EDGAR 10-K Filing

Company CIK: 764897
Filing Year: 2024
Filename: 764897_10-K_2024_0000950170-24-039408.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
We are focused on owning and managing essential grocery-anchored and mixed-use assets located in densely populated technology employment hubs and higher education centers within the Mid-Atlantic, Southeast and Colorado markets. As of December 31, 2023, we owned 15 properties. The properties in our portfolio are dispersed in sub-markets that we believe generally have high population densities, high traffic counts, good visibility and accessibility, which provide our tenants with attractive locations to serve the necessity-based needs of the surrounding communities. We intend to focus on acquiring additional strategically positioned properties in established and developing neighborhoods primarily leased to necessity-based tenants that meet the needs of the surrounding communities in our existing markets, as well as acquiring properties in new markets that meet our investment criteria, including the Southeastern United States. In addition, we provide commercial real estate brokerage services for our own portfolio and third-party office, industrial and retail operators and tenants.
The table below provides certain information regarding our portfolio as of December 31, 2023. For additional information, see “-Our Portfolio.”
As of
December 31, 2023
Number of properties
Number of states
Total rentable square feet (in thousands)
1,916
Retail
1,654
Residential
Leased % of rentable square feet (1):
Total portfolio
90.1
%
Retail
88.5
%
Residential
100.0
%
Occupied % of rentable square feet (1):
Total portfolio
86.2
%
Retail
84.1
%
Residential
100.0
%
Total residential units/beds
240/620
Monthly residential base rent per bed
$
1,099.26
Annualized residential base rent per leased square foot (2)
$
31.22
Annualized retail base rent per leased square foot (2)
$
14.99
(1)Percent leased is calculated as (a) gross leasable area (“GLA”) of rentable square feet occupied or subject to a lease as of December 31, 2023, divided by (b) total GLA, expressed as a percentage. The total percent occupied, which excludes leases that have been signed but not commenced, was 86.2% as of December 31, 2023.
(2)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
The table below provides certain information regarding our retail portfolio as of December 31, 2023. For additional information, see “-Our Portfolio.”
As of
December 31, 2023
Total rentable square feet (in thousands)
1,654
Anchor spaces
Inline spaces
Leased % of rentable square feet (1):
Total retail portfolio
88.5
%
Anchor spaces
95.0
%
Inline spaces
81.6
%
Occupied % of rentable square feet (1):
Total retail portfolio
84.1
%
Anchor spaces
88.8
%
Inline spaces
79.2
%
Average remaining lease term (in years) (2)
5.4
(1)Percent leased is calculated as (a) GLA of rentable commercial square feet occupied or subject to a lease as of December 31, 2023, divided by (b) total GLA, expressed as a percentage. The total percent occupied, which excludes leases that have been signed but not commenced, was 84.1% as of December 31, 2023.
(2)The average remaining lease term (in years) excludes future options to extend the term of the lease.
We are structured as an “Up-C” corporation with substantially all of our operations conducted through our Operating Partnership and its direct and indirect subsidiaries. As of December 31, 2023, we owned 85.7% of the Class A common units of limited partnership interest (“Common OP units”) in the Operating Partnership and Series A preferred units of limited partnership interest in the Operating Partnership (“Preferred OP units” and, together with the Common OP units, “OP units”), and we are the sole member of the sole general partner of the Operating Partnership. We began operating in our current structure on December 27, 2019 upon the completion of certain Mergers (as defined below) on such date, and we operate as a single reporting segment.
2023 Highlights
Below are some of our significant activities during 2023:
•Sold Spotswood Valley Square Shopping Center for a sales price of $23.0 million and recognized a net gain of $11.6 million. In connection with the disposition, we used $11.8 million of the proceeds to repay the mortgage loan secured by the property and $2.3 million to redeem the Lamont Street Preferred Interest (as defined below).
•Sold Dekalb Plaza for a sales price of $23.1 million and recognized a net loss of $0.1 million. In connection with the disposition, we used $17.4 million of the proceeds to pay down a portion of the Basis Term Loan (as defined below).
•Refinanced four loans for a total loan amount of $45.3 million and used proceeds therefrom to pay down the Basis Term Loan by $41.0 million resulting in a total paydown of the Basis Term Loan in 2023 of $58.4 million.
•Signed 74 leases for a total of 260,763 square feet of space, including 17 new leases for 41,360 square feet, 45 renewal leases for 197,144 square feet and 12 modifications for 22,259 square feet of our retail portfolio. Our total portfolio, including residential, was 90.1% leased at the end of 2023.
•Our leasing spread gains on both new and renewal leases demonstrate continued internal growth from our existing portfolio.
oIn 2023, leasing spreads averaged 10.4%, including 35.9% for new leases and 7.7% on renewals.
•Midtown Row Residential was 100% leased for the 2023-2024 academic school year. The annualized base rental revenue per square foot in 2023 was 1.7% higher than 2022. As of December 31, 2023, Midtown Row Residential was 91.6% pre-leased for the 2024-2025 academic year.
•Reported net loss of $7.0 million, funds from operations (“FFO”) attributable to common stockholders and OP unit holders of $2.4 million and adjusted FFO (“AFFO”) attributable to common stockholders and OP unit holders of $3.0 million. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Performance Measures.”
•Reported net operating income (“NOI”) of $24.9 million and same-center NOI of $15.9 million - an increase of 5.6% over the prior year. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Performance Measures.”
•Revenues for the year ended December 31, 2023 increased approximately $9.2 million, or 28%, from the prior year because of an approximately $9.1 million and $0.4 million increase in rental income and commissions, respectively, partially offset by an approximately $0.3 million decrease in management and other income.
oIncrease in rental income is attributable to the acquisition of two properties in the fourth quarter of 2022, partially offset by the disposition of two properties during 2023.
oThe increase in commissions is attributable to higher transaction volume in leasing.
oThe decrease in management and other income is mainly attributable to fees recognized in 2022 related to properties that were acquired in 2022.
Our Portfolio
As of December 31, 2023, we owned 15 properties, of which 12 are located in the Mid-Atlantic region and three are located in Colorado, consisting of 1,654,337 total square feet of GLA for the retail properties. The following table provides additional information about the retail properties in our portfolio as of December 31, 2023.
Property Name
City/State
Year
Built /
Renovated (1)
GLA
Percent Leased (2)
Total Annualized Base Rent (3)
Annualized Base Rent per Leased SF (4)
Percentage of Total Annualized Base Rent
Anchor/
Key Tenant
Avondale Shops
Washington, D.C.
28,308
100.0
%
$
669,105
$
23.64
3.0
%
Dollar Tree
Brookhill Azalea Shopping Center
Richmond, VA
163,353
87.0
%
1,575,742
11.09
7.2
%
Food Lion
Coral Hills Shopping Center
Capitol Heights, MD
85,514
100.0
%
1,472,854
17.22
6.7
%
Shoppers Food Warehouse
Crestview Square Shopping Center
Landover Hills, MD
74,694
100.0
%
1,533,968
20.54
7.0
%
Value Village
Cromwell Field Shopping Center
Glen Burnie, MD
233,410
86.2
%
1,967,774
9.78
9.0
%
Rose's
The Shops at Greenwood Village
Greenwood Village, CO
198,681
95.1
%
3,514,976
18.61
16.0
%
United States Postal Service
Highlandtown Village Shopping Center
Baltimore, MD
57,524
100.0
%
1,095,140
19.04
5.0
%
Hazlo Market
Hollinswood Shopping Center
Baltimore, MD
112,659
97.8
%
1,800,007
16.33
8.2
%
LA Mart
Lamar Station Plaza East
Lakewood, CO
84,745
39.0
%
511,940
15.47
2.3
%
-
Lamar Station Plaza West
Lakewood, CO
186,705
100.0
%
2,140,621
11.47
9.8
%
Casa Bonita
Midtown Colonial
Williamsburg, VA
95,455
86.0
%
968,132
11.80
4.4
%
Food Lion
Midtown Lamonticello
Williamsburg, VA
63,157
83.9
%
916,730
17.29
4.2
%
Earth Fare
Midtown Row (Retail Portion)
Williamsburg, VA
61,907
29.7
%
490,697
26.68
2.2
%
-
Vista Shops at Golden Mile
Frederick, MD
98,674
100.0
%
1,840,643
18.65
8.4
%
Aldi
West Broad Commons Shopping Center
Richmond, VA
109,551
95.3
%
1,455,107
13.93
6.6
%
New Grand Mart
Total/Weighted Average
1,654,337
88.5
%
$
21,953,436
$
14.99
100.0
%
(1)Represents the most recent year in which a property was either built or renovated. For purposes of this table, renovation means significant upgrades, alterations or additions to the property.
(2)Percent leased is calculated as (a) GLA of rentable commercial square feet occupied or subject to a lease as of December 31, 2023, divided by (b) total GLA, expressed as a percentage. The total percent occupied, which excludes leases that have been signed but not commenced, was 84.1% as of December 31, 2023.
(3)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. Total annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(4)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
The following table provides information about the residential portion of Midtown Row as of December 31, 2023.
Property Name
City/State
Year Built
Primary University Served
Average Monthly Revenue/Bed (1)
# of Units
# of Beds
Percent Leased (2)
Annualized Base Rent (3)
Midtown Row (Residential Portion)
Williamsburg, VA
William and Mary
$
1,083
100.0
%
$
8,178,720
(1)Average Monthly Revenue/Bed is calculated based on our base rental revenue earned during the year ended December 31, 2023 divided by average occupied beds over the same period.
(2)Percent leased is calculated as (a) leased beds as of December 31, 2023, divided by (b) total rentable beds as of December 31, 2023. As of March 15, 2024 Midtown Row Residential is 98% leased for the 2024-2025 academic school year.
(3)Total annualized base rent is calculated by multiplying (a) monthly base rent as of December 31, 2023, for leases that had commenced as of such date, by (b) 12.
Tenant Diversification
The following table sets forth information about the 20 largest tenants in our retail portfolio, based upon annualized base rent, as of December 31, 2023.
Tenant Name
Number of Leased Stores
Total Leased
GLA
Percentage of
Total GLA
Total
Annualized
Base Rent (1)
Annualized Base Rent Per Sq. Ft.
Percentage
of Total
Annualized
Base Rent
Planet Fitness (2)
56,346
3.4
%
821,574
$
14.58
3.7
%
Casa Bonita
65,728
4.0
%
604,977
9.20
2.8
%
Dollar Tree
43,188
2.6
%
588,972
13.64
2.7
%
Food Lion
71,759
4.3
%
495,948
6.91
2.3
%
AutoZone
60,018
3.6
%
467,895
7.80
2.1
%
New Grand Mart
39,386
2.4
%
456,592
11.59
2.1
%
Hazlo
26,904
1.6
%
417,207
15.51
1.9
%
Earth Fare
24,016
1.5
%
360,240
15.00
1.6
%
Dollar General
34,673
2.1
%
354,706
10.23
1.6
%
Shoppers Food Warehouse
34,251
2.1
%
350,000
10.22
1.6
%
LA Mart
30,030
1.8
%
321,117
10.69
1.5
%
Value Village
23,400
1.4
%
296,244
12.66
1.4
%
Arc Thrift Stores
34,404
2.1
%
292,434
8.50
1.3
%
United States Post Office
24,395
1.5
%
285,064
11.69
1.3
%
Family Dollar
19,430
1.2
%
273,485
14.08
1.2
%
Pathway Vet
9,852
0.6
%
260,839
26.48
1.2
%
QED Inc dba Galleria Lighting & Design
13,520
0.8
%
238,777
17.66
1.1
%
Riverside Healthcare
11,548
0.7
%
224,897
19.47
1.0
%
CSL Plasma
14,700
0.9
%
223,440
15.20
1.0
%
House of Tropicals
13,656
0.8
%
223,245
16.35
1.0
%
Sub-total top twenty tenants
651,204
39.4
%
7,557,653
11.61
34.4
%
Remaining tenants
813,590
49.1
%
14,395,783
17.69
65.6
%
Sub-total Average all tenants
1,464,794
88.5
%
21,953,436
$
14.99
100.0
%
Vacant space
189,543
11.5
%
Total
1,654,337
100.0
%
(1)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. Total annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Each Planet Fitness tenant is a different franchisee.
Lease Distribution
The following table sets forth information relating to the distribution of leases in our retail portfolio, based on GLA, as of December 31, 2023.
Square Feet Under Lease
Number
of Leases
Leased GLA
Percentage
of Leased
GLA
Total
Annualized
Base Rent (1)
Annualized
Base Rent
per Leased
SF (2)
Percentage
of Total
Annualized
Base Rent
Less than 1,000
22,497
1.5
%
$
1,079,518
$
47.98
4.9
%
1,000 - 2,499
212,193
14.5
%
4,822,289
22.73
22.0
%
2,500 - 9,999
428,940
29.3
%
7,778,320
18.13
35.4
%
10,000 - 39,999
617,652
42.2
%
7,183,770
11.63
32.7
%
40,000 or Greater
183,512
12.5
%
1,089,539
5.94
5.0
%
Total/Weighted Average
1,464,794
100.0
%
21,953,436
$
14.99
100.0
%
(1)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. Total annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Annualized base rent per leased square foot is calculated as annualized base rent divided by leased GLA as of December 31, 2023.
Geographic Concentration
The following table sets forth information regarding the geographic concentration of our retail portfolio as of December 31, 2023.
Metropolitan
Statistical
Area ("MSA")
MSA
Rank (1)
Number
of
Properties
GLA
Percentage
of Total
GLA
Percent
Leased (2)
Total
Annualized
Base
Rent (3)
Annualized
Base Rent
per Leased
SF (4)
Percentage
of Total
Annualized
Base Rent
Washington-Baltimore-Arlington
690,783
41.8
%
95.0
%
$
10,379,491
$
15.82
47.3
%
Richmond, VA
272,904
16.5
%
90.3
%
3,030,849
12.29
13.8
%
Virginia Beach-Norfolk-Newport News
220,519
13.3
%
69.6
%
2,375,559
15.48
10.8
%
Denver-Aurora-Lakewood
470,131
28.4
%
86.9
%
6,167,537
15.09
28.1
%
Total/Weighted Average
1,654,337
100.0
%
88.5
%
$
21,953,436
$
14.99
100.0
%
(1)MSA Rank is derived from the U.S. Census of 2020.
(2)Percent leased is calculated as (a) GLA of rentable commercial square feet occupied or subject to a lease as of December 31, 2023, divided by (b) total GLA, expressed as a percentage. The total percent occupied, which excludes leases that have been signed but not commenced, was 84.1% at December 31, 2023.
(3)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. In the case of triple net or modified gross leases, annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(4)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
Lease Expirations
The following table sets forth a summary schedule of the lease expirations in our portfolio for retail leases in place as of December 31, 2023, for the ten calendar years from 2024 to 2033 and thereafter, assuming no exercise of renewal options or early termination rights.
Year of Lease Expirations
Number of
Expiring
Leases
GLA of
Expiring
Leases
Percentage
of Total
GLA
Total
Annualized
Base Rent
of Expiring
Leases (1)
Annualized
Base Rent
per Leased
SF (2)
Percentage
of Total
Annualized
Base Rent
Month-To-Month (3)
7,469
0.4
%
$
74,400
$
9.96
0.4
%
2024 (4)
38,559
2.3
%
793,787
20.59
3.6
%
159,789
9.7
%
2,667,419
16.69
12.2
%
187,443
11.3
%
2,923,260
15.60
13.3
%
124,406
7.5
%
2,108,008
16.94
9.6
%
314,184
19.0
%
3,756,625
11.96
17.1
%
87,948
5.3
%
1,738,248
19.76
7.9
%
116,927
7.1
%
1,765,031
15.10
8.0
%
51,382
3.1
%
730,307
14.21
3.3
%
88,853
5.4
%
1,279,152
14.40
5.8
%
46,593
2.8
%
899,734
19.31
4.1
%
Thereafter
241,241
14.6
%
3,217,465
13.34
14.7
%
Vacant
189,543
11.5
%
-
-
-
Total/Weighted Average
1,654,337
100.0
%
$
21,953,436
$
14.99
100.0
%
(1)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. Total annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
(3)One of the month-to-month lease relates to a tenant with a food truck and therefore has no gross leasable area.
(4)As of March 15, 2024, we renewed six leases totaling 30,548 square feet of GLA.
Description of Properties
Avondale Shops, Washington D.C.
