Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - PILLARSTONE CAPITAL REIT | exhibit312certificationofc.htm |
| EX-32.1 - EXHIBIT 32.1 - PILLARSTONE CAPITAL REIT | exhibit321certificationofc.htm |
| EX-31.1 - EXHIBIT 31.1 - PILLARSTONE CAPITAL REIT | exhibit311certificationofc.htm |
| 10-K - 10-K - PILLARSTONE CAPITAL REIT | psr10-k2017x12.htm |
Exhibit 99.1
PILLARSTONE CAPITAL REIT OPERATING PARTNERSHIP LP
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017 and 2016
and for the Year Ended December 31, 2017 and the Period from
September 23, 2016 (Inception) to December 31, 2016
with Report of Independent Registered Public Accounting Firm
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | ||
Page | ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Pillarstone Capital REIT Operating Partnership LP:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Pillarstone Capital REIT Operating Partnership LP and subsidiaries (the “Partnership”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in partners’ capital (deficit), and cash flows for the year ended December 31, 2017 and the period from September 23, 2016 (Inception) to December 31, 2016, and the related notes (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the year ended December 31, 2017 and the period from September 23, 2016 (Inception) to December 31, 2016, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These Consolidated Financial Statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Pannell Kerr Forster of Texas, P.C.
We have served as the Partnership’s auditor since 2016.
Houston, Texas
March 29, 2018
1
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(in thousands, except per unit data) | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Real estate assets, at cost | ||||||||
Property | $ | 95,146 | $ | 92,338 | ||||
Accumulated depreciation | (35,980 | ) | (32,533 | ) | ||||
Total real estate assets | 59,166 | 59,805 | ||||||
Cash and cash equivalents | 2,812 | 1,236 | ||||||
Escrows and acquisition deposits | 2,188 | 2,274 | ||||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 3,624 | 3,692 | ||||||
Unamortized lease commissions and deferred legal costs, net | 1,265 | 1,150 | ||||||
Prepaid expenses and other assets | 65 | 82 | ||||||
Total assets | $ | 69,120 | $ | 68,239 | ||||
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) | ||||||||
Liabilities: | ||||||||
Notes payable | $ | 64,313 | $ | 65,474 | ||||
Accounts payable and accrued expenses | 4,499 | 3,746 | ||||||
Tenants' security deposits | 1,191 | 996 | ||||||
Total liabilities | 70,003 | 70,216 | ||||||
Commitments and contingencies: | — | — | ||||||
Partners' capital (deficit): | ||||||||
General partner, 3,096,403 units issued and outstanding as of December 31, 2017 and 2016 | (86 | ) | 15 | |||||
Limited partner, 13,591,764 units issued and outstanding as of December 31, 2017 and 2016 | (797 | ) | (1,992 | ) | ||||
Total partners' capital (deficit) | (883 | ) | (1,977 | ) | ||||
Total liabilities and partners' capital (deficit) | $ | 69,120 | $ | 68,239 | ||||
See the accompanying notes to the consolidated financial statements.
2
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
Year Ended December 31, 2017 | For the Period September 23, 2016 (Inception) to December 31, 2016 | |||||||
Rental revenues | $ | 13,685 | $ | 938 | ||||
Other revenues | 2,517 | 154 | ||||||
Total property revenues | 16,202 | 1,092 | ||||||
Property expenses | ||||||||
Property operation and maintenance | 5,029 | 397 | ||||||
Real estate taxes | 2,672 | 174 | ||||||
Total property expenses | 7,701 | 571 | ||||||
Other expenses | ||||||||
General and administrative | 235 | — | ||||||
Depreciation and amortization | 3,940 | 285 | ||||||
Interest expense | 2,706 | 156 | ||||||
Total other expense | 6,881 | 441 | ||||||
Income before income taxes and loss on disposal of assets | 1,620 | 80 | ||||||
Provision for income taxes | (88 | ) | — | |||||
Loss on sale or disposal of assets | (31 | ) | — | |||||
Net income | $ | 1,501 | $ | 80 | ||||
Net income per unit: Basic and Diluted | $ | 0.09 | $ | 0.00 | ||||
Weighted average number of units outstanding: Basic and Diluted | 16,688 | 16,688 | ||||||
See the accompanying notes to the consolidated financial statements.
