Table of Contents

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 March 31, 2018

 

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 or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

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

 

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 March 31, 2018 (unaudited) and December 31, 2017 (audited)	1
	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2018 and 2017	2
	Consolidated Statements of Changes in Partners' Equity (Deficit) (unaudited) for the three months ended March 31, 2018	3
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2018 and 2017	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

 

 

See notes to consolidated financial statements

 

 

2

 

SB PARTNERS

(A New York Limited Partnership)

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See notes to consolidated financial statements

 

 

3

 

SB PARTNERS

(A New York Limited Partnership)

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)

For the Three Months Ended March 31, 2018

 

 

 

 

See notes to consolidated financial statements.

 

 

4

 

SB PARTNERS

(A New York Limited Partnership)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See notes to consolidated financial statements

 

 

5

 

9

 

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS
	OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

General

 

The consolidated financial statements for the three months ended March 31, 2018 and 2017 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 March 31, 2018, 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 8 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 March 31, 2018 increased $7,000 to approximately $274,000 as compared to approximately $267,000 for the three months ended March 31, 2017. Total revenues increased due to an increase in base rental income and interest income. Base rental income increased $5,000 to approximately $184,000 for the three months ended March 31, 2018 as compared to the same period in 2017 due to an increase in base rent at Registrant’s property located in Maple Grove, MN. Interest income increased due to an increase in interest rates. Other rental income decreased slightly.

 

The Registrant reported a net loss from operations of approximately $126,000 for the three months ended March 31, 2018, an improvement of $2,000 as compared to a net loss from operations of approximately $128,000 for the same period in 2017. 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 higher total revenues partially offset by higher total expenses. Total expenses from operations for 2018 increased $4,000 to approximately $400,000 from approximately $396,000 in 2017, due primarily to an increase in management fee expense of $6,000 partially offset by a decrease in professional fees of $2,000.

 

The Registrant has a 30% non-controlling interest in Omaha that is accounted for on a fair value basis. Net increase in net assets decreased $7,794,000 to approximately $3,705,000 for the three months ended March 31, 2018 compared to net increase in net assets of approximately $11,499,000 for the same period in 2017. During 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 selling expenses and pay off each property’s secured mortgage. Remaining net sales proceeds were used to reduce Omaha’s unsecured loan. During the twelve months ended December 31, 2017, Omaha reported a net increase in the value of its remaining real estate portfolio of $33,815,000. During the quarter ended March 31, 2018, Omaha sold its garden apartment property in Asheville, North Carolina and its garden apartment property in Fresno, California. Net sales proceeds in each transaction were used to first pay selling expenses and pay off each property’s secured mortgage. Remaining net sales proceeds were used to pay off Omaha’s unsecured loan. During the three months ended March 31, 2018, Omaha reported a net increase in the value of its remaining real estate portfolio of $1,075,000.

 

During 2017 the floating rates on Omaha loans increased as short term LIBOR rates increased. The one month LIBOR rate increased from an average of (0.7164%) during December 2016 to an average of (1.4925%) during December 2017. Fixed mortgage interest rates for multi-family properties of similar class and location as Omaha’s portfolio also increased during 2017 from an approximate range of 4.10% to 4.15% in early 2017 to 4.35% to 4.50% near the end of 2017. Mortgage interest rates are expected to continue to increase in 2018 as the U.S. Federal Reserve continues a policy to increase the Federal Funds Rate. Although increases in fixed mortgage rates do not impact the operating cash flow of the Omaha properties directly, increases in fixed and floating rates on commercial mortgage debt can have a negative impact on capitalization rates and the sales prices Sentinel Omaha may achieve in the future.