Avondale is a strip retail property located in the northeast region of Washington, D.C. at the signalized intersection of Michigan Avenue and Eastern Avenue. The property has 28,308 square feet of GLA and, as of December 31, 2023, was 100% leased and occupied by nine tenants and accounted for 3.0% of our total annualized base rent. The anchor tenant, Dollar Tree, represents approximately 24.6% of Avondale’s total annualized base rent as of December 31, 2023 and its lease expires in May 2027.
Brookhill Azalea Shopping Center, Richmond, Virginia
Brookhill is a retail center located on the border of the City of Richmond and its northern suburbs in close proximity to major transportation corridors Interstate 95, U.S. Route 1 and U.S. Route 301. The property is located adjacent to major retail demand drivers Walmart and CVS Pharmacy. The property has 163,353 square feet of GLA and, as of December 31, 2023, was 87.0% leased and occupied by 25 tenants and accounted for 7.2% of our total annualized base rent. The anchor tenant, Food Lion, represented 19.6% of Brookhill’s total annualized base rent as of December 31, 2023, and its lease expires in January 2025. Other notable national tenants include Dollar General and CitiTrends.
Coral Hills Shopping Center, Capitol Heights, Maryland
Coral Hills is a retail center located in the densely populated Capitol Heights neighborhood, which is blocks from the Washington, D.C. metro line and has excellent visibility along Marlboro Pike with large pylons. The property is anchored by Shoppers Food Warehouse and is adjacent to McDonalds and across the street from a CVS Pharmacy. The property has 85,514 square feet of GLA and, as of December 31, 2023, was 100.0% leased and occupied by 18 tenants and accounted for 6.7% of our total annualized base rent. Shoppers Food Warehouse represented 23.8% of Coral Hill’s total annualized base rent as of December 31, 2023, and its lease expires in February 2026. Other notable national tenants include Family Dollar and AutoZone.
Crestview Square Shopping Center, Landover Hills, Maryland
Crestview is located in a densely populated suburban market near the Hyattsville Arts District and University of Maryland College Park campus. The property is located less than a mile from major regional transportation corridors, including Interstate 295 and U.S. Route 50. The property has prominent pylon signage at the signalized intersection for Annapolis Road and Cooper Lane and is in close proximity to national retailers Walmart and McDonalds. The property has 74,694 square feet of GLA and, as of December 31, 2023, was 100.0% leased and occupied by 19 tenants and accounted for 7.0% of our total annualized base rent. The anchor tenant, Value Village, represented 19.3% of Crestview’s total annualized base rent as of December 31, 2023, and its lease expires in January 2030.
Cromwell Field Shopping Center, Glen Burnie, Maryland
Cromwell is a retail center located near Baltimore/Washington International Thurgood Marshall Airport and the MARC train and light rail station. The property has 233,410 square feet of GLA and, as of December 31, 2023, was 86.2% leased to 22 tenants and accounted for 9.0% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 63.0% as of December 31, 2023. The anchor tenant, Rose's, represented 10.2% of Cromwell's total annualized base rent as of December 31, 2023, and its lease expires in January 2028.
The Shops at Greenwood Village, Greenwood Village, Colorado
Greenwood Village is a retail center located in Greenwood Village, Colorado. The property is conveniently located off Interstate 25 and in close proximity to Denver Tech Center. The property has 198,681 square feet of GLA and, as of December 31, 2023, was 95.1% leased to 73 tenants and accounted for 16.0% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 91.7% as of December 31, 2023. The anchor tenant, the United States Postal Service, accounted for 8.1% of Greenwood Village's total annualized base rent as of December 31, 2023, and its lease expires in August 2026.
The following tables set forth certain information with respect to Greenwood Village as of December 31, 2023.
Significant Tenants
Tenant
Lease Expiration
Renewal Options
Total Leased GLA
% of Property GLA
Annualized
Base
Rent(1)
Annualized
Base Rent
per Leased
SF(2)
% of Property
Annualized
Base Rent
United States Post Office
8/31/2026
2 x 5 year Term
24,395
12.2
%
$
285,064
$
11.69
8.1
%
QED Inc.
11/30/2026
2 x 5 year Term
13,520
6.8
%
227,271
16.81
6.5
%
(1)Annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. In the case of triple net or modified gross leases, annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
Lease Expirations
Year of Lease Expirations
Number of
Expiring
Leases
GLA of
Expiring
Leases
Percentage
of Total
GLA
Total
Annualized
Base Rent
of Expiring
Leases(1)
Annualized
Base Rent
per Leased
SF(2)
Percentage
of Total
Annualized
Base Rent
14,204
7.1
%
$
315,477
22.21
9.0
%
26,376
13.3
%
588,234
22.30
16.7
%
64,493
32.5
%
1,035,320
16.05
29.4
%
10,298
5.2
%
182,709
17.74
5.2
%
21,605
10.9
%
380,219
17.60
10.8
%
15,713
7.9
%
287,843
18.32
8.2
%
3,616
1.8
%
76,962
2.2
%
4,489
2.2
%
37,454
8.34
1.1
%
16,421
8.3
%
366,289
22.31
10.4
%
-
-
-
-
-
-
Thereafter
11,635
5.9
%
244,469
21.01
7.0
%
Vacant
9,831
4.9
%
-
-
-
Total/Weighted Average
198,681
100.0
%
$
3,514,976
$
18.61
100.0
%
(1)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. In the case of triple net or modified gross leases, annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
Percent Leased, Percent Occupied and Base Rent
As of December 31,
Percent Leased (1)
Percent Occupied (2)
Average Annual Rent
Per Square Foot (3)
95.1
%
91.7
%
$
18.01
97.3
%
93.2
%
$
16.85
94.2
%
91.2
%
$
16.62
(1)Percent leased is calculated as (a) GLA of rentable commercial square feet occupied or subject to a lease as of December 31, 2023,
divided by (b) total GLA, expressed as a percentage.
(2)Percent occupied is calculated as occupied GLA divided by total GLA as of December 31 of each year.
(3)Average annual rent per square foot is calculated by dividing the total annualized base rent by the occupied GLA as of December 31 of each year.
Highlandtown Village Shopping Center, Baltimore, Maryland
Highlandtown is a retail center located in Baltimore, Maryland. The property is located along a busy street with prominent visibility. The property has 57,524 of GLA and, as of December 31, 2023, was 100% leased and occupied by 16 tenants and accounted for 5.0% of our total annualized base rent. The anchor tenant, Hazlo Market, represented 38.1% of Highlandtown's total annualized base rent as of December 31, 2023.
Hollinswood Shopping Center, Baltimore, Maryland
Hollinswood is a retail center located in suburban Baltimore, Maryland. The property has 112,659 of GLA and, as of December 31, 2023, was 97.8% leased to 25 tenants and accounted for 8.2% of our total annualized base rent. The percent occupied, which excludes leases that have been signed but not commenced, was 89.8% as of December 31, 2023. The anchor tenant, LA Mart, represented 17.8% of Hollinswood’s total annualized base rent as of December 31, 2023, and its lease expires in October 2030. Other notable tenants include Planet Fitness, Advance Auto, Dollar General, Walgreens and a Royal Farms convenience and gas center.
Lamar Station Plaza East, Lakewood, Colorado
Lamar Station Plaza East is a retail center located adjacent to Lamar Station Plaza West in Lakewood, Colorado. The property has 84,745 square feet of GLA and, as of December 31, 2023, was 39.0% leased and occupied by 12 tenants and accounted for 2.3% of our total annualized base rent. Notable tenants include Hopebridge, which accounted for 31.6% of Lamar Station Plaza East's total annualized base rent as of December 31, 2023, and its lease expires in March 2028.
Lamar Station Plaza West, Lakewood, Colorado
Lamar Station Plaza West is a retail center located adjacent to Lamar Station Plaza East in Lakewood, Colorado. The property has 186,705 square feet of GLA and, as of December 31, 2023, was 100.0% leased and occupied by 17 tenants and accounted for 9.8% of our total annualized base rent. The anchor tenant, Casa Bonita, accounted for 25.5% of Lamar Station Plaza West's total annualized base rent as of December 31, 2023, and its lease expires in October 2032. Other notable tenants include arc Thrift Stores, Ross Dress for Less, Inc. and Planet Fitness.
Midtown Colonial, Williamsburg, Virginia
Midtown Colonial is a retail center located in Williamsburg, Virginia. The property is part of the Midtown Row redevelopment, which created a mixed-use town center in Williamsburg, Virginia. The property is located adjacent to The College of William & Mary, within minutes of the campus center, and is situated at signalized intersections along Monticello Avenue. The property has 95,455 square feet of GLA and, as of December 31, 2023, was 86.0% leased and occupied by seven tenants and accounted for 4.4% of our total annualized base rent. The anchor tenant, Food Lion, accounted for 19.3% of Midtown Colonial’s total annualized base rent as of December 31, 2023 and its lease expires in November 2028.
Midtown Lamonticello, Williamsburg, Virginia
Midtown Lamonticello is a retail center located in Williamsburg, Virginia. The property is located directly across the street from The College of William & Mary, within minutes of the campus center. It is situated at a signalized intersection along Monticello Avenue that is shared with our Midtown Colonial property. The property has 63,157 square feet of GLA and, as of December 31, 2023, was 83.9% leased and occupied by 10 tenants and accounted for 4.2% of our total annualized base rent. The anchor tenant, Earth Fare, accounted for 39.3% of Midtown Lamonticello’s total annualized base rent as of December 31, 2023, and its lease expires in October 2031. Ace Hardware is another notable tenant.
Midtown Row, Williamsburg, Virginia
Midtown Row is a mixed-use property located in Williamsburg, Virginia. The property is a recently completed development and is located adjacent to the College of William and Mary. It is situated along Monticello Avenue, between Mt. Vernon Avenue and Richmond Road. The residential portion includes 332,949 gross and 262,373 leasable square feet of space and is comprised of 240 student housing units with 620 beds, which was 100% leased as of December 31, 2023. The retail portion has 61,907 square feet of GLA and, as of December 31, 2023, was 29.7% leased to 10 tenants and accounted for 2.2% of our total annualized base rent. The percent occupied, which excludes a lease that has been signed but not commenced, was 26.5% as of December 31, 2023. The retail space is first-generation space and was first available to be leased in August 2021.
The following tables set forth certain information with respect to the retail portion of Midtown Row as of December 31, 2023.
Significant Tenants
Tenant
Lease Expiration
Renewal Options
Total Leased GLA
% of Property GLA
Annualized
Base
Rent (1)
Annualized
Base Rent
per Leased
SF (2)
% of Property
Annualized
Base Rent
Super Chix
7/31/2032
2 x 5 year Term
3,195
5.2
%
$
83,475
$
26.13
17.0
%
California Tortilla
9/30/2032
2 x 5 year Term
2,368
3.8
%
62,752
26.50
12.8
%
Mezeh Grill
1/31/2033
2 x 5 year Term
2,071
3.3
%
64,201
31.00
13.1
%
(1)Annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. In the case of triple net or modified gross leases, annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
Lease Expirations
Year of Lease Expirations
Number of
Expiring
Leases
GLA of
Expiring
Leases
Percentage
of Total
GLA
Total
Annualized
Base Rent
of Expiring
Leases (1)
Annualized
Base Rent
per Leased
SF (2)
Percentage
of Total
Annualized
Base Rent
-
-
-
-
-
-
1,336
2.2
%
6,000
4.49
1.2
%
1,951
3.2
%
51,243
26.26
10.5
%
-
-
-
-
-
-
1,969
3.2
%
48,614
24.69
9.9
%
2,901
4.7
%
84,522
29.14
17.2
%
-
-
-
-
-
-
-
-
-
-
-
-
5,083
8.2
%
148,843
29.28
30.3
%
3,150
5.1
%
83,475
26.50
17.0
%
Thereafter
2,000
3.2
%
68,000
34.00
13.9
%
Vacant
43,517
70.2
%
-
-
-
Total/Weighted Average
61,907
100.0
%
$
490,697
$
26.68
100.0
%
(1)Total annualized base rent is calculated by multiplying (a) monthly base rent (before abatements) as of December 31, 2023, for leases that had commenced as of such date, by (b) 12. In the case of triple net or modified gross leases, annualized base rent does not include tenant reimbursements for real estate taxes, insurance, common area maintenance or other operating expenses.
(2)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31, 2023.
Percent Leased, Percent Occupied and Base Rent
As of December 31,
Percent Leased (1)
Percent Occupied (2)
Average Annual Rent
Per Square Foot (3)
29.7
%
26.5
%
$
29.94
25.9
%
16.3
%
$
27.97
18.8
%
6.2
%
$
24.49
(1)Percent leased is calculated as (a) GLA of rentable commercial square feet occupied or subject to a lease as of December 31, 2023, divided by (b) total GLA, expressed as a percentage.
(2)Percent occupied is calculated as occupied GLA divided by total GLA as of December 31 of each year.
(3)Average annual rent per square foot is calculated by dividing the total annualized base rent by the occupied GLA as of December 31 of each year.
The following table set forth certain information with respect to the residential portion of Midtown Row as of December 31, 2023.
As of December 31,
Percent Occupied (1)
Annualized Base Rent (2)
Annualized Base Rent Per Square Foot (3)
100.0
%
$
8,178,720
$
31.22
100.0
%
$
8,043,300
$
30.70
2021 (4)
85.2
%
$
7,042,752
$
26.88
(1)Percent occupied is calculated as occupied beds divided by total rentable beds as of December 31 of each year.
(2)Total annualized base rent is calculated by multiplying monthly base rent by 12 for leases that had commenced as of December 31 of each year.
(3)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31 of the applicable year.
(4)As of December 31, 2021, the residential buildings were 100% leased on a per-unit basis. Several multi-bed units were leased to fewer individuals, but at a higher rate equivalent to the corresponding unit with fewer beds.
Vista Shops at Golden Mile, Frederick, Maryland
Vista Shops is a retail center located in Frederick, Maryland. The property is accessible from the main retail thoroughfare West Patrick Street, also known as “The Golden Mile,” and in close proximity to Interstate 270. The property has 98,674 square feet of GLA and, as of December 31, 2023, was 100% leased to 25 tenants and accounted for 8.4% of our total annualized base rent. The percent occupied, which excludes a lease that has been signed but not commenced, was 97.6% as of December 31, 2023. The anchor tenant, Aldi, has been on site for over 10 years. Aldi accounted for 11.7% of Vista Shops’ total annualized base rent as of December 31, 2023, and its lease expires in December 2028. Other notable tenants include Planet Fitness, Dollar Tree and Care Veterinary Center, owned by Pathway Vet Alliance, which operates over 150 locations.
West Broad Commons Shopping Center, Richmond, Virginia
West Broad is a retail center located in the suburbs of Richmond, Virginia. The property is located at a signalized intersection along West Broad Street and in close proximity to Costco, McDonalds, Sam’s Club and Guitar Center. The property has 109,551 square feet of GLA and, as of December 31, 2023, was 95.3% leased and occupied by 16 tenants and accounted for 6.6% of our total annualized base rent. The anchor tenant, New Grand Mart, is a specialty grocery store with four locations in the metro Washington D.C. region and two in Richmond, Virginia. New Grand Mart accounted for 31.4% of West Broad’s total annualized base rent as of December 31, 2023, and its lease expires in December 2037.
Investment Criteria
When evaluating potential property acquisitions or development opportunities, we consider, among other things, the following:
Projected Risk and Returns: We evaluate the projected investment returns in relation to our cost of capital as well as the anticipated risk to achieve these returns, in order to provide our stockholders and OP unit holders with appropriate risk-adjusted rates of return.
Value Creation: We evaluate the projected value creation at each property through repositioning, refurbishing and redevelopment. Our goal is to create long-term value and achieve the projected returns we underwrite at each property.
Tenants and Tenant Mix: We assess the quality of tenants at each location including their sales performance and creditworthiness in order to provide our stockholders and OP unit holders with appropriate risk-adjusted rates of return. We evaluate each property to ensure a complementary mix of tenants that drive overall sales at each location.
Demographics: We assess certain demographic information at each property location, including daytime population, households, household incomes, education levels, population and income trends for the market, as well as local economic drivers.
Competition: We assess the competitive retail environment at each location, including GLA per capita for retail properties, competition for existing and potential tenants, the number of existing competing properties and the potential for additional competing properties through development or the repositioning or redevelopment of existing properties.
Access and Visibility: We evaluate each property’s accessibility from main thoroughfares and the potential for new, widened or realigned roadways within the property trade area, which may affect consumer accessibility and shopping patterns. We generally seek to acquire properties that have signalized ingress and egress, which we believe increases the ability of consumers to safely access our properties. We also assess the existing signage and the ability to renovate or add new signage to ensure appropriate sight lines for consumers to view the tenants at each of our property locations.