3
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (in thousands) | ||||||||||||||||||
Total | ||||||||||||||||||
Partners' | ||||||||||||||||||
General Partner | Limited Partner | Capital | ||||||||||||||||
Units | Amount | Units | Amount | (Deficit) | ||||||||||||||
Balance, September 23, 2016 (Inception) | — | $ | — | — | $ | — | $ | — | ||||||||||
Contributions from partners | 3,096 | 4,121 | 13,592 | 18,090 | 22,211 | |||||||||||||
Deemed distributions to partners | — | (4,121 | ) | — | (20,147 | ) | (24,268 | ) | ||||||||||
Net income | — | 15 | — | 65 | 80 | |||||||||||||
Balance, December 31, 2016 | 3,096 | $ | 15 | 13,592 | $ | (1,992 | ) | $ | (1,977 | ) | ||||||||
Contributions from limited partner | — | — | — | 1,635 | 1,635 | |||||||||||||
Distributions to partners | — | (379 | ) | — | (1,663 | ) | (2,042 | ) | ||||||||||
Net income | — | 278 | — | 1,223 | 1,501 | |||||||||||||
Balance, December 31, 2017 | 3,096 | $ | (86 | ) | 13,592 | $ | (797 | ) | $ | (883 | ) | |||||||
See the accompanying notes to the consolidated financial statements.
4
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | ||||||||
Year Ended December 31, 2017 | For the Period September 23, 2016 (Inception) to December 31, 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,501 | $ | 80 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 3,939 | 285 | ||||||
Amortization of deferred loan costs | 97 | — | ||||||
Loss on sale or disposal of assets | (31 | ) | — | |||||
Bad debt expense | 412 | 127 | ||||||
Changes in operating assets and liabilities: | ||||||||
Escrows and acquisition deposits | 86 | — | ||||||
Accrued rent and accounts receivable | (344 | ) | (2,153 | ) | ||||
Unamortized lease commissions and deferred legal costs | (565 | ) | (8 | ) | ||||
Prepaid expenses and other assets | 98 | — | ||||||
Accounts payable and accrued expenses | 753 | 1,431 | ||||||
Tenants' security deposits | 195 | 61 | ||||||
Net cash provided by (used in) operating activities | 6,141 | (177 | ) | |||||
Cash flows from investing activities: | ||||||||
Additions to real estate | (1,265 | ) | — | |||||
Net cash used in investing activities | (1,265 | ) | — | |||||
Cash flows from financing activities: | ||||||||
Distributions paid to General Partner | (379 | ) | — | |||||
Distributions paid to Limited Partner | (1,663 | ) | — | |||||
Proceeds from issuance of OP units, net of offering costs | — | 1,413 | ||||||
Repayments of notes payable | (1,258 | ) | — | |||||
Net cash provided by (used in) financing activities | (3,300 | ) | 1,413 | |||||
Net increase in cash and cash equivalents | 1,576 | 1,236 | ||||||
Cash and cash equivalents at beginning of period | 1,236 | — | ||||||
Cash and cash equivalents at end of period | $ | 2,812 | $ | 1,236 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 2,611 | $ | — | ||||
Non cash investing and financing activities: | ||||||||
Note payable assumed with acquisitions of real estate | $ | — | $ | 65,937 | ||||
Value of OP units exchanged for real estate | $ | — | $ | 16,677 | ||||
OP units issued to general partner | $ | — | $ | 4,121 | ||||
Deemed distributions to partners | $ | — | $ | (24,268 | ) | |||
Additions to real estate contributed by limited partner | $ | 1,635 | $ | — | ||||
Disposal of fully depreciated real estate | $ | 847 | $ | — | ||||
See the accompanying notes to the consolidated financial statements.
5
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Pillarstone Capital REIT Operating Partnership LP, a Delaware limited partnership, together with its subsidiaries, (collectively, the “Partnership,” “Pillarstone OP,” “we,” “our,” or “us”), was formed on September 23, 2016 to conduct substantially all of the operations for its sole general partner, Pillarstone Capital REIT (“Pillarstone” or the “General Partner”). Pillarstone is a Maryland Real Estate Investment Trust (“REIT”) engaged in investing in, owning and operating commercial properties. Future real estate investments may include (i) acquisition and development of retail, office, office warehouse, industrial, multifamily, hotel, and other commercial properties, (ii) acquisition of or merger with a real estate investment trust or real estate operating company and (iii) joint venture investments. Excess funds can be invested in cash equivalents depending on market conditions. As of December 31, 2017 and 2016, we owned 14 commercial properties in and around Dallas-Fort Worth and Houston.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation. The accompanying consolidated financial statements include the accounts of the Partnership and its subsidiaries. All net income or loss is allocated between the General Partner and limited partner based on the weighted-average percentage ownership of the Partnership during the year. Issuances of additional limited partnership interest in the Partnership (“OP units”) changes the basis of ownership interests of both the General Partner and limited partner.
