense of $9,000.

 

The Registrant has a 30% non-controlling interest in Omaha that is accounted for on a fair value basis. Under the terms of its unsecured bank loan Omaha is precluded from making distributions to its investors, including the Registrant, until its unsecured loan is paid in full. Net increase in net assets increased $406,000 to approximately $17,947,000 for the six months ended June 30, 2017 compared to net increase in net assets of approximately $17,541,000 for the same period in 2016. Due to the global financial crisis, stagnant real estate market and slowing economy, Omaha reported a net write-down of the value of its real estate portfolio of approximately $100,852,000 during 2008 to 2014. During 2015 and 2016 capitalization rates for older properties in tertiary markets where Omaha owns most of its properties, generally were lower than for the prior years. Physical and economic occupancy improved at the properties during 2015 and market rates increased during 2016. However, occupancy at two large properties which rely on tenants from a local military base declined due to deployments during 2016. Job growth continued to improve but at a slow pace. For the years 2015 and 2016, as real estate values recovered Omaha reported an increase in the value of its portfolio of $88,512,000. During the second quarter of 2017, Omaha sold its garden apartment property in Daytona, Florida and sold both garden apartment properties located in Fayetteville, North Carolina. Net sales proceeds in each transaction were used to first pay off each property’s secured mortgage and remaining net sales proceeds were used to pay down Omaha’s unsecured loan. During the first six months of 2017, Omaha reported a net increase in its remaining real estate portfolio of $16,269,000. During 2016, the net operating income reported for Omaha’s properties continued to improve which allowed Omaha to continue to make payments on its unsecured loan. However, Omaha’s mortgages and unsecured loan are encumbered with floating interest rates which started to increase near the end of 2016 and during the first half of 2017. As mentioned above, Omaha, during the second quarter of 2017 made a pay down of its unsecured loan using net sales proceeds from the sale of three properties. Omaha’s unsecured loan which as of June 30, 2017 has a balance of $27,034,322 has a maturity date of December 31, 2017. Omaha has one option to extend the maturity date to June 30, 2018. It is unlikely Omaha will be able to pay off the unsecured loan from net operating cash flow or refinancing proceeds. Omaha will have to sell one or more of the remaining properties which will reduce its net cash flow from operations which could be available for distribution to the investors after the unsecured loan is paid off. Registrant had in 2015 recognized a value in the Omaha investment equal to Registrant’s 30% portion of the equity reported on Omaha’s balance sheet as of December 31, 2015 less a 50% reserve. However the above mentioned improvement in Omaha’s real estate values and operations had allowed Registrant to reduce the reserve in 2016 to 35% as of December 31, 2016 and further in 2017. Registrant as of June 30, 2017 has recognized a value in the Omaha investment equal to Registrant’s 30% portion of the equity reported on Omaha’s balance sheet as of June 30, 2016 less a 30% reserve.

 

 

10

 

For additional analysis, please refer to the discussions of the individual properties below.

 

This report on Form 10-Q includes statements that constitute "forward looking statements" within the meaning of Section 27(A) of the Securities Act of 1933 and Section 21(E) of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. By their nature, all forward looking statements involve risks and uncertainties as further described in the Registrant’s latest annual report on Form 10-K. Actual results may differ materially from those contemplated by the forward looking statements.

 

CRITICAL ACCOUNTING POLICIES

 

The Registrant’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2016. There were no significant changes to such policies in 2017. There are no accounting pronouncements or interpretations that have been issued, but not yet adopted, that Registrant believes will have a material impact on its consolidated financial statements.

 

Liquidity and Capital Resources

 

As of June 30, 2017, the Registrant had cash and cash equivalents of approximately $1,348,000. These balances are approximately $21,000 higher than cash and cash equivalents held on December 31, 2016. Cash and cash equivalents increased slightly during the six months ended June 30, 2017 due to cash flow generated from operating activities at Registrant’s wholly owned property partially offset by partnership expenses and pay down of the loan payable.