Owned Property Performance: In markets where we own retail properties, we assess the performance of those properties in order to evaluate the potential performance of to-be-acquired or developed properties. We seek to acquire or develop properties in our existing markets that are complementary to our existing properties.
Physical Condition: We assess the physical condition of each property in order to determine the useful remaining life, required capital expenditures and the property cost relative to replacement cost. We often seek to acquire properties at below replacement cost, which we believe allows us to reposition, refurbish or redevelop a property and command higher rents relative to the market and deliver attractive risk-adjusted returns for our stockholders.
Property Management and Brokerage Business
We manage or co-manage the properties in our portfolio and three other properties. We also lease all of our owned and managed properties but utilize third-party leasing companies to augment our staff on a limited basis. A third party manages the student-housing portion of Midtown Row. Our asset and property management teams directly oversee the properties in our portfolio and our third-party managed properties and seek to increase our operating cash flows through the success of our leasing, property management and asset
management functions. Our property management functions include the oversight of all day-to-day operations of our properties as well as the coordination and oversight of tenant improvements and building services. Our internal leasing and management team identifies prospective tenants, assists in the negotiation of leases, provides statements as to the income and expenses applicable to each such property, monitors monthly lease payments, periodically verifies tenant payment of real estate taxes and insurance coverage and periodically inspects each such property and tenants’ sales records, where applicable.
We receive fees for any third-party property management, brokerage or leasing services. Our third-party brokerage business represents primarily commercial tenants for their office and retail real estate needs, either for lease transactions or purchase and sale transactions.
We intend to increase cash flows through cost efficient property operations and leasing strategies designed to capture market rental growth from the renewal of below-market leases at higher rates and/or recruitment of new quality tenants. We carefully monitor property expenses and manage how we incur and bill expenses to our tenants. We aggressively seek to renegotiate and extend any existing leases that are below market at market rates. Although we maintain ongoing dialogue with our tenants, we generally raise the issue of renewal at least 12 months prior to lease renewal often providing concessions for early renewal. We also aggressively pursue new tenants for any vacant space. As necessary, we may use third-party leasing agents in attracting tenants. Our use of third-party brokerage firms is based on their demonstrated track record and knowledge of the sub-markets in which our properties are located.
We define small tenants as those leasing less than 10,000 square feet and we have tailored our management and leasing approach to deal with the unique needs of these smaller tenants. As of December 31, 2023, of the 304 retail leases on our owned properties, 270 are leased to small tenants representing 45.3% of our retail portfolio leased GLA and 62.3% of our total annualized base rent. We believe that our ability to act quickly allows us to capture those tenants that are unable or unwilling to wait a substantial period of time for a lease to be approved. We are able to examine the credit of a potential tenant during the lease negotiation process and efficiently finalize the terms of the lease. Smaller tenants generally pay a premium per square foot to occupy smaller spaces. As of December 31, 2023, this base rent premium averaged 95.8% over what larger tenants in our portfolio pay on a weighted average per square foot basis.
Terms of Leases
We typically lease our retail properties to tenants on either a triple-net or modified gross basis. Our triple net leases provide that the tenant is generally responsible for reimbursing us for the cost of all maintenance and minor repairs, property taxes and insurance relating to its leased space and most other operating expenses. We perform common area maintenance, and the related cost is reimbursed by the tenant. Utilities and other premises-specific costs are typically paid directly by the tenant. Our modified gross leases provide that the tenant pays us a base rent and we are responsible for the payment of all property expenses. In our modified gross leases, we typically negotiate that a proportional share of increases in expenses such as real estate taxes, sales and use taxes, special assessments, utilities, insurance and building repairs, and other building operation and management costs that exceed a base rate, are reimbursed to us by the tenant. The leases for the retail properties in our portfolio have remaining lease terms that range from month-to-month to over 10 years, with a weighted average remaining lease term of 5.4 years as of December 31, 2023 based on GLA. Anchor tenant leases are typically for 10 to 20 years, with one or more renewal options available to the lessee upon expiration of the initial lease term. By contrast, smaller store leases are typically negotiated for five-year terms. The longer terms of major tenant leases serve to protect us against significant vacancies and to ensure the presence of strong tenants that draw consumers to our centers. The shorter terms of smaller store leases allow us under appropriate circumstances to adjust rental rates periodically and, where possible, upgrade or adjust the overall tenant mix.
The leases for the residential portion of Midtown Row typically follow standard forms customarily used between landlords and residents in the geographic area in which the property is located. Midtown Row is leased by the bed on an individual lease liability basis. Individual lease liability limits each resident's liability to his or her own rent without the liability of a roommate's rent. A parent or guardian is generally required to execute each lease as a guarantor unless the resident provides adequate proof of income or financial aid. Less than one percent of leases require security deposits, as a parent or guardian is generally required to execute each lease as a guarantor. We require a nonrefundable reservation fee at lease signing and the tenant pays rent on a monthly basis during the term of the lease. As landlord, we are directly responsible for all real estate taxes, sales and use taxes, special assessments, property-level utilities, insurance and building repairs, and other building operation and management costs. Certain utilities are consumed by the tenant which is included in the monthly installment payment. Our lease terms are generally 11.5 months with 12 equal payments. There are a limited number of nine-month leases with 10 equal payments. These leases typically correspond to the university's academic year.
Tenant Underwriting
For retail leases, we use a number of industry credit rating services to determine the creditworthiness of potential tenants and any personal guarantor or corporate guarantor of each potential tenant. In addition, we review the prospective tenants’ business plans and financial models. We have established leasing guidelines to use in evaluating prospective tenants and proposed lease terms and conditions. For existing tenants looking to extend with us, we look at their past payment record.
Competition
We believe that the market for retail properties and financially stable tenants has historically been extremely competitive and has become even more competitive as a result of the current retail environment. We compete with a number of other real estate investors, including domestic and foreign corporations and financial institutions, publicly traded and privately held real estate investment trusts (“REITs”) and other real estate companies, private institutional investment funds, investment banking firms, life insurance companies and pension funds, some of which have greater financial resources than we do.
In operating and managing our properties, we compete for tenants based upon a number of factors including, but not limited to, location, rental rates, security, flexibility, expertise to design space to meet prospective tenants’ needs and the manner in which the property is operated, maintained and marketed. As leases at our properties expire, we may encounter significant competition to renew or re-lease space in light of the large number of competing properties within the markets in which we operate. As a result, we may be required to provide rent concessions, incur costs for tenant improvements and other inducements or we may not be able to timely lease vacant space, all of which would adversely impact our results of operations.
We also face competition when pursuing acquisition, development and redevelopment opportunities. Our competitors may be able to pay more for acquisitions, have more funds for development and redevelopment, may have private access to opportunities not available to us and otherwise be in a better position to acquire, develop or redevelop a commercial property. Competition may also have the effect of reducing the number of suitable acquisition, development or redevelopment opportunities available to us, increasing the price required to consummate an acquisition, development or redevelopment opportunity and generally reducing the demand for commercial space in our geographic markets. Similarly, should we decide to dispose of a property, we may compete with third-party sellers of similar types of commercial properties for suitable purchasers, which may result in our receiving lower net proceeds from a sale or in our not being able to dispose of such property at a time of our choosing.
Regulatory Matters
General
The properties in our portfolio are, and any properties we acquire in the future will be, subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of the properties in our portfolio has the necessary permits and approvals to operate our business.
Environmental Regulations
Under various federal, state and local environmental laws, ordinances and regulations, a current or former owner or operator of real property may be liable for the cost to remove or remediate hazardous or toxic substances, waste or petroleum products at, on, under, from or in such property. These costs could be substantial, and liability under these laws may attach whether or not the owner or operator knew of, or was responsible for, the presence of such contamination. Even if more than one person may have been responsible for the contamination, each liable party may be held entirely responsible for all of the clean-up costs incurred (i.e., the liability may be joint and several). In addition, third parties may sue the current or former owner or operator of a property for damages based on personal injury, natural resources or property damage and/or for other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of contamination on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to redevelop, sell or lease the property or borrow using the property as collateral. In addition, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants. We also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so.
Some of our properties may be adjacent to or near other properties used for industrial or commercial purposes or that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. Releases from these properties could impact our properties. In addition, certain of our properties are currently used, have been used and may be used in the future by others, including former owners or tenants of our properties, for commercial or industrial activities, e.g., gas stations and dry cleaners, that may release petroleum products or other hazardous or toxic substances at our properties or to surrounding properties.
We have previously obtained Phase I Environmental Site Assessments or similar environmental audits from an independent environmental consultant for all the properties in our portfolio and the properties under contract to be acquired. A Phase I Environmental Site Assessment is a written report that identifies existing or potential environmental conditions associated with a particular property. These environmental site assessments generally involve a review of records, interviews and visual inspection of the property; however, they have a limited scope (e.g., they do not include soil sampling or ground water analysis) and may not reveal all potential environmental liabilities. Further, material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances or regulations may impose additional material environmental liability beyond what was known at the time the site assessment was conducted. While environmental assessments conducted prior to acquiring our properties have not revealed, nor are we aware of, any environmental liability that we believe will have a material adverse effect on our operations, certain properties that we
have acquired contain, or contained, uses that could have impacted our properties, including dry-cleaning establishments utilizing solvents or gas stations. Where we believed it was warranted, subsurface investigations or samplings of building materials were undertaken with respect to these and other properties. To date, the costs associated with these investigations and any subsequent remedial measures taken to address any identified impacts have not resulted in material costs. Prior to purchasing property in the future, we plan on conducting Phase I Environmental Site Assessments and other environmental investigations, if warranted.
Our properties and the tenants of our properties are subject to various federal, state and local environmental, health and safety laws, including laws governing the management of waste, underground and aboveground storage tanks, local fire safety requirements and local land use and zoning regulations. For example, some of our tenants handle regulated substances or waste as part of their operations on our properties. Noncompliance with these environmental, health and safety laws could subject us or our tenants to liability. These environmental liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with environmental, health and/or safety laws, including increasing liability for noncompliance or requiring significant unanticipated expenditures. We are not presently aware of any instances of material non-compliance with environmental, health and safety laws at our properties, and we believe that we have all permits and approvals necessary under current law to operate our properties.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain or may have contained asbestos-containing material (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment. We are not presently aware of any material liabilities related to building conditions, including any instances of material non-compliance with asbestos requirements or any material liabilities related to asbestos.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues, which could lead to liability for adverse health effects or property damage or costs for remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at our properties.
Americans with Disabilities Act of 1990
Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is “readily achievable.” We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. Noncompliance with the ADA, however, could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Insurance
We believe that each of our properties is covered by adequate fire, flood, earthquake, wind (as deemed necessary or as required by our lenders) and property insurance, as well as commercial liability insurance. We also carry terrorism insurance at levels we believe are commercially reasonable. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of coverage and industry practice, and in the opinion of our management, the properties in our portfolio are adequately insured. Furthermore, we believe that our businesses and assets are likewise adequately insured against casualty loss and third-party liabilities. The cost of such insurance is passed through to tenants to the extent possible. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties that we acquire in the future, including the properties in our acquisition portfolio. We will not carry insurance for generally uninsured losses such as loss from riots, war or acts of God.
Employees
We have a company-wide commitment to a set of core principles-Teamwork, Respect, Integrity, Balance, Accountability and Leadership, or TRIBAL. We believe our TRIBAL principles lead to greater employee retention, collaboration and efficiency, which increases our ability to provide high quality service to our tenants and deliver attractive risk-adjusted returns to our stockholders. We have also identified a set of 30 behavioral fundamentals to which we adhere. We continuously educate our employees on these behavioral fundamentals to ensure we work under an identified set of standards.
As of December 31, 2023, we have 35 employees, all of which are full time employees.
Corporate Information
Our principal executive office is located at 11911 Freedom Drive, Suite 450, Reston, Virginia 20190. The telephone number for our principal executive office is (301) 828-1200. We maintain a website located at broadstreetrealty.com. The information on, or accessible through, our website is not incorporated into and does not constitute a part of this report or any other report or document we file with or furnish to the SEC.
Available Information
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the SEC. You may obtain copies of these documents by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public free of charge through our website or by contacting our Corporate Secretary at the address set forth above under “-Corporate Information.”
	Our Code of Business Conduct and Ethics, and the charters of our audit committee, compensation committee and nominating and corporate governance committee are all available in the Corporate Governance section of the Investor Relations section of our website. Any amendment to or waiver of our Code of Business Conduct and Ethics will be disclosed in the Corporate Governance section of the Investor Relations section of our website within four business days of the amendment or waiver.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our stockholders. You should carefully consider the following risks in evaluating our Company and our business. The occurrence of any of the following risks could materially adversely impact our financial condition, results of operations, cash flows, the market price of shares of our common stock and our ability to, among other things, satisfy our debt service obligations and to make distributions to our stockholders, which in turn could cause our stockholders to lose all or a part of their investment. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements” included elsewhere in this report.
Risks Related to Our Business and Properties
We have a history of net losses and expect to continue to incur net losses in the near term.
We have a history of net losses, including net loss attributable to common stockholders of $21.5 million and $15.3 million for the years ended December 31, 2023 and 2022, respectively, and we expect to continue to incur net losses in the near term. If we cannot become profitable, our financial condition will deteriorate, and we may be unable to achieve our business objectives, which could materially and adversely affect the trading price and value of our common stock.
We primarily rely upon external sources of capital to fund acquisitions, development opportunities and repayment of significant maturities of principal debt, and, if we encounter difficulties in obtaining capital, we may not be able to repay maturing obligations or make future investments necessary to grow our business.
We primarily rely upon external sources of capital, including debt and equity financing, to fund our capital needs, including acquisitions, development opportunities and repayment of debt maturities. We have encountered, and may continue to encounter, difficulties obtaining the necessary capital to finance future acquisitions and service and refinance our existing indebtedness, including approximately $20.9 million of debt that matures in 2024 and approximately $9.2 million of debt that matures in January 2025. If we fail to refinance such indebtedness and contribute the applicable properties to Broad Street Eagles JV LLC (the “Eagles Sub-OP”), it would be considered a Trigger Event under the Amended and Restated Limited Liability Company Agreement of the Eagles Sub-OP (the “Eagles Sub-OP Operating Agreement”). See “-The Eagles Sub-OP Operating Agreement contains provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.” Our access to capital depends upon a number of factors over which we have little or no control, including general market conditions, the market’s perception of our current and potential future earnings and cash distributions, our current debt levels and the market price of the shares of our common stock, and our access to capital is currently constrained by our existing debt and the lack of an active trading market for our common stock. Economic, market and other disruptions worldwide, including in the bank lending, capital and other financial markets, have exacerbated, and may continue to exacerbate, the issues we have encountered obtaining financing.
We may not have access to capital in order to be able to refinance debt as it comes due, make debt service payments, acquire additional properties or pay dividends to our stockholders. In addition, although our common stock is quoted on the OTCQX Best Market (the "OTCQX"), an over-the-counter stock market, there is a very limited trading market for our common stock, and if a more active trading market is not developed and sustained, we will be limited in our ability to issue equity to fund our capital needs. If we cannot obtain capital from third-party sources, we may not be able to meet the capital and operating needs of our existing properties,
satisfy our debt service obligations, acquire or develop properties when strategic opportunities exist, or make cash distributions to our stockholders.
All of the properties in our portfolio are located in the greater Mid-Atlantic and Colorado regions. Adverse economic or regulatory developments in these areas could materially and adversely affect our business.
Twelve of the 15 properties currently in our portfolio are located in the Mid-Atlantic region, including Maryland, Virginia and Washington, D.C., and the remaining three properties are located in the Denver, Colorado area. As a result of this geographic concentration, our business is dependent on the condition of the economy in these regions generally and the respective markets for retail real estate in particular, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. We cannot assure you that these markets will grow or that underlying real estate fundamentals will be favorable to owners and operators of retail properties. Our operations may also be adversely affected if competing properties are built in these markets. Moreover, submarkets within any of our target markets may be dependent upon a limited number of industries. Any adverse economic or real estate developments in our markets, or any decrease in demand for retail space resulting from the regulatory environment, business climate or fiscal problems, could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
We depend upon tenant leases for most of our revenue, and lease terminations and/or tenant defaults, particularly by one of our significant tenants, could materially and adversely affect the income produced by our properties, which could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
We depend primarily upon tenant leases for our revenue. Our ability to sustain our rental revenue depends on the financial stability of our tenants, any of whom may experience a change in its business at any time. The ability of our tenants to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their operations, and cash flows generated by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property. In 2023, we recorded $1.0 million to Impairment of real estate assets on the consolidated statement of operations, of which $0.6 million and $0.4 million was due to early lease terminations and a tenant bankruptcy, respectively.