Basis of Accounting. Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, the estimated allowance for doubtful accounts and the estimates supporting our impairment analysis for the carrying values of our real estate assets. Actual results could differ from those estimates.
Revenue Recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We have established an allowance for doubtful accounts against the portion of tenant accounts receivable which is estimated to be uncollectible.
Cash and Cash Equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents as of December 31, 2017 and 2016 consisted of demand deposits at commercial banks and brokerage accounts.
Real Estate
Acquired Properties and Acquired Lease Intangibles. For acquired properties under common control, the carrying value at the time of purchase of the acquired properties' land, building and improvements, identifiable intangible assets and the acquired liabilities were transferred to the Partnership.
Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings, respectively. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter.
6
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2017.
Accrued Rents and Accounts Receivable. Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. For the year ended December 31, 2017 and 2016, we had an allowance for uncollectible accounts of $0.5 million and $0.1 million, respectively. As of December 31, 2017 and for the period from September 23, 2016 (Inception) to December 31, 2016, we recorded bad debt expense in the amount of $0.4 million and $0.1 million, respectively, related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness. Bad debt expenses and any related recoveries are included in property operation and maintenance expense.
Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized using the straight-line method over the terms of the related lease agreements. Loan costs are amortized on the straight-line method over the terms of the loans, which approximates the interest method. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases.
Prepaids and Other Assets. Prepaids and other assets include escrows established pursuant to certain mortgage financing arrangements for real estate taxes and insurance.
State Taxes. We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (1% for us) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. Although the Texas Margin Tax is not considered an income tax, FASB ASC 740, “Income Taxes” (“ASC 740”) applies to the Texas Margin Tax. As of December 31, 2017, we recorded a margin tax provision of $87,000. As of December 31, 2016, we had not recorded a margin tax provision.
Fair Value of Financial Instruments. Our financial instruments consist primarily of cash, cash equivalents, accounts receivable and accounts and notes payable. The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to their short-term nature. The fair value of our long-term debt, consisting of fixed rate secured notes and a variable rate related party note aggregate to approximately $65.1 million and $65.1 million as compared to the book value of approximately $64.7 million and $65.9 million as of December 31, 2017 and 2016, respectively. The fair value of our long-term debt is estimated on a Level 2 basis (as provided by ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”)), using a discounted cash flow analysis based on the borrowing rates currently available to us for loans with similar terms and maturities, discounting the future contractual interest and principal payments.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2017 and 2016. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2017 and current estimates of fair value may differ significantly from the amounts presented herein.
Concentration of Risk. Substantially all of our revenues are obtained from office, warehouse and retail locations in the Dallas-Fort Worth and Houston metropolitan areas. We maintain cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts sometimes exceed the federally insured limits, although no losses have been incurred in connection with these deposits.
7
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Recent accounting pronouncements. In May 2014, the FASB issued guidance, as amended in subsequent updates, establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. The standard also requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We have adopted this guidance on a modified retrospective basis beginning January 1, 2018 and do not expect this standard to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance requiring lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting will remain largely unchanged with the exception of changes related to costs which qualify as initial direct costs. The guidance will also require new qualitative and quantitative disclosures to help financial statement users better understand the timing, amount and uncertainty of cash flows arising from leases. This guidance will be effective for reporting periods on or after December 15, 2018, with early adoption permitted. We will adopt this guidance on a modified retrospective basis beginning January 1, 2019, and such adoption will result in certain costs (primarily legal costs related to lease negotiations) being expensed rather than capitalized. We capitalized $47,000 in legal related costs for the year ended December 31, 2017.