 

Currently, Registrant’s only source of cash is rental income received from the tenant who leases 100% of the leasable space at Registrant’s wholly owned property in Maple Grove. The tenant reimburses Registrant for real estate taxes, insurance and most of the properties’ operating expenses leaving a significant portion of the base rent received available to fund capital improvements and partnership administrative expenses. A portion of any remaining annual cash flow is used to pay down the principal balance of Note B in accordance with the Loan Agreement while the remaining cash income is retained by Registrant as cash reserves. As part of Registrant and the Holder restructuring the bank loan in 2011, Registrant set aside $500,000 in escrow to be held and used only to pay the costs to re-tenant the space at Registrant’s wholly owned property if Registrant’s tenant defaults on its lease or exercises its right to terminate the lease early or fails to renew.

 

Total outstanding debt at June 30, 2017 consists of Note B at $5,726,590. Under the terms of the Loan Agreement, when Note A was repaid, interest on the Note B stopped accruing. Note B matures April 29, 2018. Registrant has three one-year options to extend the maturity date if certain conditions are satisfied. If the Registrant does not have funds on hand sufficient to repay its indebtedness at maturity, the Registrant may need to refinance such indebtedness with new debt financing or provide necessary funds through equity offering(s) or other sources, if available. The Registrant may be unable to obtain a loan which will be sufficient to retire the existing loan. If it is unable to refinance this indebtedness on acceptable terms, the Registrant may be forced to liquidate its remaining assets upon disadvantageous terms, which could result in losses to the Registrant and adversely affect the amount of cash reserves. If general economic conditions result in higher interest rates at a time when the Registrant must refinance its indebtedness, the Registrant's interest expense could increase, which would adversely affect the Registrant's results of operations and financial condition. The Registrant has no other debt except normal trade accounts payable and accrued investment management fees.

 

During the quarter, inflation and changing prices did not significantly affect the markets in which the Registrant conducts its business, or the Registrant's business overall.

 

Registrant anticipates cash flow generated from the property located in Maple Grove and current cash reserves will be sufficient to cover operating and capital improvement costs and other working capital requirements of the Registrant so long as the tenant remains in place.

 

 

11

Eagle Lake Business Center IV (Maple Grove, Minnesota)

 

Total revenues for the three months ended June 30, 2017 increased $4,000 to approximately $266,000 as compared to approximately $262,000 for the three months ended June 30, 2016. The property reported higher base rental income and slightly lower other rental income. Base rental income was higher in 2017 due to a scheduled increase in the base rent. Net operating income, which includes deductions for depreciation, increased $1,000 for the three months ended June 30, 2017 to approximately $158,000 from approximately $157,000 for the three months ended June 30, 2016 due primarily to higher total revenues offset by higher operating expenses. Operating expenses were higher due to higher repairs expenses and insurance premiums.

 

Total revenues for the six months ended June 30, 2017 increased $9,000 to approximately $532,000 as compared to approximately $523,000 for the six months ended June 30, 2016. The property reported higher base rental income and slightly lower other rental income. Base rental income was higher in 2017 due to a scheduled increase in the base rent. Net operating income, which includes deductions for depreciation, increased $13,000 for the six months ended June 30, 2017 to approximately $323,000 from approximately $310,000 for the six months ended June 30, 2016 due primarily to higher total revenues combined with lower operating expenses. Operating expenses were lower due to lower utilities expenses and real estate taxes.

 

Investment in Sentinel Omaha, LLC

 

Comparison of three months ended June 30, 2017 to June 30, 2016:

 

As of June 30, 2017, the Omaha portfolio consisted of 11 multi-family properties located in 8 markets. Omaha’s total revenues for the three months ended June 30, 2017 were approximately $10,463,000. Income before realized losses and net unrealized income was approximately $3,272,000. Major expenses included approximately $1,667,000 for interest expense, $976,000 for repairs and maintenance, $1,353,000 for payroll, and $1,400,000 for real estate taxes. Omaha reported realized losses of $20,794,000 and net unrealized income of approximately $23,969,000 resulting in net increase in net assets of approximately $6,447,000. For the three months ended June 30, 2017, the Registrant’s 30% equity interest in the net increase in net assets of Omaha was approximately $1,934,000. Registrant recognized a reserve of 30% of the reported value of Omaha on its balance sheet. The reserve for value was adjusted in conjunction with recording the equity income for the quarter ended June 30, 2017. As a result, Registrant reported net equity in net increase in net assets of Omaha for the quarter ended June 30, 2017 of $3,466,000.