 

As noted above, Registrant’s only wholly owned property is 100% leased to a single tenant. If the tenant does not renew or if the tenant exercises its termination option, the Registrant would have no internal source of funds until the space is released to a new tenant or Registrant receives distributions from Sentinel Omaha. Registrant may have to consider that it would be in the best interests of the limited partners to sell its investment in Sentinel Omaha and/or sell its wholly owned property. Registrant would not have considered a sale of its 30% non-controlling investment in Omaha in prior years due to Omaha’s unsecured debt. Selling the investment in Omaha while Omaha had a significant unsecured loan with an upcoming maturity would have likely realized a sale price for the investment that would be heavily discounted reflecting the unsecured debt risk. However, since Sentinel Omaha has in the past two years paid off the unsecured debt along with improving performance at the properties, the debt risk is estimated to be lower. The investment in a 30% non-controlling interest would still be valued at a discount due to the lack of liquidity. Registrant will continue to report a reserve on the value of Omaha on its books but due to the payoff of Omaha's unsecured loan in 2017, the reserve is reduced from 25% as of December 31, 2017 to 20% as of March 31, 2018.

 

 

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, 2017. There were no significant changes to such policies in 2018. 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 March 31, 2018, the Registrant had cash and cash equivalents of approximately $1,505,000. These balances are approximately $55,000 higher than cash and cash equivalents held on December 31, 2017. Cash and cash equivalents increased slightly during the three months ended March 31, 2018 due to cash flow generated from operating activities at Registrant’s wholly owned property partially offset by partnership expenses.

 

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 March 31, 2018 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. On January 30, 2018, the Partnership sent notice to Holder to exercise its first one year option to extend the maturity date to April 29, 2019, which Holder has acknowledged. 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.

 

Eagle Lake Business Center IV (Maple Grove, Minnesota)

 

Total revenues for the three months ended March 31, 2018 increased $5,000 to approximately $271,000 as compared to approximately $266,000 for the three months ended March 31, 2017. The property reported higher base rental income and slightly lower other rental income. Base rental income was higher in 2018 due to a scheduled increase in the base rent. Net operating income, which includes deductions for depreciation, decreased $4,000 for the three months ended March 31, 2018 to approximately $161,000 from approximately $165,000 for the three months ended March 31, 2017 due primarily to higher operating expenses partially offset by higher total revenues. Operating expenses were higher due to higher utilities and repairs expenses.

 

 

11

 

Investment in Sentinel Omaha, LLC

 

Comparison of three months ended March 31, 2018 to March 31, 2017:

 

As of March 31, 2018, the Omaha portfolio consisted of 9 multi-family properties located in 6 markets.

 

Omaha’s total revenues for the three months ended March 31, 2018 were approximately $9,341,000. Income before net unrealized income was approximately $2,931,000. Major expenses included approximately $1,586,000 for interest expense, $705,000 for repairs and maintenance, $1,283,000 for payroll, and $1,209,000 for real estate taxes. Omaha reported net unrealized losses of approximately $9,145,000 and net realized gains of approximately $9,919,000 resulting in a net increase in net assets of approximately $3,705,000. For the three months ended March 31, 2018, the Registrant’s 30% equity interest in the income of Omaha was approximately $1,112,000. Registrant reserves 20% of the reported value of Omaha on its balance sheet for March 31, 2018.

 

The reserve for value was adjusted in conjunction with recording the equity income for the quarter ended March 31, 2018. As a result, Registrant reported net income from equity interest in income of Omaha for the quarter ended March 31, 2018 of $3,395,000.

 

Omaha’s total revenues for the three months ended March 31, 2017 were approximately $11,287,000. Income before net unrealized income was approximately $3,922,000. Major expenses included approximately $1,626,000 for interest expense, $820,000 for repairs and maintenance, $1,664,000 for payroll, and $1,342,000 for real estate taxes. Omaha reported net unrealized income of approximately $7,577,000 resulting in a net increase in net assets of approximately $11,499,000. For the three months ended March 31, 2017, the Registrant’s 30% equity interest in the income of Omaha was approximately $3,450,000. Registrant reserved 35% of the reported value of Omaha on its balance sheet as of March 31, 2017.

 

 The reserve for value was adjusted in conjunction with recording the equity income for the quarter ended March 31, 2017. As a result, Registrant reported net income from equity interest in income of Omaha for the quarter ended March 31, 2017 of $2,242,000.

 

 

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 March 31, 2018 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 March 31, 2018 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: May 10, 2018	By:	/s/ George N. Tietjen III
		George N. Tietjen III
		Chief Executive Officer
		Principal Financial & Accounting Officer
Dated: May 10, 2018	By:	/s/ John H. Zoeller
		John H. Zoeller
		Chief Financial Officer