In November 2016, the FASB issued guidance requiring that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We have adopted this guidance effective January 1, 2018, and we will reconcile cash and cash equivalents and restricted cash and restricted cash equivalents on a retrospective basis, whereas under the previous guidance, we reported restricted cash and restricted cash equivalents under cash flows from financing activities.
In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We have adopted this guidance on a prospective basis beginning January 1, 2018 and believe the majority of our future acquisitions will qualify as asset acquisitions and the associated transaction costs will be capitalized as opposed to expensed under previous guidance.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance, adds guidance for partial sales of nonfinancial assets and clarifies recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We have adopted this guidance on a modified retrospective basis beginning January 1, 2018 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
3. REAL ESTATE
As of December 31, 2017, we owned 14 commercial properties in the Dallas-Fort Worth and Houston areas comprised of approximately 1.5 million square feet of gross leasable area.
8
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Property Acquisitions. On December 8, 2016, Pillarstone and the Partnership entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT (“Whitestone”), pursuant to which Whitestone OP contributed to the Partnership all of the equity interests in four of its wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”, and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that own fourteen (14) real estate assets (the “Real Estate Assets” and, together with the Entities, the “Property”) for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A OP units, issued at a price of $1.331 per OP Unit; and (2) the assumption of approximately $65.9 million of liabilities by the Partnership, consisting of (a) approximately $15.5 million of Whitestone OP’s liability under that certain Amended and Restated Credit Agreement, dated as of November 7, 2014, as amended, among the Bank of Montreal, as Administrative Agent (the “Agent”), the lenders party thereto, BMO Capital Markets, Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and U.S. Bank, National Association, Whitestone OP, as borrower, and Whitestone and certain subsidiaries of Whitestone OP, as guarantors (as amended, the “Whitestone Credit Facility”); (b) an approximately $16.3 million promissory note (the “Whitestone Uptown Tower Promissory Note”) of Uptown Tower issued under that certain Loan Agreement, dated as of September 26, 2013, (as amended, the “Whitestone Uptown Tower Loan Agreement” and, together with the Whitestone Uptown Tower Promissory Note, the “Whitestone Uptown Tower Loan Documents”) between Uptown Tower, as borrower, and U.S. Bank National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as lender, and (c) an approximately $34.1 million promissory note (the “Whitestone Industrial-Office Promissory Note”) of Industrial-Office issued under that certain Loan Agreement, dated as of November 26, 2013 (the “Whitestone Industrial-Office Loan Agreement” and, together with the Whitestone Industrial-Office Promissory Note, the “Whitestone Industrial-Office Loan Documents”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Acquisition”).
In connection with the Acquisition, on December 8, 2016, the Partnership and Pillarstone entered into an OP Unit Purchase Agreement (the “OP Unit Purchase Agreement”) with Whitestone OP pursuant to which the Partnership may require Whitestone OP to purchase up to an aggregate of $3.0 million of OP Units at a price of $1.331 per OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. The OP Unit Purchase Agreement contains customary closing conditions and the parties have made certain customary representations, warranties and indemnifications to each other in the OP Unit Purchase Agreement. In addition, pursuant to the OP Unit Purchase Agreement, in the event of a Change of Control (as defined therein) of Whitestone, the Partnership shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit.
In connection with the Acquisition, (1) with respect to each Real Estate Asset (other than the Real Property Asset owned by Uptown Tower), Whitestone TRS, Inc. (“Whitestone TRS”), a subsidiary of Whitestone, entered into a Management Agreement with the Entity that owns such Real Estate Asset and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with the Partnership (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Real Estate Asset (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Real Estate Asset in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Real Estate Asset and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective Real Estate Asset based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Real Estate Asset. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to the Partnership in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower.