 

Omaha’s total revenues for the three months ended June 30, 2016 were approximately $10,944,000. Income before net unrealized income was approximately $4,103,000. Major expenses included approximately $1,614,000 for interest expense, $964,000 for repairs and maintenance, $1,442,000 for payroll, and $1,061,000 for real estate taxes. Omaha reported net unrealized income of approximately $6,862,000 resulting in net increase in net assets of approximately $10,965,000. For the three months ended June 30, 2016, the Registrant’s 30% equity interest in the net increase in net assets of Omaha was approximately $3,290,000. Registrant reserved 50% of the reported value of Omaha on its balance sheet. The reserve for value was adjusted in conjunction with recording the equity income for the quarter ended June 30, 2016. As a result, Registrant reported net equity in net increase in net assets of Omaha for the quarter ended June 30, 2016 of $1,645,000.

 

Comparison of six months ended June 30, 2017 to June 30, 2016:

 

Omaha’s total revenues for the six months ended June 30, 2017 were approximately $21,750,000. Income before realized losses and net unrealized income was approximately $7,193,000. Major expenses included approximately $3,293,000 for interest expense, $1,796,000 for repairs and maintenance, $3,017,000 for payroll, and $2,742,000 for real estate taxes. Omaha reported realized losses of $20,794,000 and net unrealized income of approximately $31,548,000 resulting in net increase in net assets of approximately $17,947,000. For the six months ended June 30, 2017, the Registrant’s 30% equity interest in the net increase in net assets of Omaha was approximately $5,384,000. Registrant recognized a reserve of 30% of the reported value of Omaha on its balance sheet. The reserve for value was adjusted in conjunction with recording the equity income for the six months ended June 30, 2017. As a result, Registrant reported net equity in net increase in net assets of Omaha for the six months ended June 30, 2017 of $5,708,000.

 

Omaha’s total revenues for the six months ended June 30, 2016 were approximately $21,774,000. Income before net unrealized income was approximately $8,148,000. Major expenses included approximately $3,270,000 for interest expense, $1,746,000 for repairs and maintenance, $2,932,000 for payroll, and $2,211,000 for real estate taxes. Omaha reported net unrealized income of approximately $9,393,000 resulting in net increase in net assets of approximately $17,541,000. For the six months ended June 30, 2016, the Registrant’s 30% equity interest in the net increase in net assets of Omaha was approximately $5,262,000. Registrant reserved 50% of the reported value of Omaha on its balance sheet. The reserve for value was adjusted in conjunction with recording the equity income for the six months ended June 30, 2016. As a result, Registrant reported net equity in net increase in net assets of Omaha for the six months ended June 30, 2016 of $2,631,000.

 

 

12

 

ITEM 3.

 

None

 

ITEM 4.

CONTROLS AND PROCEDURES

 

	(a)	The Chief Executive Officer and the Principal Accounting & Financial Officer of the general partner of SB Partners have evaluated the disclosure controls and procedures relating to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission and have judged such controls and procedures to be effective.
	(b)	The Chief Executive Officer and the Principal Accounting and Financial Officer of the general partner of SB Partners have evaluated the internal control over financial reporting relating to the Registrant’s Quarterly Report on form 10-Q for the period ended June 30, 2017 and have identified no changes in the Registrant’s internal controls that have materially affected or are reasonably likely to materially affect the Registrant’s internal controls over financial reporting.

  

 

PART II – OTHER INFORMATION

 

ITEM 6.

EXHIBITS

 

Exhibit No.

Description

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definition
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

13

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

		SB PARTNERS
		(Registrant)
	By:	SB PARTNERS REAL ESTATE CORPORATION
		General Partner
Dated: August 10, 2017	By:	/s/ George N. Tietjen III
		George N. Tietjen III
		Chief Executive Officer
		Principal Financial & Accounting Officer
Dated: August 10, 2017	By:	/s/ John H. Zoeller
		John H. Zoeller
		Chief Financial Officer