If significant leases are terminated or defaulted upon, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. In addition, significant expenditures, such as mortgage payments, real estate taxes and insurance and maintenance costs, are generally fixed and do not decrease when revenues at the related property decrease.
The occurrence of any of the situations described above, particularly if it involves one of our anchor tenants, could seriously harm our operating performance and materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
We may be unable to collect balances due from tenants that file for bankruptcy protection, which could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
If a tenant files for bankruptcy, we may not be able to collect all pre-bankruptcy amounts owed by that party. In addition, a tenant that files for bankruptcy protection may terminate its lease with us, in which event we would have a general unsecured claim against such tenant that would likely be worth less than the full amount owed to us for the remainder of the lease term, which could adversely affect our financial condition, results of operations and cash flows. In 2023, we recorded $0.6 million of unamortized tenant improvement to Impairment of real estate assets on the consolidated statement of operations due to a tenant bankruptcy.
We face significant competition from the College of William and Mary university-owned student housing.
Midtown Row is the only student housing property we have owned, and we can provide no assurance that its performance will replicate the past performance of our other properties. Midtown Row is in close proximity to the College of William and Mary. On-campus student housing traditionally has certain inherent advantages over off-campus student housing because of, among other factors, closer physical proximity to the university campus and integration of on-campus facilities into the academic community. Colleges and universities can generally avoid real estate taxes, while we are subject to full real estate tax rates. Also, colleges and universities may be able to borrow funds at lower interest rates than those available to us. As a result, the College of William and Mary may be able to offer
more convenient and/or less expensive student housing than we can through Midtown Row, which may adversely affect our occupancy and rental rates.
We have a substantial amount of indebtedness outstanding, which could materially and adversely affect our financial condition, results of operations and ability to make distributions to our stockholders.
As of December 31, 2023, we had an aggregate of $324.8 million of outstanding indebtedness, including $91.7 million of the Preferred Equity Investment (as defined below) that is classified as temporary equity on our balance sheet. We may also need to incur additional indebtedness in the future to repay or refinance other outstanding debt, to make acquisitions or for other purposes. If we incur additional debt, the related risks that we now face could intensify. Our substantial indebtedness could have material adverse consequences to us, including:
•making it more difficult for us to meet our debt service obligations;
•making it more difficult for us to borrow additional funds as needed, on favorable terms or at all, which could, among other things, adversely affect our ability to meet operational needs and subject us to greater sensitivity to interest rate increases;
•making us more vulnerable to general adverse economic and industry conditions;
•limiting our ability to withstand competitive pressures from competitors that have relatively less debt than we have;
•limiting our ability to refinance our indebtedness at maturity or result in refinancing terms that are less favorable than the terms of our original indebtedness; and
•increasing our risk of defaulting under the terms of our existing indebtedness, in which case the lenders could accelerate the timing of payments under the applicable debt obligations, and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms or at all.
If any one or more of these events were to occur, our financial condition, results of operations, cash flows and the market value of our common stock could be materially and adversely affected.
Secured debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.
Most of the properties in our portfolio are subject to secured indebtedness. Mortgage and other secured debt obligations increase our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For example, at December 31, 2023, we had three mortgage loans on three properties with a combined principal balance outstanding of approximately $32.9 million that mature within the next twelve months. One of the mortgage loans with a balance of $11.3 million as of December 31, 2023 was refinanced on February 8, 2024. In addition, the Basis Term Loan, which is secured by mortgages on two properties, has an outstanding balance of $8.5 million and matures in July 2024. We can provide no assurances that we will be able to refinance the remaining loans on favorable terms, or at all. If we are unable to refinance or extend the loans, the lenders will have the right to place their loans in default and ultimately foreclose on the properties. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. If any of our properties are foreclosed upon due to a default, it could materially and adversely affect our financial condition, results of operations, cash flows and cash available for distribution to our stockholders.
The Eagles Sub-OP Operating Agreement contains provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.
CF Flyer PE Investor LLC (the “Fortress Member”), an entity affiliated with Fortress Investment Group LLC (“Fortress”), has substantial rights under the Eagles Sub-OP Operating Agreement. Under this agreement, the following require the approval of the Fortress Member:
•the adoption and approval of annual corporate and property budgets;
•the amendment, renewal, termination or modification of Material Contracts (as defined in the Eagles Sub-OP Operating Agreement), leases over 5,000 square feet and certain loan documents;
•the liquidation, dissolution, or winding-up of the Eagles Sub-OP, the Company or any of its subsidiaries;
•taking actions of bankruptcy or failing to defend an involuntary bankruptcy action of the Eagles Sub-OP, the Company or any of its subsidiaries;
•effecting any reorganization or recapitalization of the Eagles Sub-OP, the Company or any of its subsidiaries;
•declaring or paying distributions on any equity security of the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions;
•issuing any equity securities in the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions;
•conducting a merger or consolidation of the Eagles Sub-OP, the Company or the Operating Partnership or selling substantially all of the assets of the Company and its subsidiaries or the Eagles Sub-OP and its subsidiaries;
•amending, terminating or otherwise modifying the loans secured by the properties indirectly owned by the Eagles Sub-OP, subject to certain exceptions;
•incurring additional indebtedness or making prepayments on indebtedness, subject to certain exceptions;
•acquiring any property outside the ordinary course of business of the Company; and
•selling any property below the minimum release price for such property.
In addition, we are required to maintain separate bank accounts for tenant improvement costs and leasing costs as well as the net proceeds from the Spotswood and Dekalb dispositions. Prior written consent of the Fortress Member is required for the disbursement and use of cash held in such accounts.
In connection with the Preferred Equity Investment, the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East. The subsidiaries of the Operating Partnership that indirectly own the Excluded Properties (as defined below) were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates. Six of the eight Excluded Properties have been either contributed to the Eagles Sub-Op or sold with the approval of the Fortress Member. The Fortress Member has approved extensions of the outside date for the remaining Excluded Properties, which is currently April 30, 2024. There can be no assurance that we will contribute the remaining Excluded Properties to the Eagles Sub-OP by the outside date or that the Fortress Member will approve a further extension of such outside date.
Under the Eagles Sub-OP Operating Agreement, “Trigger Events” include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property owned by the Company or any of its subsidiaries; (ii) a Bankruptcy Event (as defined in the Eagles Sub-OP Operating Agreement) with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Eagles Sub-OP Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the Fortress Mezzanine Loan (as defined below) or the mortgage loans secured by properties owned directly or indirectly by the Eagles Sub-OP (including the Excluded Properties); (v) failure to meet the minimum Total Yield requirements under the Eagles Sub-OP Operating Agreement; (vi) failure to pay the Current Preferred Return (as defined below) (subject to a limited cure period) or failure to make distributions as required by the Eagles Sub-OP Operating Agreement; (vii) the occurrence of a Change of Control (as defined in the Eagles Sub-OP Operating Agreement); (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Mr. Jacoby (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of common stock and OP units, in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under certain other agreements related to the Preferred Equity Investment.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest (as defined below) by payment to the Fortress Member of the full Redemption Amount upon not less than 90 days prior written notice to the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
Under certain circumstances, including in the event of a Trigger Event or if a Qualified Public Offering (as defined in the Eagles Sub-OP Operating Agreement) has not occurred by November 22, 2027, the Fortress Member may remove the Operating Partnership as the managing member of the Eagles Sub-OP. If the Fortress Member removes the Operating Partnership and becomes the managing member of the Eagles Sub-OP, the Eagles Sub-OP Operating Agreement only requires the Fortress Member to act in a manner consistent with other institutional preferred equity investors that have exercised remedies to remove managing members. Moreover, in such a circumstance, the Eagles Sub-OP Operating Agreement specifically reserves the Fortress Member’s right to (i) sell any property to a third party buyer unaffiliated with the Fortress Member, (ii) take any action in connection with curing or reacting to a default under any mortgage loan and (iii) otherwise exercise its rights and remedies pursuant to the terms of the Eagles Sub-OP Operating
Agreement. Accordingly, in the event the Fortress Member becomes the managing member of the Eagles Sub-OP, it may take actions that are not in the best interest of us and our stockholders.
The Fortress Member’s rights may significantly impede our ability to operate our business and manage our properties. Furthermore, these rights may prevent us from engaging in transactions, including change of control or financing transactions, that otherwise would be attractive to us. The foregoing could adversely affect our financial condition, results of operations and cash flows, the market value of our common stock and our ability to pay dividends to our common stockholders in the future. In addition, failure to comply with any of these covenants could cause a Trigger Event, which would result in the Fortress Member having certain rights, including the right to remove the Operating Partnership as the managing member of the Eagles Sub-OP, and, therefore, could have a material adverse effect on us.
The Basis Loan Agreement contains provisions that could significantly impede our operations and our ability to efficiently manage our business and that could materially and adversely affect our financial condition, results of operations and cash flows, the trading price of our common stock and our ability to pay dividends to our common stockholders in the future.
An entity affiliated with Basis Management Group, LLC (“Basis”) has substantial rights under the Basis Loan Agreement (as defined below), in particular, with respect to Midtown Colonial and Midtown Lamonticello, which secure the Basis Term Loan. Under these agreements, the following are either prohibited or require the approval of Basis:
•the sale of properties secured by the Basis Term Loan;
•any change in control of the Company (as defined in the Basis Loan Agreement);
•the incurrence of new indebtedness or modification of existing indebtedness by the entities;
•capital expenditures over certain thresholds on properties owned by the entities;
•any proposed change to a property directly or indirectly owned by the entities;
•direct or indirect acquisitions of new properties by the entities;
•the issuance of new membership interests in the entities;
•the entry into any new material lease or any amendment to an existing material lease with respect to the applicable properties; and
•decisions regarding the dissolution, winding up or liquidation of the entities.
If the debt service coverage ratio under the Basis Loan Agreement falls below 1.05x for two consecutive calendar quarters, the Basis Lender (as defined below) has the right to remove us as the manager of the two properties securing the Basis Term Loan. If the Basis Lender removed us as the manager of these properties, we would no longer manage the day-to-day operations of those properties.
The Basis Lender has the right to sweep the cash accounts of the property-owning entities that collect rental payments from the properties securing the Basis Term Loan if the debt service coverage ratio under the Basis Loan Agreement falls below 1.10x. If the Basis Lender exercises its right under the cash sweep provision, then our cash available for operations and other purposes would be significantly limited.
Basis’ rights may significantly impede our ability to operate our business and manage our properties. Furthermore, these rights may prevent us from engaging in transactions, including change of control or financing transactions, that otherwise would be attractive to us. The foregoing could adversely affect our financial condition, results of operations and cash flows, the market value of our common stock and our ability to pay dividends to our common stockholders in the future. In addition, failure to comply with any of these covenants, including the financial coverage ratios, could cause an event of default under or accelerate some or all of our indebtedness, which would have a material adverse effect on us.
Covenants in our debt agreements could adversely affect our financial condition, results of operations and cash flows and the trading price of our common stock.
In addition to the restrictions provided in the Basis Loan Agreement and the Eagles Sub-OP Operating Agreement described above, other documents evidencing indebtedness contain certain financial covenants and affirmative and restrictive covenants, including, among other things, with respect to insurance coverage and our ability to incur additional indebtedness. The Hollinswood mortgage, Vista Shops mortgage, Brookhill mortgage, Crestview mortgage, Highlandtown mortgage, Cromwell mortgage, Lamar Station Plaza West mortgage, Midtown Row mortgage, Coral Hills mortgage, West Broad mortgage and Greenwood Village mortgage require us to maintain a debt service coverage ratio (as such terms are defined in the respective loan agreements) of at least 1.40x, 1.50x, 1.30x, 1.25x, 1.25x, 1.20x, 1.30x, 1.15x, 1.20x, 1.25x and 1.40x, respectively. These limitations may restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations and cash flows and the market value of our common stock. In addition, failure to comply with any of these covenants, including the financial coverage ratios, could cause an event of default under or accelerate some or all of our indebtedness, which would have a material adverse effect on us.
There are inherent risks associated with real estate investments and with the real estate industry, each of which could have an adverse impact on our financial performance and the value of our properties.
By owning our common stock, you are subject to the risks associated with the ownership of real properties, including risks related to:
•changes in national, regional and local conditions, which may be negatively impacted by inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence, liquidity concerns and other adverse business concerns;
•changes in local conditions, such as an oversupply of, reduction in demand for, or increased competition among, retail properties;
•changes in interest rates and the availability of financing;
•the attractiveness of our properties to potential tenants; and
•changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.
Any of these factors could adversely impact our financial performance and the value of our properties.
Our dependence on smaller businesses to rent our space could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to satisfy our debt service obligations.
Many of our tenants are smaller businesses that generally do not have the financial strength or resources of larger corporate tenants. Smaller independent businesses generally experience a higher rate of failure than larger businesses. As a result of our dependence on these smaller businesses, we could experience a higher rate of tenant defaults, turnover and bankruptcies, which could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Our growth will depend in part upon our ability to acquire additional retail properties for our portfolio, and we may be unsuccessful in identifying and consummating attractive acquisitions or taking advantage of other investment opportunities, which would impede our growth and materially and adversely affect our ability to pay dividends to our stockholders.
Our ability to expand through acquisitions is integral to our long-term business strategy and requires that we identify and consummate suitable acquisition or investment opportunities in retail properties for our portfolio that meet our investment criteria and are compatible with our growth strategy. Our ability to acquire retail properties on favorable terms, or at all, may be adversely affected by the following significant factors:
•competition from other real estate investors, including public and private REITs, private equity investors and institutional investment funds, many of which have greater financial and operational resources and lower costs of capital than we have and may be able to accept more risk than we can prudently manage;
•competition from other potential acquirers, which could significantly increase the purchase prices for properties we seek to acquire;
•we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete;
•even if we enter into agreements for the acquisition of properties, these agreements are subject to customary closing conditions, including the satisfactory results of our due diligence investigations; and
•we have limited access to additional capital and may be unable to obtain financing for acquisitions on favorable terms, or at all, as a result of our existing indebtedness, market conditions or other factors. See “-We primarily rely upon external sources of capital to fund acquisitions, development opportunities and repayment of significant maturities of principal debt, and, if we encounter difficulties in obtaining capital, we may not be able to repay maturing obligations or make future investments necessary to grow our business.”
Our failure to identify and consummate attractive acquisitions or take advantage of other investment opportunities without substantial expense, delay or other operational or financial problems, would impede our growth and materially and adversely affect our ability to make distributions to our stockholders.
The terms of joint venture agreements or other joint ownership arrangements into which we may enter could impair our operating flexibility and subject us to risks not present in investments that do not involve co-ownership.
Until we have greater access to capital, we intend to make acquisitions through joint ventures, partnerships, co-tenancies or other syndicated or co-ownership arrangements entered into with affiliates or third parties. For example, as described above, Fortress
has substantial rights under the Eagles Sub-OP Operating Agreement. We may also enter into joint ventures to redevelop or develop properties. Such investments may involve risks not otherwise present when acquiring real estate directly, including the following:
•a co-venturer, co-owner or partner may have certain approval rights over major decisions, which may prevent us from taking actions that are in our best interests but opposed by our co-venturers, co-owners or partners;
•a co-venturer, co-owner or partner may at any time have economic or business interests or goals, which are, or become, inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination or liquidation of the joint venture;
•a co-venturer, co-owner or partner may become insolvent or bankrupt (in which event we and any other remaining partners or members would generally remain liable for the liabilities of the partnership or joint venture);
•we may incur liabilities as a result of an action taken by our co-venturer, co-owner or partner;
•a co-venturer, co-owner or partner may be in a position to take actions contrary to our instructions or requests or contrary to our policies or objectives;
•agreements governing joint ventures, limited liability companies and partnerships often contain restrictions on the transfer of a member’s or partner’s interest or “buy-sell” or other provisions that may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms;
•disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable joint venture to additional risk; and
•under certain joint venture arrangements, neither joint venture partner may have the power to control the venture, and an impasse could be reached, which might have adverse effects on the joint venture and our relationship with our joint venture partners.
If any of the foregoing were to occur, our financial condition, results of operations and cash available for distribution could be materially and adversely affected.
Failure to succeed in new markets may limit our growth.