9
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
4. ACCRUED RENTS AND ACCOUNTS RECEIVABLE, NET
Accrued rents and accounts receivable, net, consists of amounts accrued, billed and due from tenants, allowance for doubtful accounts and other receivables as follows (in thousands):
December 31, | ||||||||
2017 | 2016 | |||||||
Tenant receivables | $ | 680 | $ | 294 | ||||
Receivables due from partners | 1,576 | 1,695 | ||||||
Accrued rents and other recoveries | 1,907 | 1,828 | ||||||
Allowance for doubtful accounts | (539 | ) | (125 | ) | ||||
Totals | $ | 3,624 | $ | 3,692 | ||||
5. UNAMORTIZED LEASE COMMISSIONS AND DEFERRED LEGAL COST, NET
Costs which have been deferred consist of the following (in thousands):
December 31, | ||||||||
2017 | 2016 | |||||||
Leasing commissions | $ | 2,936 | $ | 2,507 | ||||
Deferred legal cost | 47 | — | ||||||
Total cost | 2,983 | 2,507 | ||||||
Less: leasing commissions accumulated amortization | (1,709 | ) | (1,357 | ) | ||||
Less: deferred legal cost accumulated amortization | (9 | ) | — | |||||
Total cost, net of accumulated amortization | $ | 1,265 | $ | 1,150 | ||||
A summary of expected future amortization of deferred costs is as follows (in thousands):
Years Ended December 31, | Leasing Commissions | Deferred Legal Costs | Total | |||||||||
2018 | $ | 380 | $ | 11 | $ | 391 | ||||||
2019 | 272 | 9 | 281 | |||||||||
2020 | 222 | 7 | 229 | |||||||||
2021 | 155 | 5 | 160 | |||||||||
2022 | 100 | 4 | 104 | |||||||||
Thereafter | 98 | 2 | 100 | |||||||||
Total | $ | 1,227 | $ | 38 | $ | 1,265 | ||||||
10
Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
6. FUTURE MINIMUM LEASE INCOME
We lease the majority of our properties under noncancelable operating leases, which provide for minimum base rents plus, in some instances, contingent rents based upon a percentage of the tenants’ gross receipts. A summary of minimum future rents to be received (exclusive of renewals, tenant reimbursements, and contingent rents) under noncancelable operating leases in existence as of December 31, 2017 is as follows (in thousands):
Years Ended December 31, | Minimum Future Rents | |||
2018 | $ | 11,532 | ||
2019 | 8,568 | |||
2020 | 6,839 | |||
2021 | 4,429 | |||
2022 | 2,584 | |||
Thereafter | 13,160 | |||
Total | $ | 47,112 | ||
7. DEBT
Mortgages and other notes payable consist of the following (in thousands):
December 31, | ||||||||
Description | 2017 | 2016 | ||||||
Fixed rate notes | ||||||||
$37.0 million 3.76% Note, due December 1, 2020 | $ | 33,148 | $ | 34,166 | ||||
$16.5 million 4.97% Note, due September 26, 2023 | 16,058 | 16,298 | ||||||
Floating rate notes | ||||||||
Related party Note, LIBOR plus 1.40% to 1.95%, due December 8, 2018 | 15,473 | 15,473 | ||||||
Total notes payable principal | 64,679 | 65,937 | ||||||
Less deferred financing costs, net of accumulated amortization | (366 | ) | (463 | ) | ||||
$ | 64,313 | $ | 65,474 | |||||
Our mortgage debt was collateralized by 10 operating properties as of December 31, 2017 and 2016 with a combined net book value of $42.9 million and $42.3 million, respectively. Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and the assignment of certain rents and leases associated with those properties.
Certain other of our loans are subject to customary covenants. As of December 31, 2017, we were in compliance with all loan covenants. Annual maturities of notes payable as of December 31, 2017 are due during the following years:
Amount Due | ||||
Year | (in thousands) | |||
2018 | $ | 16,817 | ||
2019 | 1,376 | |||
2020 | 31,286 | |||
2021 | 308 | |||
2022 | 323 | |||
Thereafter | 14,569 | |||
Total | $ | 64,679 | ||
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Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
8. EARNINGS PER UNIT
Basic earnings per unit for the Partnership's unit holders is calculated by dividing net income by the Partnership's weighted-average units outstanding during the period. Diluted earnings per unit for the Partnership's unit holders is calculated by dividing net income by the Partnership's weighted-average units outstanding during the period including any dilutive unvested restricted units.
(in thousands, except per unit data) | Year Ended December 31, 2017 | For the Period September 23, 2016 (Inception) to December 31, 2016 | ||||||
Numerator: | ||||||||
Net income | $ | 1,501 | $ | 80 | ||||
Denominator: | ||||||||
Weighted average number of units - basic and dilutive | 16,688 | 16,688 | ||||||
Earnings Per Unit: | ||||||||
Basic and Diluted: | ||||||||
Net income per unit | $ | 0.09 | $ | 0.00 | ||||
9. PARTNERS' CAPITAL
Operating Partnership Units
The Partnership conducts substantially all of Pillarstone's business. Pillarstone is the sole general partner of the Partnership and as of December 31, 2017 and 2016, owned an 18.6% interest in the Partnership.
At any time on or after six months following the date of the initial issuance thereof, limited partners in the Partnership holding OP units have the right to convert their OP units for cash, or at the option of the general partner, common shares of Pillarstone. As of December 31, 2017 and 2016, there were 16,688,167 OP units outstanding.
Distributions
The following table reflects the total distributions we have paid in each indicated quarter (in thousands):
General | Limited | |||||||||||
Partner | Partner | Total | ||||||||||
Quarter Paid(1) | Amount Paid | Amount Paid | Amount Paid | |||||||||
2017 | ||||||||||||
Fourth Quarter | $ | — | $ | — | $ | — | ||||||
Third Quarter | 112 | 494 | 606 | |||||||||
Second Quarter | 226 | 989 | 1,215 | |||||||||
First Quarter | 41 | 180 | 221 | |||||||||
Total | $ | 379 | $ | 1,663 | $ | 2,042 | ||||||
(1) There were no distributions for the period September 23, 2016 (Inception) to December 31, 2016.
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Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
10. COMMITMENTS AND CONTINGENCIES
We are a participant in various legal proceedings and claims that arise in the ordinary course of our business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, we believe that the final outcome of these matters will not have a material effect on our financial position, results of operations, or cash flows.
11. RELATED PARTY TRANSACTIONS
Transactions with Limited Partner
We lease space to Whitestone OP at five of our commercial properties. We also pay interest to Whitestone OP related to our obligation under the Whitestone Credit Facility. The following table represents the amounts incurred for the year ended December 31, 2017 and for the period September 23, 2016 (Inception) to December 31, 2016:
(in thousands) | Year Ended December 31, 2017 | For the Period September 23, 2016 (Inception) to December 31, 2016 | ||||||
Revenue | ||||||||
Rental revenue | $ | 782 | $ | 58 | ||||
Interest Expense | ||||||||
Related party Note | 528 | 26 | ||||||
Property and Asset Management Fees
Pursuant to the terms of the Management Agreements described in Note 3, summarized below are the property management and asset management fees incurred by Pillarstone OP to Whitestone TRS for the year ended December 31, 2017 and for the period September 23, 2016 (Inception) to December 31, 2016:
(in thousands) | Year Ended December 31, 2017 | For the Period September 23, 2016 (Inception) to December 31, 2016 | ||||||
Property management fees | $ | 732 | $ | 57 | ||||
Asset management fees | 264 | 17 | ||||||
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Pillarstone Capital REIT Operating Partnership LP and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Due to/from partners
Pursuant to the terms of the Management Agreement and Contribution Agreement, summarized below are the related party amounts receivable or payable as of December 31, 2017 and December 31, 2016:
December 31, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Receivables due from related parties | ||||||||
Tenant receipts received by Whitestone OP | $ | 892 | $ | 1,180 | ||||
Reimbursement of general and administrative expenses (1) | 316 | 316 | ||||||
Reimbursement of operating expenses (2) | 368 | 199 | ||||||
Total receivables due from related parties | $ | 1,576 | $ | 1,695 | ||||
Payables due to related parties | ||||||||
Property management fees | $ | 61 | $ | 57 | ||||
Asset management fees | 23 | 17 | ||||||
Related party Note interest | 44 | 26 | ||||||
Reimbursement of operating expenses (2) | 877 | 165 | ||||||
Total payables due from related parties | $ | 1,005 | $ | 265 | ||||
Related party Note, LIBOR plus 1.40% to 1.95%, due December 8, 2018 | $ | 15,473 | $ | 15,473 | ||||
(1) | Reimbursement of general and administrative expenses primarily related to legal fees paid by Pillarstone OP on Pillarstone Capital REIT's behalf. |
(2) | Reimbursement of operating expenses primarily related to insurance, leasing commissions, utilities and legal fees either paid by Pillarstone OP on Whitestone OP's behalf or paid by Whitestone OP on Pillarstone OP's behalf. |
12. SUBSEQUENT EVENTS
We have evaluated subsequent events through March 29, 2018, the date the financial statements were available to be issued, and are not aware of any events that have occurred that would require additional adjustments to or disclosures in the Consolidated Financial Statements.
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