In the future, if appropriate opportunities arise and subject to capital availability, we may acquire properties that are outside of our existing markets. Entering into new markets exposes us to a variety of risks, including difficulty evaluating local market conditions and local economies, developing new business relationships in the area, competing with other companies that already have an established presence in the area, hiring and retaining key personnel, evaluating quality tenants in the area and a lack of familiarity with local governmental and permitting procedures. Furthermore, expansion into new markets may divert management time and other resources away from our existing markets. As a result, we may not be successful in expanding into new markets, which could adversely impact our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Many of our operating costs and expenses are fixed and will not decline if our revenues decline.
Our results of operations depend, in large part, on our level of revenues, operating costs and expenses. The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in revenue from the property. As a result, if revenues or cash flows decline, we may not be able to reduce our expenses to keep pace with the corresponding reductions in revenues. Many of the costs associated with real estate investments, such as real estate taxes, insurance, loan payments and maintenance, generally will not be reduced if a property is not fully occupied or other circumstances cause our revenues or cash flows to decrease, which could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Most of our costs, such as operating and general and administrative expenses, interest expense, and real estate acquisition costs, are subject to inflation.
In 2023, the consumer price index rose by approximately 3% over the previous year, following 2022's increase in the index of 7%, which was the largest annual inflation surge in 40 years. A significant portion of our operating expenses are sensitive to inflation. Operating expenses include those for property-related contracted services such as janitorial and engineering services, utilities, repairs and maintenance, and insurance. Property taxes are also impacted by inflationary changes as taxes are regularly reassessed based on changes in the fair value of our properties.
Our operating expenses, with the exception of the residential portion of Midtown Row, are typically recoverable through our lease arrangements, which allow us to pass through substantially all expenses associated with property taxes, insurance, utilities, repairs and maintenance, and other operating expenses (including increases thereto) to our tenants. Our remaining leases are generally gross leases, which provide for recoveries of operating expenses above the operating expenses from the initial year within each lease. During
inflationary periods, we expect to recover increases in operating expenses from our triple net leases and our gross leases. In addition, our leases for the residential portion of Midtown Row generally have lease terms of 11.5 months or nine months, which we believe reduces our exposure to the effects of inflation, although an extreme and sustained escalation in costs could have a negative impact on our residents and their ability to absorb rent increases. As a result, we do not believe that inflation would result in a significant adverse effect on our net operating income and operating cash flows at the property level. However, there is no guarantee that our tenants would be able to absorb these expense increases and be able to continue to pay us their portion of operating expenses, capital expenditures, and rent.
Our general and administrative expenses consist primarily of compensation costs, technology services, and professional service fees. Our employee compensation is reviewed annually and adjusted to reflect any merit increases; however, to maintain our ability to successfully compete for the best talent, rising inflation rates may require us to provide compensation increases beyond historical annual merit increases, which may unexpectedly or significantly increase our compensation costs. Similarly, technology services and professional service fees are also subject to the impact of inflation and expected to increase proportionately with increasing market prices for such services. Consequently, inflation is expected to increase our general and administrative expenses over time and may adversely impact our results of operations and operating cash flows.
Adverse conditions in the general retail environment could have a material adverse effect on our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
We are subject to factors that affect the retail sector generally, as well as the market for retail space. The retail environment and the market for retail space have been, and in the future could be, adversely affected by weakness in the national, regional and local economies such as the level of consumer spending and consumer confidence, the adverse financial condition of some large retail companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing competition from discount retailers, outlet malls, internet retailers and other online businesses. Increases in consumer spending via the internet may significantly affect our retail tenants’ ability to generate sales in their stores. New and enhanced technologies, including new digital technologies and new web services technologies, may increase competition for certain of our retail tenants. Our tenants may experience difficulties attracting customers to their stores even after the social-distancing measures are lifted.
Any of the foregoing factors could adversely affect the financial condition of our retail tenants and the willingness of retailers to lease space in our retail properties. In turn, these conditions could negatively affect market rents for retail space and could materially and adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past led and may in the future lead to market-wide liquidity problems. Disruptions and uncertainty in the banking sector may negatively impact our ability to refinance existing indebtedness and access additional financing for acquisitions, development of our properties and other purposes at reasonable terms or at all. The failure of banks and financial institutions and measures taken, or not taken, by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations.
The majority of our cash and cash equivalents are held at major commercial banks, and our account balances may at times exceed the Federal Deposit Insurance Corporation (the “FDIC”) insurance limit. If the financial institutions with which we do business enter receivership or become insolvent in the future, there is no guarantee that the Department of the Treasury, the Federal Reserve or the FDIC will intercede to provide us and other depositors with access to balances in excess of the FDIC insurance limit, that we would be able to access our existing cash, cash equivalents and investments, that we would be able to maintain any required letters of credit or other credit support arrangements, or that we would be able to adequately fund our business for a prolonged period of time or at all, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, if any of our tenants are unable to access funds on deposit with such a financial institution or pursuant to lending arrangements with such a financial institution, such tenants’ ability to meet their obligations to us could be adversely affected, which, in turn, could have a material adverse effect on our business, results of operations and financial condition.
An epidemic, pandemic or other health crisis and measures intended to prevent the spread of such an event could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
We face risks related to an epidemic, pandemic or other health crisis which have in the past impacted, and in the future could impact, the markets in which we operate and could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations. The impact of an epidemic, pandemic or other health
crisis and measures intended to prevent the spread of such an event could materially and adversely affect our business in a number of ways. Our rental revenue and operating results depend significantly on the occupancy levels at our properties and the ability of our tenants to meet their rent obligations to us, which have been in certain cases, and could in the future be, adversely affected by, among other things, job losses, furloughs, store closures, lower incomes, uncertainty about the future as a result of an epidemic, pandemic or other health crisis and related governmental actions including eviction moratoriums, shelter-in-place orders, prohibitions on charging certain fees, and limitations on collection laws and rent increases, which have affected, and, if such restrictions are not lifted, or are reinstated, or new restrictions imposed, may continue to affect our ability to collect rent or enforce legal or contractual remedies for the failure to pay rent, which have negatively impacted, and may continue to negatively impact, our ability to remove tenants who are not paying rent and our ability to rent their space to new tenants. In addition, the federal government has in the past allocated, and may in the future allocate, funds to rent relief programs to be run by state and local authorities. In certain locations, the funds available may not be sufficient to pay all past due rent and reallocation of such funds may result in markets in which we operate not having access to the funds anticipated. Further, certain of our tenants with past due rent have not qualified, and may not in the future qualify, to participate in such programs. In addition, some of such programs have required, and programs in the future may require, the forgiveness of a portion of the past due rent or agreeing to other limitations that may adversely affect our business in order to participate or may only provide funds to pay a portion of the past due rent. It is uncertain how the rent relief programs will impact our business. An epidemic, pandemic or other health crisis or related impacts thereof also could adversely affect the businesses and financial conditions of our counterparties, including our joint venture partners and general contractors and their subcontractors, and their ability to satisfy their obligations to us and to complete transactions or projects with us as intended.
Cybersecurity incidents or other technology disruptions could negatively impact our business, our relationships, and our reputation.
We use computers and computer networks in most aspects of our business operations. We also use mobile devices to communicate with our employees, suppliers, business partners, and tenants. These devices are used to transmit sensitive and confidential information, including financial and strategic information about us, employees, business partners, tenants and other individuals and organizations. Additionally, we utilize third-party service providers that host personally identifiable information and other confidential information of our employees, business partners, tenants and others. We also maintain confidential financial and business information regarding us and persons and entities with which we do business on our information technology systems. Cybersecurity incidents, including physical or electronic break-ins, computer viruses, malware, attacks by hackers, ransomware attacks, phishing attacks, supply chain attacks, breaches due to employee error or misconduct and other similar breaches can create system disruptions, shutdowns or unauthorized access to information maintained in our information technology systems and in the information technology systems of our third-party service providers. We expect cybersecurity incidents to occur in the future and we are constantly managing efforts to infiltrate and compromise our information technology systems and data. The theft, destruction, loss or release of sensitive and confidential information or operational downtime of the systems used to store and transmit our or our tenants’ confidential business information could result in disruptions to our business, negative publicity, brand damage, violation of privacy laws, financial liability, difficulty attracting and retaining tenants, loss of business partners and loss of business opportunities, any of which may materially and adversely affect our financial condition, results of operations, cash flow, cash available for distribution and ability to service our debt obligations. Although we carry cybersecurity insurance that is designed to protect us against certain losses related to cybersecurity incidents, that insurance coverage may not be sufficient or available to cover all expenses or other losses or all types of claims that may arise in connection with cybersecurity incidents. Furthermore, in the future, such insurance may not be available on commercially reasonable terms, or at all.
We face considerable competition in leasing our properties and may be unable to renew existing leases or re-lease retail space on terms similar to the existing leases, or we may expend significant capital in our efforts to re-lease retail space, which may adversely affect our operating results.
As of December 31, 2023, leases representing approximately 3.6% and 12.2% of our total annualized base rent are scheduled to expire by the end of 2024 and 2025, respectively, assuming no exercise of renewal options or early termination rights. In addition, approximately 11.5% of the square footage at our properties was available for rent as of December 31, 2023. We compete with many other entities engaged in real estate investment and leasing activities, including national, regional and local owners, operators, acquirers and developers. If our competitors offer retail space at rental rates below current market rates or below the rental rates that we currently charge our tenants, we may lose potential tenants. Even if our tenants renew their leases or we are able to re-lease the space, the terms and other costs of renewal or re-leasing, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. If we are unable to renew leases or re-lease space in a reasonable time, or if rental rates decline or tenant improvement costs increase, leasing commissions or other costs increase, our business, financial condition and results of operations, ability to make distributions and ability to satisfy our debt service obligations could be materially and adversely affected.
Our operating results are subject to risks inherent in the student housing industry, including a concentrated lease-up period.
Leases for the residential portion of Midtown Row are typically for terms of 11.5 months with 12 equal payments. There are a limited number of nine-month leases with 10 equal payments. The residential portion of Midtown Row must be entirely re-leased each
year during a limited leasing season. We are therefore highly dependent on the effectiveness of our marketing and leasing efforts and personnel during leasing season, exposing us to significant leasing risk. If we are unable to lease a substantial portion of the residential portion of Midtown Row, or if the rental rates upon such leasing are significantly lower than expected rates, our cash flow from operations and our ability to make distributions and ability to satisfy our debt service obligations could be materially and adversely affected.
Certain of the leases at our properties contain, and leases for properties that we may acquire in the future may contain, “co-tenancy” or “go-dark” provisions, which, if triggered, may allow tenants to pay reduced rent, cease operations or terminate their leases, any of which could materially and adversely affect our performance or the value of the affected retail property.
Certain of the leases at our properties contain, and leases for properties that we may acquire in the future may contain, “co-tenancy” provisions that condition a tenant’s obligation to remain open, the amount of rent payable by the tenant or the tenant’s obligation to continue occupancy on certain conditions, including: (i) the presence of a certain anchor tenant or tenants, (ii) the continued operation of an anchor tenant’s store and (iii) minimum occupancy levels at the retail property. If a co-tenancy provision is triggered by a failure of any of these or other applicable conditions, a tenant could have the right to cease operations, to terminate its lease early or to reduce its rent. In periods of prolonged economic decline, there is a higher-than-normal risk that co-tenancy provisions will be triggered as there is a higher risk of tenants closing stores or terminating leases during these periods. In addition to these co-tenancy provisions, certain of the leases at our retail properties contain “go-dark” provisions that allow the tenant to cease operations while continuing to pay rent. This could result in decreased customer traffic at the affected retail property, thereby decreasing sales for our other tenants at that property, which may result in our other tenants being unable to pay their minimum rents or expense recovery charges. These provisions also may result in lower rental revenue generated under the applicable leases. To the extent co-tenancy or go-dark provisions in our retail leases result in lower revenue, tenants’ rights to terminate their leases early, or a reduction of their rent, our revenues and the value of the affected retail property could be materially and adversely affected.
Risks associated with redevelopment and development activities could materially adversely affect us.
We may determine in the future to redevelop or develop certain properties directly rather than acquiring existing operating properties that meet our investment criteria. Large-scale, ground-up redevelopment or development of retail or mixed-use properties presents additional risks for us, including risks that:
•we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy or other required governmental or third-party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities;
•we may incur costs that exceed our original estimates due to increased material, labor or other costs, such as litigation;
•we may be unable to complete construction and lease up of a property on our anticipated schedule, resulting in increased construction and financing costs and a decrease in, or a delay in our receipt of, expected rental revenues;
•occupancy and leasing rates at a property may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development of competing properties;
•we may be unable to obtain financing on favorable terms, or at all, for the proposed development or redevelopment of a property, which may cause us to delay or abandon an opportunity;
•we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in pursuing those opportunities;
•we may incur liabilities to third parties during the development or redevelopment process, for example, in connection with resident lease terminations or managing existing improvements on the site prior to resident lease terminations; and
•loss of a key member of a project team could adversely affect our ability to deliver development or redevelopment projects on time and within our budget.
In addition, capital improvements on our existing properties may divert cash that may otherwise be available for property acquisitions, dividends to our stockholders or for other purposes. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of redevelopment and development activities once undertaken, any of which could have a material adverse effect on our business, results of operations and financial condition.
The illiquid nature of real estate investments could significantly impede our ability to respond to changing economic, financial and investment conditions, which could adversely affect our cash flows and results of operations.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. The real estate market is affected by many factors, such as general
economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. Accordingly, we cannot predict whether we will be able to sell any of our properties for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of our properties. We may be required to expend funds to correct defects or to make improvements before a property can be sold, and we cannot assure you that we will have funds available to correct those defects or to make those improvements. Our inability to dispose of assets at opportune times or on favorable terms could adversely affect our cash flows and results of operations.
Increases in interest rates could increase our interest expense and may adversely affect our cash flows, our ability to service our indebtedness and our ability to pay dividends to our stockholders.
As of December 31, 2023, we had approximately $61.1 million in floating-rate indebtedness, and we may enter into debt instruments with variable interest rates in the future. Increases in interest rates on variable rate debt will increase our interest expense, unless we make arrangements to hedge the risk of rising interest rates. However, as a result of rising interest rates, the cost of hedging transactions has increased significantly and may continue to increase. These increased costs could reduce our profitability, impair our ability to meet our debt obligations, increase the cost of financing or impair our ability to pay dividends to our stockholders. An increase in interest rates also could limit our ability to refinance existing debt upon maturity or cause us to pay higher rates upon refinancing.
Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
We have entered into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt and may enter into other hedging transactions in the future. Our hedging transactions include interest rate cap agreements and interest rate swap agreements. These agreements involve risks, such as the risk that (i) such arrangements would not be effective in reducing our exposure to interest rate changes, (ii) a court could rule that such agreements are not legally enforceable, (iii) hedging could actually increase our costs and reduce the overall returns on our investments, as interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates, (iv) counterparties to such arrangements would not perform, (v) we could incur significant costs associated with the settlement of the agreements, or (vi) the underlying transactions could fail to qualify as highly-effective cash flow hedges under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. Our failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations, cash flows, cash available for distribution and ability to service our debt obligations.
If we fail to maintain an effective system of disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements could be impaired, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404(a) of the Sarbanes-Oxley Act, to furnish with our annual report on Form 10-K and quarterly reports on Form 10-Q a report by management on, among other things, the effectiveness of the internal control over financial reporting. Effective internal control over financial reporting is necessary for reliable financial reports and, together with adequate disclosure controls and procedures, such internal controls are designed to prevent fraud. We have in the past identified, and may in the future identify, material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, including material weaknesses, could create a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. Additionally, any failure to implement required controls, or difficulties encountered in their implementation, could result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, any of which could cause the value of our common stock to decline.
We face possible liability for environmental cleanup costs and damages for contamination related to properties we acquire, which could materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
Because we own real estate, we are subject to various federal, state and local environmental laws, ordinances and regulations. Under these laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including the
release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real estate for personal injury or property damage associated with exposure to released hazardous substances. In addition, new or more stringent laws or stricter interpretations of existing laws could change the cost of compliance or liabilities and restrictions arising out of such laws. The cost of defending against these claims, complying with environmental regulatory requirements, conducting remediation of any contaminated property, or of paying personal injury claims could be substantial, which could materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders. In addition, the presence of hazardous substances on a property or the failure to meet environmental regulatory requirements may materially impair our ability to use, lease or sell a property, or to use the property as collateral for borrowing.
Uninsured losses relating to real estate and lender requirements to obtain insurance may materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
There are types of losses relating to real estate, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes and other natural disasters, pollution or environmental matters, for which we do not intend to obtain insurance unless we are required to do so by mortgage lenders. If any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for uninsured losses, we could suffer reduced earnings. In cases where we are required by mortgage lenders to obtain casualty loss insurance for catastrophic events or terrorism, such insurance may not be available, or may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our properties. Additionally, if we obtain such insurance, the costs associated with owning a property would increase. If any one of the events described above were to occur, it could have a material adverse effect on our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
Compliance with the ADA and fire, safety and other regulations may require us to make unexpected expenditures that adversely affect our business, financial condition, results of operations and ability to pay dividends to our stockholders.
Under the ADA all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons. Noncompliance with the ADA could result in the imposition of fines, an award of damages to private litigants and/or an order to correct any non-complying feature which could result in substantial capital expenditures. A number of additional U.S. federal, state and local laws may also require modifications to our properties, or restrict certain further renovations of such properties, with respect to access thereto by disabled persons. We have not conducted a detailed audit or investigation of all of our properties to determine our compliance, and we cannot predict the ultimate cost of compliance with the ADA or other legislation. If one or more of our properties is not in compliance with the ADA or other similar legislation, then we would be required to incur additional costs to bring such property into compliance, which could adversely affect our financial condition, results of operations and cash flows. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements, which could materially and adversely affect our business, financial condition, results of operations and ability to pay dividends to our stockholders.
We are subject to risks from natural disasters, such as hurricanes and flooding, and the risks associated with the physical effects of climate change.
Natural disasters and severe weather such as flooding, earthquakes, tornadoes or hurricanes may result in significant damage to our properties. Twelve of the 15 properties currently in our portfolio are located in the Mid-Atlantic region, parts of which historically have experienced heightened risk for natural disasters like hurricanes and flooding. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake) or destructive weather event (such as a tornado or hurricane) affecting a region may have a significant negative effect on our financial condition and results of operations. Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather.
All of the properties in our portfolio are located in the greater Mid-Atlantic and Colorado regions. Accordingly, we are also exposed to risks associated with inclement winter weather, including increased costs for the removal of snow and ice. Inclement weather also could increase the need for maintenance and repair of our properties.
Lastly, to the extent that climate change does occur, its physical effects could have a material adverse effect on our properties, operations and business. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity. These conditions could result in physical damage to our properties or declining demand for space in our buildings or the inability of us to operate the buildings at all in the areas affected by these conditions. Climate change also may have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy, and increasing the cost of snow removal or related costs at our properties. Proposed legislation and regulatory actions to address climate change could increase utility and other costs of operating our properties, which, if not offset by rising rental income, would
reduce our net income. Should the impact of climate change be material in nature or occur for lengthy periods of time, our properties, operations or business would be adversely affected.
We may not be able to rebuild our properties to their existing specifications if we experience a substantial or comprehensive loss of such properties.
In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications. Further, reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. Environmental and legal restrictions could also restrict the rebuilding of our properties.
We depend on key personnel whose continued service is not guaranteed and each of whom would be difficult to replace.
Our success depends, to a significant extent, on the services of certain key personnel, particularly Michael Jacoby, our chairman and chief executive officer. Among the reasons that Mr. Jacoby is important to our continued success is that he has significant experience in acquiring, financing, owning, leasing, managing, developing and redeveloping commercial real estate properties. Our ability to acquire, manage, develop and redevelop and successfully integrate and operate retail properties, therefore, depends upon the significant relationships that Mr. Jacoby and other members of our senior management team have developed over many years. Although we have entered into employment agreements with Mr. Jacoby and Alexander Topchy, our chief financial officer, we cannot provide any assurance that they will remain employed by us. Our ability to retain our senior management team, or to attract and integrate suitable replacements should any member of the senior management team leave, is dependent upon the competitive nature of the employment market. The loss of services of one or more members of our senior management team, particularly Mr. Jacoby, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry personnel, which could adversely affect our business, financial condition and results of operations. Furthermore, the Basis Loan Agreement and Eagles Sub-OP Operating Agreement prohibits us from engaging in certain change of control transactions. It is deemed a change of control under the Basis Loan Agreement if Mr. Jacoby ceases to be our chairman and chief executive officer and ceases to be actively involved in our daily activities and operations if Basis or the Company does not approve a replacement of Mr. Jacoby within 90 days of him ceasing to serve in such roles. Although not classified as a change of control, the Eagles Sub-OP Operating Agreement has a similar restriction with respect to Mr. Jacoby’s position and involvement with the Company. If Mr. Jacoby were to no longer serve in his current roles, we could be declared in default under the Basis Loan Agreement, and it would constitute a Trigger Event under the Eagles Sub-OP Operating Agreement, which would result in Fortress having certain rights, including the right to remove the Operating Partnership as the managing member of the Eagles Sub-OP.
Risks Related to Our Common Stock
Our common stock has a very limited trading market, which limits your ability to resell shares of our common stock.
	Although our common stock is quoted on the OTCQX, there is a very limited trading market for our common stock, which limits your ability to resell shares of our common stock. The OTCQX quotation platform is an inter-dealer market that is less regulated than the major securities markets. There can be no assurances that an active trading market for our common stock will develop or be sustained. Accordingly, there can be no assurance as to the ability of holders of shares of our common stock to sell their shares or the prices at which holders may be able to sell their shares.
In addition, all of the shares of our common stock that were issued in the Mergers were issued pursuant to exemptions from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder. Those shares may not be offered or sold unless the offer and sale is registered under, or exempt from the registration requirements of, the Securities Act, and we do not intend to register the offer and sale of those shares. Pursuant to Rule 144 under the Securities Act, those shares may be transferred without registration only if we satisfy the current public information requirement of Rule 144, which requires that we have filed all required periodic reports under the Exchange Act during the 12 months preceding such sale. If we do not satisfy the current public information requirement of Rule 144, shares of common stock issued in the Mergers that have been completed to date cannot be transferred pursuant to Rule 144 under the Securities Act.
The trading volume and market price of our common stock may fluctuate significantly, and you may have an illiquid investment.
Even if a trading market develops and is sustained for our common stock, the market price of our common stock may be volatile. In addition, the trading volume of our common stock may fluctuate and cause significant price variations to occur. It may be difficult for our stockholders to resell their shares in the amount or at prices or times that they find attractive, or at all. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future, including as a result of factors unrelated to our operating performance or prospects. In particular, the market price of our common stock could be subject to wide fluctuations in response to many factors, including, among others, the following:
•actual or anticipated variations in our operating results, cash flows, liquidity or financial condition;
•changes in our earnings estimates;
•changes in our dividend policy;
•publication of research reports about us or the real estate industry generally;
•increases in market interest rates that lead purchasers of our common stock to demand a higher dividend yield;
•changes in market valuations of similar companies;
•adverse market reaction to the amount of our outstanding debt at any time, the amount of our maturing debt in the near and medium term and our ability to refinance that debt and the terms thereof or our plans to incur additional debt in the future;
•additions or departures of key management personnel, including our ability to find qualified replacements;
•speculation in the press or investment community;
•the realization of any of the other risk factors included in this report; and
•general market and economic conditions.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on us.
We have not established a minimum dividend, and there can be no assurance that we will be able to pay or maintain cash dividends on our common stock or that dividends will increase over time.
We have not established a minimum dividend payment level for our common stock and can provide no assurances regarding the payment of dividends in the future. Dividends will be authorized and determined by our board of directors in its sole and absolute discretion from time to time and will depend upon a number of factors, including:
•cash available for distribution;
•our results of operations;
•our financial condition, especially in relation to our anticipated future capital needs of our properties;
•the level of reserves we establish for future capital expenditures;
•customary loan covenants in certain of our debt agreements;
•restrictions in the Eagles Sub-OP Operating Agreement;
•our operating expenses; and
•other factors that our board of directors deems relevant.
We bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover dividends to our stockholders at desirable levels or at all.
Common stock eligible for future sale could have an adverse effect on the market price of our common stock.
In connection with the acquisitions since 2019, we have issued 28,744,641 shares of common stock, 3,849,613 Common OP units and 1,842,917 Preferred OP units. Common OP units may be tendered by the holder for redemption in exchange for cash or, at our election, shares of common stock beginning on the first anniversary of issuance. Holders of Preferred OP units have the right to convert each Preferred OP unit into one Common OP unit plus a cash payment. On the date that the common stock is first listed on the New York Stock Exchange, the NYSE American or the Nasdaq Stock Market, each Preferred OP unit will automatically convert into one Common OP unit and the right to receive a cash payment. We have also issued (i) warrants to purchase 200,000 shares of common stock at an exercise price of $2.50 per share and (ii) warrants to purchase 3,060,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments.
Pursuant to Rule 144 under the Securities Act, the shares of common stock issued to non-affiliates will become freely transferable by the holders thereof six months after issuance, subject to us meeting the current public information requirement under Rule 144. Additionally, the holder of the Fortress Warrants (as defined below) has certain registration rights with respect to the shares of common stock issuable pursuant to the Fortress Warrants. In addition, from time to time we may issue additional shares of common stock or OP units in connection with the acquisition of properties, as compensation or otherwise, and we may grant registration rights in connection with such issuances.
We cannot predict the effect, if any, of future issuances and sales of our common stock and OP units, or the availability of shares for future sales, on the market price of the common stock. Issuances and sales of substantial amounts of our common stock, or upon the exchange of OP units, or the perception that such sales could occur, may materially and adversely affect the market price of our common stock.
Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.
Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our stockholders, to issue 1.0 million shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.
Future issuances of debt securities or preferred stock, which would rank senior to our common stock upon liquidation, or future issuances of equity securities (including OP units), which would dilute our existing stockholders and may be senior to our common stock for purposes of making distributions, may materially and adversely affect the market price of our common stock and the value of OP units.
In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. If we incur additional debt in the future, our future interest costs could increase and adversely affect our liquidity and results of operations. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities (including OP units), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. Holders of Preferred OP units are entitled to monthly distributions, a portion of which will be paid in cash and a portion of which will accrue on and be added to the liquidation preference of the Preferred OP units each month. Such monthly distributions could eliminate or otherwise limit our ability to make dividends to our common stockholders. If we issue additional preferred stock, it would likely have a preference on dividend payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make dividends to our common stockholders. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
Increases in market interest rates may reduce demand for our common stock and result in a decline in the market price of our common stock.
The market price of our common stock may be influenced by the dividend yield on our common stock (i.e., the amount of our annual dividends, if any, as a percentage of the market price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently low compared to historical levels, may lead prospective purchasers of our common stock to expect a higher dividend yield, which we may not be able, or may choose not, to provide. Higher interest rates would also likely increase our borrowing costs and decrease our operating results and cash available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decline.
Risks Related to Our Organizational Structure
Messrs. Jacoby and Yockey own a substantial interest in our company on a fully diluted basis and may have the ability to exercise significant influence on our company.
As of March 25, 2024, Messrs. Jacoby and Yockey together owned approximately 17.8% of the outstanding shares of our common stock and 19.7% of the combined outstanding shares of common stock, Common OP units (which Common OP units may be tendered by the holder for redemption in exchange for cash or, at our election, shares of common stock beginning on the first anniversary of issuance) and Preferred OP units. In addition, Mr. Neal, a member of our board of directors, owned approximately 3.3% of the outstanding shares of our common stock as of March 25, 2024. Consequently, certain members of our management and our board of directors, whose economic, tax or business interests or goals may be different or inconsistent with ours, may be able to significantly influence the outcome of matters submitted for stockholder action, including the election of directors and the approval of significant corporate transactions, including business combinations, consolidations and mergers.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of OP units in the Operating Partnership, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the Operating Partnership or any partner thereof (including certain of our executive officers and directors), on the other hand. Our directors and officers have duties to our company under Delaware law in connection with their management of our company. At the same time, our wholly owned subsidiary, Broad Street OP GP, LLC, as the general partner of the Operating Partnership, has fiduciary duties and obligations to the Operating Partnership and its limited partners under Delaware law and the Agreement of Limited Partnership of the Operating Partnership (the “OP Partnership Agreement”) in connection with the management of the Operating Partnership. The general partner’s fiduciary duties and obligations as the general partner of the Operating Partnership may come into conflict with the duties of our directors and officers of the Company. Certain of our officers and directors are limited partners in the Operating Partnership.
Unless otherwise provided for in a partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The OP Partnership Agreement provides that, in the event of a conflict between the interests of the limited partners of the Operating Partnership, on the one hand, and the separate interests of our stockholders, on the other hand, the general partner, in its capacity as the general partner of the Operating Partnership, shall act in the interests of our stockholders and is under no obligation to consider the separate interests of the limited partners of the Operating Partnership in deciding whether to cause the Operating Partnership to take or not to take any actions. The OP Partnership Agreement further provides that any decisions or actions not taken by the general partner in accordance with the OP Partnership Agreement will not violate any duties, including the duty of loyalty that the general partner, in its capacity as the general partner of the Operating Partnership, owes to the Operating Partnership and its partners.
We are a holding company with no direct operations and, as such, we will rely on funds received from the Eagles Sub-OP and the Operating Partnership to pay any distributions to our stockholders, and the interests of our stockholders are structurally subordinated to all liabilities and obligations of the Eagles Sub-OP and the Operating Partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through the Eagles Sub-OP and the Operating Partnership. Apart from interests in the Operating Partnership, we do not have any material assets. As a result, we will rely on cash distributions from the Operating Partnership, which relies on cash distributions from the Eagles Sub-OP, to pay any distributions our board of directors may declare on shares of our common stock. We also rely on distributions from the Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from the Operating Partnership. In addition, because we are a holding company, claims of our stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Eagles Sub-OP, the Operating Partnership and their respective subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the Eagles Sub-OP, the Operating Partnership and their respective subsidiaries will be available to satisfy the claims of our stockholders only after all of our and the Eagles Sub-OP’s, the Operating Partnership’s and their respective subsidiaries’ liabilities and obligations have been paid in full.
Our board of directors may change its strategies, policies or procedures without the consent of stockholders, which may subject us to different and more significant risks in the future.
Our investment, financing, leverage and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by our board of directors in its sole discretion. These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without notice to or a vote of the stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those previously disclosed. Under these circumstances, we may be exposed to different and more significant risks in the future, which could have a material adverse effect on our business and growth. In addition, our board of directors may change our policies with respect to conflicts of interest, provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our financial condition, results of operations, cash flows, trading price of our common stock and ability to satisfy our liquidity obligations and to make distributions to stockholders.
Certain provisions in the OP Partnership Agreement may delay or prevent unsolicited acquisitions of us.
Provisions in the OP Partnership Agreement may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change in our control, although some of our stockholders might consider such proposals, if made, desirable. These provisions include, among others:
•redemption rights;
•a requirement that the general partner may not be removed as the general partner of the Operating Partnership;
•transfer restrictions on OP units; and
•our ability, as the sole member of the general partner, in some cases to amend the OP Partnership Agreement to cause the Operating Partnership to issue units with terms that could delay, defer or prevent a merger or other change in control of us or the Operating Partnership without the consent of the limited partners.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event that we take certain actions which are not in our stockholders’ best interests.
Our charter and bylaws obligate us to indemnify each present and former director or officer, and the OP Partnership Agreement requires us to indemnify the general partner of the Operating Partnership, to the maximum extent permitted by Delaware law, in the defense of any proceeding to which he, she or it is made, or threatened to be made, a party by reason of his, her or its service to us or the Operating Partnership. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. We have also entered into indemnification agreements with our executive officers and directors granting them express indemnification rights. As a result, we and our stockholders may have more limited rights against our directors and officers, than might otherwise exist absent the current provisions in our charter, bylaws and indemnification agreements or that might exist for other public companies.
Anti-takeover provisions in our organizational documents and under Delaware law could delay or prevent a change of control.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions provide for, among other things:
•the ability of our board of directors to issue one or more series of preferred stock;
•advance notice requirements for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings of stockholders;
•certain limitations on convening special stockholder meetings;
•a majority of the remaining directors in office, even if less than a quorum, having the exclusive power to fill vacancies; and
•the required approval of at least 66 2/3% of the voting power of the outstanding shares of capital stock entitled to vote thereon to (i) adopt, amend, or repeal certain provisions of our amended and restated certificate of incorporation and (ii) make, amend, alter, change, add to or repeal any provision of our amended and restated bylaws.
Additionally, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder (generally a stockholder, who together with affiliates and associates, owns 15% or more of our voting rights) for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our stockholders.
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware or the U.S. federal district courts, as applicable, will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or stockholders.
Our amended and restated certificate of incorporation provides that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of the Company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee of the Company to the Company or our stockholders, creditors or other constituents, (iii) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) action asserting a claim governed by the internal affairs doctrine of the State of Delaware. Our amended and restated certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the U.S. federal district courts will be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, Section 22 of the Securities Act, creates concurrent jurisdiction for federal and state courts over all suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder and accordingly, we cannot be certain that a court would enforce such provision.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation, except our stockholders will not be
deemed to have waived (and cannot waive) compliance with the federal securities laws and the rules and regulations thereunder. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.
Termination of the employment agreements with our executive officers could be costly and prevent a change in control.
The employment agreements that we entered into with Messrs. Jacoby and Topchy provide that, if their employment with us terminates under certain circumstances (including upon a change in our control), we may be required to pay them significant amounts of severance compensation, including accelerated vesting of equity awards, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control that might involve a premium paid for our common stock or otherwise be in the best interests of our stockholders.
We may pursue less vigorous enforcement of terms of certain agreements with members of our senior management and our affiliates because of our dependence on them and conflicts of interest.
Messrs. Jacoby and Yockey entered into a representation, warranty and indemnification agreement with the Company and the Operating Partnership, pursuant to which they have agreed to indemnify the Company and the Operating Partnership for certain breaches of the representations and warranties of certain parties to the merger agreements for a period of one year following the closing of the Mergers. We may choose not to enforce, or to enforce less vigorously, our rights under this agreement because of our desire to maintain ongoing relationships with Messrs. Jacoby and Yockey, which could have a negative impact on stockholders.
Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.
In connection with the Mergers in which Common OP units were be issued as consideration, our Operating Partnership entered into tax protection agreements that provide that if we dispose of any interest in the contributed properties in a taxable transaction prior to the seventh anniversary of the completion of such Mergers, subject to certain exceptions, we will indemnify the investors for their tax liabilities attributable to the built-in gain that exists with respect to such property interests as of the time of such Mergers and the tax liabilities incurred as a result of such tax protection payment. In addition, we may enter into similar tax protection agreements in the future if we issue OP units in connection with the acquisition of properties. Therefore, although it may be in our best interests that we sell one of these properties, it may be economically prohibitive for us to do so because of these obligations.
Our tax protection agreements may require our Operating Partnership to maintain certain debt levels that otherwise would not be required to operate our business.
Under our tax protection agreements, our Operating Partnership is obligated to provide certain OP unit holders the opportunity to guarantee debt or enter into deficit restoration obligations, including upon a future repayment, retirement, refinancing or other reduction (other than scheduled amortization) of currently outstanding debt prior to the seventh anniversary of the completion of such Mergers. If we fail to make such opportunities available, we will be required to deliver to each such OP unit holder a cash payment intended to approximate the investor’s tax liability resulting from our failure to make such opportunities available to that OP unit holder and the tax liabilities incurred as a result of such tax protection payment. We agreed to these provisions in order to assist the investors in deferring the recognition of taxable gain as a result of and after such Mergers, and we may agree to similar provisions in the future if we issue OP units in connection with the acquisition of additional properties. These obligations may require us to maintain more or different indebtedness than we would otherwise require for our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The information set forth under “Our Portfolio” in Item 1 of this report is incorporated herein by reference.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTCQX under the symbol “BRST.” On March 25, 2024, there were 564 holders of record. Such information was obtained through our registrar and transfer agent. The quotations on the OTCQX are inter-dealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
Dividends
We do not have a history of paying cash dividends to holders of our common stock. In the future, we intend to make regular quarterly distributions to the holders of our common stock. However, we can provide no assurances as to the timing of dividends or as to the amount of dividends. Our ability to make distributions will depend upon our actual results of operations and earnings, economic conditions, restrictions in the Eagles Sub-OP Operating Agreement (as discussed below) and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations to us and unanticipated expenditures. For more information regarding factors that could materially and adversely affect our actual results of operations and ability to make distributions to our stockholders, see Item 1.A “Risk Factors” included elsewhere in this report. Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and the capital requirements of our company. We may be required to fund distributions from working capital or borrow to provide funds for such distributions, or we may choose to make a portion of the required distributions in the form of a taxable stock dividend to preserve our cash balance or reduce our distributions. However, we currently have no intention to make distributions using shares of our common stock.
Furthermore, we anticipate that, at least initially, any distributions that we make will exceed our then current and then accumulated earnings and profits for the relevant taxable year, as determined for U.S. federal income tax purposes, due to non-cash expenses, primarily depreciation and amortization charges that we expect to incur. Therefore, all or a portion of these distributions may represent a return of capital for U.S. federal income tax purposes. The extent to which our distributions exceed our current and accumulated earnings and profits may vary substantially from year to year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. As a result, the gain (or loss) recognized on the sale of that common stock or upon our liquidation will be decreased (or increased) accordingly.
The Eagles Sub-OP Operating Agreement contains the following restrictions on the payment of dividends to holders of our common stock: (1) we were not able to pay dividends on our common stock until January 2024 and (2) the amount of such dividends, if any, together with distributions on the OP units, will be limited to a 4.0% annual yield based on the average price of our common stock on the first trading day of each calendar month and based on the aggregate outstanding shares of common stock and OP units (other than Common OP units held by us).
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section provides a discussion of our financial condition and comparative results of operations and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in this report. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the audited consolidated financial statements included in this report.
Overview
We are focused on owning and managing essential grocery-anchored and mixed-use assets located in densely populated technology employment hubs and higher education centers within the Mid-Atlantic, Southeast and Colorado markets. As of December 31, 2023, we owned 15 properties. The properties in our portfolio are dispersed in sub-markets that we believe generally have high population densities, high traffic counts, good visibility and accessibility, which provide our tenants with attractive locations to serve the necessity-based needs of the surrounding communities. As of December 31, 2023, the properties in our portfolio were 90.1% leased and 86.2% occupied. We are focused on acquiring additional strategically positioned properties in established and developing neighborhoods primarily leased to necessity-based tenants that meet the needs of the surrounding communities in our existing markets, as well as acquiring properties in new markets that meet our investment criteria, including the Southeastern United States. In addition, we provide commercial real estate brokerage services for our own portfolio and third-party office, industrial and retail operators and tenants.
The table below provides certain information regarding our portfolio as of December 31, 2023 and 2022.
As of
As of
December 31, 2023
December 31, 2022 (1)
Number of properties
Number of states
Total rentable square feet (in thousands)
1,916
2,288
Retail
1,654
2,026
Residential
Leased % of rentable square feet (2):
Total portfolio
90.1
%
91.5
%
Retail
88.5
%
90.4
%
Residential
100.0
%
100.0
%
Occupied % of rentable square feet (2):
Total portfolio
86.2
%
85.8
%
Retail
84.1
%
84.0
%
Residential
100.0
%
100.0
%
Total residential units/beds
240/620
240/620
Monthly residential base rent per bed
$
1,099.26
$
1,081.09
Annualized residential base rent per leased square foot (3)
$
31.22
$
30.70
Annualized retail base rent per leased square foot (3)
$
14.99
$
13.76
(1)Includes Spotswood Valley Square Shopping Center, which was sold on June 30, 2023, and Dekalb Plaza, which was sold on July 20, 2023.
(2)Percent leased is calculated as (a) GLA of rentable square feet occupied or subject to a lease as of December 31 of the applicable year, divided by (b) total GLA, expressed as a percentage. The total percent occupied, which excludes leases that have been signed but not commenced, was 86.2% and 85.8% as of December 31, 2023 and 2022, respectively.
(3)Annualized base rent per leased square foot is calculated as total annualized base rent divided by leased GLA as of December 31 of the applicable year.
The table below provides certain information regarding our retail portfolio as of December 31, 2023 and 2022.
As of
As of
December 31, 2023
December 31, 2022 (1)
Total rentable square feet (in thousands)
1,654
2,026
Anchor spaces
1,104
Inline spaces
Leased % of rentable square feet (2):
Total retail portfolio
88.5
%
90.4
%
Anchor spaces
95.0
%
96.3
%
Inline spaces
81.6
%
83.4
%
Occupied % of rentable square feet (2):
Total retail portfolio
84.1
%
84.0
%
Anchor spaces
88.8
%
89.6
%
Inline spaces
79.2
%
77.3
%
Average remaining lease term (in years) (3)
5.4
5.3
(1)Includes Spotswood Valley Square Shopping Center, which was sold on June 30, 2023, and Dekalb Plaza, which was sold on July 20, 2023.
(2)Percent leased is calculated as (a) GLA of rentable commercial square feet occupied or subject to a lease as of December 31 of the applicable year, divided by (b) total GLA, expressed as a percentage. The total percent occupied, which excludes leases that have been signed but not commenced, was 84.1% and 84.0% as of December 31, 2023 and 2022, respectively.
(3)The average remaining lease term (in years) excludes future options to extend the term of the lease.
We are structured as an “Up-C” corporation with substantially all of our operations conducted through our Operating Partnership and its direct and indirect subsidiaries. As of December 31, 2023, we owned 85.7% of the OP units in our Operating Partnership, and we are the sole member of the sole general partner of our Operating Partnership.
Dispositions
On June 30, 2023, we completed the sale of Spotswood Valley Square Shopping Center for a sales price of $23.0 million in cash and recognized a net gain of $11.6 million in our consolidated statements of operations.
On July 20, 2023, we completed the sale of Dekalb Plaza for a sales price of $23.1 million in cash and recognized a net loss of $0.1 million in our consolidated statements of operations.
Related Party Transactions
See Note 17 “Related Party Transactions” in the notes to the consolidated financial statements for information concerning our related party transactions.
How We Derive Our Revenue
We derive a substantial majority of our revenue from rents received from our tenants at each of our properties. Our leases are generally triple net, pursuant to which the tenant is responsible for property expenses, including real estate taxes, insurance and maintenance, or modified gross, pursuant to which the tenant generally reimburses us for its proportional share of expenses. As of December 31, 2023, our retail portfolio (i) had annualized base rent of $22.0 million, (ii) had an annualized base rent per square foot of $14.99, (iii) was 88.5% leased (84.1% occupied) to a diversified group of tenants and (iv) had no tenant accounting for more than 4.0% of the total annualized base rent.
Additionally, a portion of Midtown Row is student housing. Accordingly, our income is also derived from student housing, which is leased by the bed on an individual lease liability basis. Individual lease liability limits each resident's liability to his or her own rent without the liability of a roommate's rent. A parent or guardian is generally required to execute each lease as a guarantor unless the resident provides adequate proof of income or financial aid. These leases typically correspond to the university's academic year, which runs from August 1st to July 31st. Midtown Row is comprised of 240 student housing units with 620 beds, and as of December 31, 2023, it was 100% leased and had annualized base rent of $8.2 million.
We also operate a third-party property management and brokerage business unit. Our brokerage business primarily consists of representations of commercial tenants for their office and retail real estate needs, either for lease transactions or purchase and sale transactions.
Factors that May Impact Future Results of Operations
Rental Income
Growth in rental income will depend on our ability to acquire additional properties that meet our investment criteria and on filling vacancies and increasing rents on the properties in our portfolio. The amount of rental income generated by the properties in our portfolio
depends on our ability to renew expiring leases or re-lease space upon the scheduled or unscheduled termination of leases, lease currently available space and maintain or increase rental rates at our properties. Our rental income in future periods could be adversely affected by local, regional or national economic conditions, an oversupply of or a reduction in demand for retail space, changes in market rental rates, our ability to provide adequate services and maintenance at our properties, and fluctuations in interest rates. In addition, economic downturns affecting our markets or downturns in our tenants’ businesses that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments to us could adversely affect our ability to maintain or increase rent and occupancy.
Scheduled Lease Expirations
Our ability to re-lease expiring space at rental rates equal to or greater than that of current rental rates will impact our results of operations. Our properties are marketed to smaller tenants that generally desire shorter-term leases. As of December 31, 2023, approximately 45.3% of our retail portfolio (based on leased GLA) was leased to tenants occupying less than 10,000 square feet. In addition, as of December 31, 2023, approximately 11.5% of our GLA was vacant and approximately 4.0% of our leases (based on total GLA) are scheduled to expire on or before December 31, 2024 or are month-to-month. See “Item 1 Business-Our Portfolio-Lease Expirations.” Although we maintain ongoing dialogue with our tenants, we generally raise the issue of renewal at least 12 months prior to lease renewal. If our current tenants do not renew their leases or terminate their leases early, we may be unable to re-lease the space to new tenants on favorable terms or at all. Our vacancy trends will be impacted by new properties that we acquire, which may include properties with higher vacancy where we identified opportunities to increase occupancy.
Acquisitions
Over the long-term, we intend to grow our portfolio through the acquisition of additional strategically positioned properties in established and developing neighborhoods primarily leased to necessity-based tenants that meet the needs of the surrounding communities in our existing markets, as well as acquiring properties in new markets that meet our investment criteria, including the Southeastern United States. We have established relationships with a wide variety of market participants, including tenants, leasing agents, investment sales brokers, property owners and lenders, in our target markets and beyond and, over the long-term, we believe that we will have opportunities to acquire properties that meet our investment criteria at attractive prices.
General and Administrative Expenses
General and administrative expenses include employee compensation costs, professional fees, consulting and other general administrative expenses. We expect an increase in general and administrative expenses in the future related to stock issuances to employees. We expect that our general and administrative expenses will rise in some measure as our portfolio grows but that such expenses as a percentage of our revenue will decrease over time due to efficiencies and economies of scale.
Capital Expenditures
We incur capital expenditures at our properties that vary in amount and frequency based on each property’s specific needs. We expect our capital expenditures will be for recurring maintenance to ensure our properties are in good working condition, including parking and roof repairs, façade maintenance and general upkeep. We also will incur capital expenditures related to repositioning and refurbishing properties where we have identified opportunities to improve our properties to increase income and occupancy, and we may incur capital expenditures related to redevelopment or development consistent with our business and growth strategies.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management considers accounting estimates or assumptions critical in either of the following cases:
•the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change; and
•the effect of the estimates and assumptions is material to the financial statements.
Management believes the current assumptions used to make estimates in the preparation of the consolidated financial statements are appropriate and not likely to change in the future. However, actual experience could differ from the assumptions used to make estimates, resulting in changes that could have a material adverse effect on our consolidated results of operations, financial position and/or liquidity. These estimates will be made and evaluated on an ongoing basis using information that is available as well as various other assumptions believed to be reasonable under the circumstances. Management has discussed the determination and disclosures of these critical accounting policies with the audit committee of the board of directors.
The following presents information about our critical accounting policies including the material assumptions used to develop significant estimates. Certain of these critical accounting policies contain discussion of judgments and estimates that have not yet been required by management but that it believes may be reasonably required of it to make in the future. See Note 2 “Accounting Policies and Related Matters” to the consolidated financial statements for additional information on significant accounting policies and the effect of recent accounting pronouncements.
Principles of Consolidation
The consolidated financial statements include the accounts of our wholly owned subsidiaries, and all material intercompany transactions and balances are eliminated in consolidation. We consolidate entities in which we own less than 100% of the equity interest but have a controlling interest through a variable interest, voting rights or other means. For these entities, we record a noncontrolling interest representing the equity held by other parties.
From inception, we continually evaluate all of our transactions and investments to determine if they represent variable interests subject to the variable interest entity (“VIE”) consolidation model and then determine which business enterprise is the primary beneficiary of its operations. We make judgments about which entities are VIEs based on an assessment of whether (i) the equity investors as a group, if any, do not have a controlling financial interest or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. We consolidate investments in VIEs when we are determined to be the primary beneficiary. This evaluation is based on our ability to direct and influence the activities of a VIE that most significantly impact that entity’s economic performance.
For investments not subject to the variable interest entity consolidation model, we will evaluate the type of rights held by the limited partner(s) or other member(s), which may preclude consolidation in circumstances in which the sole general partner or managing member would otherwise consolidate the limited partnership. The assessment of limited partners’ or members’ rights and their impact on the presumption of control over a limited partnership or limited liability corporation by the sole general partner or managing member should be made when an investor becomes the sole general partner or managing member and should be reassessed if (i) there is a change to the terms or in the exercisability of the rights of the limited partners or members, (ii) the sole general partner or member increases or decreases its ownership in the limited partnership or corporation or (iii) there is an increase or decrease in the number of outstanding limited partnership or membership interests.
Our ability to assess correctly our influence or control over an entity at inception of our involvement or on a continuous basis when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. Subsequent evaluations of the primary beneficiary of a VIE may require the use of different assumptions that could lead to identification of a different primary beneficiary, resulting in a different consolidation conclusion than what was determined at inception of the arrangement.
Revenue Recognition
Leases of Real Estate Properties: At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. Currently, all of our lease arrangements are classified as operating leases. Rental revenue for operating leases is recognized on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If we determine that substantially all future lease payments are not probable of collection, we will account for these leases on a cash basis. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or by us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of the tenant improvements is subject to significant judgment. If our assessment of the owner of the tenant improvements for accounting purposes were different, the timing and amount of revenue recognized would be impacted.
A majority of our leases require tenants to make estimated payments to the Company to cover their proportional share of operating expenses, including, but not limited to, real estate taxes, property insurance, routine maintenance and repairs, utilities and property management expenses. We collect these estimated expenses and are reimbursed by tenants for any actual expense in excess of estimates or reimburse tenants if collected estimates exceed actual operating results. The reimbursements are recorded in rental income, and the expenses are recorded in property operating expenses, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and bear the credit risk.
We assess the probability of collecting substantially all payments under our leases based on several factors, including, among other things, payment history of the lessee, the financial strength of the lessee and any guarantors, historical operations and operating trends and current and future economic conditions and expectations of performance. If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental income and limit our rental income to the lesser of lease income on a straight-line basis plus variable rents when they become accruable or cash collected. If we change our conclusion regarding the probability of collecting rent payments required by a lessee, we may recognize an adjustment to rental income in the period we make a change to our prior conclusion.
Contractual rent increases of renewal options are often fixed at the time of the initial lease agreement which may result in tenants being able to exercise their renewal options at amounts that are less than the fair value of the rent at the date of the renewal. In addition to fixed base rents, certain rental income derived from our tenant leases is variable and may be dependent on percentage rent. Variable lease payments from percentage rents are earned by us in the event the tenant's gross sales exceed certain amounts. Terms of percentage rent are agreed upon in the tenant’s lease and will vary based on the tenant's sales.
We recognize lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured. Upon early lease terminations, we record gains (losses) related to unrecovered tenant-specific intangibles and other assets.
Leasing Commissions: We earn leasing commissions as a result of providing strategic advice and connecting tenants to third-party property owners in the leasing of retail space. We record commission revenue on real estate leases at the point in time when the performance obligation is satisfied, which is generally upon lease execution. Terms and conditions of a commission agreement may include, but are not limited to, execution of a signed lease agreement and future contingencies, including tenant’s occupancy, payment of a deposit or payment of first month’s rent (or a combination thereof).
Property and Asset Management Fees: We provide real estate management services for owners of properties, representing a series of daily performance obligations delivered over time. Pricing is generally in the form of a monthly management fee based upon a percentage of property-level cash receipts or some other variable metric.
When accounting for reimbursements of third-party expenses incurred on a client’s behalf, we determine whether we are acting as a principal or an agent in the arrangement. When we are acting as a principal, our revenue is reported on a gross basis and comprises the entire amount billed to the client and reported cost of services includes all expenses associated with the client. When we are acting as an agent, our fee is reported on a net basis as revenue for reimbursed amounts is netted against the related expenses.
Engineering Services: We provide engineering services to third-party property owners on an as needed basis at the properties where we are the property or asset manager. We receive consideration at agreed upon fixed rates for the time incurred plus a reimbursement for costs incurred and revenue is recognized over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. We account for performance obligations using the right to invoice practical expedient. We apply the right to invoice practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contract. Under this practical expedient, we recognize revenue in an amount that corresponds directly with the value to the customer of performance completed to date and for which there is a right to invoice the customer.
Real Estate Investments
We evaluate each purchase transaction to determine whether the acquired assets and liabilities assumed meet the definition of a business and make estimates as part of our allocation of the purchase prices. For acquisitions accounted for as asset acquisitions, the purchase price, including transaction costs, is allocated to the various components of the acquisition based upon the relative fair value of each component. For acquisitions accounted for as business combinations, the purchase price is allocated at fair value of each component and transaction costs are expensed as incurred.
We assess the fair value of acquired assets and acquired liabilities in accordance with the ASC Topic 805 Business Combinations and allocate the purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market and economic conditions that may affect the property. The most significant components of our allocations are typically the allocation of fair value to land and buildings and in-place leases and other intangible assets. The estimates of the fair value of buildings will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired.
For any value assigned to in-place leases and other intangibles, including the assessment as to the existence of any above-or below-market leases, management makes its best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. These assumptions affect the amount of future revenue that we will recognize over the remaining lease term for the acquired in-place leases. The values of any identified above-or below-market leases are based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease, or for below-market leases including any bargain renewal option terms. Above-market lease values are recorded as a reduction of rental income over the lease term while below-market lease values are recorded as an increase to rental income over the lease term. The recorded values of in-place lease intangibles are recognized in amortization expense over the initial term of the respective leases.
Transaction costs related to asset acquisitions are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed business combinations are expensed as incurred.
Asset Impairment
Real estate asset impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses if there are triggering events including macroeconomic conditions, loss of an anchor tenant and the ability to re-tenant the space, significant and persistent delinquencies, unanticipated decreases in or sustained reductions of net operating income and government-mandated compliance with an adverse effect to the Company's cost basis or operating costs. If management concludes there are triggering events, we then assess the impairment of properties individually. Management analyzes recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the property. If the analysis indicates that the
carrying value of a property is not recoverable from its estimated undiscounted future cash flows, an impairment loss is recognized. Impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used. In determining fair value, we use current appraisals or other third-party opinions of value and other estimates of fair value such as estimated discounted future cash flows. The determination of future cash flows requires significant estimates by management. In management’s estimate of cash flows, it considers factors such as expected future sale of an asset, capitalization rates, holding periods and the undiscounted future cash flow analysis. Subsequent changes in estimated cash flows could affect the determination of whether an impairment exists.
Real Estate Held For Sale
We record properties held for sale, and any associated mortgage payable, assets and other liabilities associated with such properties as real estate held for sale, on our consolidated balance sheets when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected to occur within one year. Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell, an impairment expense is recognized. We estimate fair value, less estimated costs to sell, based on similar real estate sales transactions or the property’s sale price, if available. As of December 31, 2023, no properties were reclassified as held for sale.
Income Taxes
We account for deferred income taxes using the asset and liability method and recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, we determine deferred tax assets and liabilities based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes us to change our judgment about expected future tax consequences of events, is included in the tax provision when such changes occur. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes us to change our judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The estimate of our tax liabilities relating to uncertain tax positions requires management to assess uncertainties and to make judgments about the application of complex tax laws and regulations. We recognize interest and penalties associated with uncertain tax positions as part of income tax expense.
Recently Issued Accounting Standards
See Note 2 “Accounting Policies and Related Matters” in the notes to the consolidated financial statements for information concerning recently issued accounting standards.
Results of Operations
This section provides a comparative discussion on our results of operations and should be read in conjunction with our consolidated financial statements, including the accompanying notes. See “Critical Accounting Policies and Estimates” for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.
Comparison of the year ended December 31, 2023 to the year ended December 31, 2022
For the year ended December 31,
Change
(dollars in thousands)
$
%
Revenues
Rental income
$
38,990
$
29,871
$
9,119
%
Commissions
2,897
2,523
%
Management and other income
(275
)
(49
%)
Total revenues
42,169
32,951
9,218
%
Operating Expenses
Cost of services
1,928
1,917
%
Property operating
11,653
8,672
2,981
%
Depreciation and amortization
18,778
17,436
1,342
%
Impairment of real estate assets
-
N/A
Impairment of real estate held for sale
2,353
-
2,353
N/A
Bad debt expense
(101
)
(43
%)
General and administrative
12,456
13,513
(1,057
)
(8
%)
Total operating expenses
48,275
41,773
6,502
%
Gain on disposal of properties
11,486
-
11,486
N/A
Operating gain (loss)
5,380
(8,822
)
14,202
%
Other income (expense)
Net interest and other income
3,508
%
Derivative fair value adjustment
(692
)
2,638
(3,330
)
(126
%)
Net gain (loss) on fair value change on debt held under the fair value option
2,344
(3,151
)
5,495
%
Interest expense
(18,504
)
(12,710
)
(5,794
)
%
Loss on extinguishment of debt
(43
)
(59
)
(27
%)
Other expense
(68
)
(52
)
(16
)
%
Total other expense
(16,025
)
(13,308
)
(2,717
)
%
Income tax benefit, net
3,628
5,857
(2,229
)
(38
%)
Net loss
$
(7,017
)
$
(16,273
)
$
9,256
(57
%)
Less: Preferred equity return on Fortress preferred equity
(14,641
)
(1,492
)
(13,149
)
%
Less: Preferred equity accretion to redemption value
(3,247
)
-
(3,247
)
N/A
Less: Preferred OP units return
(483
)
(48
)
(435
)
%
Plus: Net loss attributable to noncontrolling interest
3,924
2,522
1,402
%
Net loss attributable to common stockholders
$
(21,464
)
$
(15,291
)
$
(6,173
)
%
Revenues for the year ended December 31, 2023 increased approximately $9.2 million, or 28%, compared to the year ended December 31, 2022, as a result of approximately $9.1 million and $0.4 million increases in rental income and commissions, respectively. The increases were partially offset by an approximately $0.3 million decrease in management and other income. Rental income primarily increased as a result of the acquisition of two properties in the fourth quarter of 2022, which had aggregate rental income of $10.8 million during 2023, which was partially offset by the sale of two properties in 2023. The increase in commissions is due to a higher transaction volume of leasing. The decrease in management and other fees is mainly attributable to fees recognized in 2022 related to properties that were acquired in the fourth quarter of 2022.
Total operating expenses for the year ended December 31, 2023 increased approximately $6.5 million, or 16%, compared to the year ended December 31, 2022, primarily from: (i) an increase in property operating expenses of $3.0 million which is primarily related to two properties acquired in 2022, partially offset by the sale of two properties during 2023, (ii) a $2.4 million impairment of real estate assets held for sale as a result of reducing the carrying value of Dekalb Plaza for the amount that exceeded the property's fair value less estimated selling costs, (iii) an increase in depreciation and amortization expense of approximately $1.3 million, primarily related to two properties that were acquired in November 2022 (which comprised $5.0 million of the total increase in depreciation and amortization expense), partially offset by a $3.0 million decrease in amortization of in-place lease tangibles and a $0.7 million decrease in real property depreciation; and (iv) $1.0 million in impairment of real estate assets due to the early termination of certain leases. These
increases were partially offset by a decrease in general and administrative expenses of approximately $1.1 million mainly attributable to a decrease in stock compensation expense of approximately $0.5 million, a decrease in professional service fees of approximately $0.4 million and a decrease in payroll and related expenses of approximately $0.1 million.
Gain on disposal of properties for the year ended December 31, 2023 reflects the gain recognized in connection with the sale of Spotswood Valley Square Shopping Center, partially offset by the loss recognized in connection with the sale of Dekalb Plaza.
Net interest and other income for the year ended December 31, 2023 increased approximately $0.9 million compared to the year ended December 31, 2022, primarily as a result of approximately $0.7 million of excess insurance proceeds of which $0.5 million was due to business interruption relating to a wind storm that damaged the roof at one of our retail properties.
The loss on derivative fair value adjustment was approximately $0.7 million for the year ended December 31, 2023 compared to a gain of approximately $2.6 million for the year ended December 31, 2022. The decline of approximately $3.3 million was primarily due to a $4.6 million change in fair value of interest rate swaps partially offset by a $1.3 million change in fair value of the embedded derivative liability relating to the Preferred Equity Investment.
Net gain (loss) on fair value change on debt held under the fair value option reflects the change in the fair value of the Fortress Mezzanine Loan, for which we elected the fair value option.
Interest expense for the year ended December 31, 2023 increased approximately $5.8 million, or 46%, compared to the year ended December 31, 2022, primarily due to debt that was assumed or originated in connection with two properties that were acquired during the fourth quarter of 2022, which was partially offset by the repayment of debt in connection with the sale of two properties during the second and third quarter of 2023. We had additional net borrowings of approximately $34.2 million during 2023.
Income tax benefit decreased approximately $2.2 million over the prior year, due to a $3.0 million valuation allowance against the deferred tax asset and the sale of Spotswood Valley Square Shopping Center, which was partially offset by certain properties generating additional tax losses compared to the prior year.
Preferred equity return on Fortress preferred equity reflects the portion of the distribution to the Fortress Member that is payable in cash and the portion that is accrued and added to the Preferred Equity Investment.
Preferred equity accretion to redemption value reflects the accretion of the carrying value of the Fortress Preferred Interest to the Redemption Amount (as defined below) over the remaining term.
Preferred OP units return reflects the portion of the distribution to holders of the Preferred OP units that are payable in cash and the portion that are accrued and added to the liquidation preference of the Preferred OP units.
Net loss attributable to noncontrolling interest for the year ended December 31, 2023 increased approximately $1.4 million compared to the year ended December 31, 2022. The net loss attributable to noncontrolling interest reflects the proportionate share of the OP units held by outside investors in the operating results of the Operating Partnership.
Non-GAAP Performance Measures
We present the non-GAAP performance measures set forth below. These measures should not be considered as an alternative to, or more meaningful than, net income (calculated in accordance with GAAP) or other GAAP financial measures, as an indicator of financial performance and are not alternatives to, or more meaningful than, cash flow from operating activities (calculated in accordance with GAAP) as a measure of liquidity. Non-GAAP performance measures have limitations as they do not include all items of income and expense that affect operations, and accordingly, should always be considered as supplemental financial results to those calculated in accordance with GAAP. Our computation of these non-GAAP performance measures may differ in certain respects from the methodology utilized by other real estate companies and, therefore, may not be comparable to similarly titled measures presented by other real estate companies. Investors are cautioned that items excluded from these non-GAAP performance measures are relevant to understanding and addressing financial performance.
Net Operating Income and Same-center Net Operating Income
NOI is a supplemental non-GAAP measure of the operating performance of our properties. We define NOI as rental income less property operating expenses, including real estate taxes. We also exclude the impact of straight-line rent revenue, net amortization of above and below market leases, depreciation and amortization, interest, impairments and gains or losses of real estate assets and other significant infrequent items that create volatility in our earnings and make it difficult to determine the earnings generated by our core ongoing business. Same-center NOI should not be viewed as an alternative measure to net income or loss calculated in accordance with GAAP as a measurement of our financial performance. We believe that NOI is a helpful measure because it provides additional information to allow management, investors and our current and potential creditors to evaluate and compare our core operating results.
Same-center NOI is a supplemental non-GAAP financial measure which we use to assess our operating results. For the years ended December 31, 2023 and 2022, Same-center NOI represents the NOI for thirteen properties that were wholly owned and operational for the entire portion of each reporting period. Same-center NOI should not be viewed as an alternative measure to net income or loss calculated in accordance with GAAP as a measurement of our financial performance, as it does not reflect the operations of our entire portfolio. We believe that Same-center NOI is a helpful measure because it provides additional information to allow management, investors and our current and potential creditors to enhance the comparability of our operating performance between periods.
The table below compares Same-center NOI for the years ended December 31, 2023 and 2022:
For the year ended December 31,
Change
(unaudited, dollars in thousands)
$
%
Revenues
Rental income (1)
$
24,067
$
23,338
$
%
Operating Expenses
Property operating
8,167
8,283
(116
)
(1
%)
Total Same-center NOI
$
15,900
$
15,055
$
%
(1)Excludes straight-line revenue and net amortization of above and below market lease.
Our reconciliation of Same-center NOI for the years ended December 31, 2023, and 2022 is as follows:
For the Year Ended December 31,
(unaudited, dollars in thousands)
Net loss
$
(7,017
)
$
(16,273
)
Adjusted to exclude:
Commissions
(2,897
)
(2,523
)
Management and other income
(282
)
(557
)
Straight-line rent revenue
(1,137
)
(945
)
Amortization of above and below market lease, net
(387
)
Consolidated eliminations adjustments
(1,588
)
(1,495
)
Cost of services
1,928
1,917
Depreciation and amortization
18,778
17,436
Impairment of real estate assets
-
Impairment of real estate held for sale
2,353
-
Bad debt expense
General and administrative
12,456
13,513
Gain on disposal of properties
(11,486
)
-
Net interest and other income
(938
)
(26
)
Derivative fair value adjustment
(2,638
)
Net (gain) loss on fair value change on debt held under the fair value option
(2,344
)
3,151
Interest expense
18,504
12,710
Loss on extinguishment of debt
Other expense
Income tax benefit, net
(3,628
)
(5,857
)
NOI
24,931
18,372
Less: Non Same-center NOI relating to acquisitions - residential (1)
(5,620
)
(624
)
Less: Non Same-center NOI relating to acquisitions - retail (2)
(1,669
)
Less: Non Same-center NOI relating to dispositions (3)
(1,742
)
(2,943
)
Total Same-center NOI
$
15,900
$
15,055
(1)Reflects operating revenues and expenses for the residential portion of Midtown Row.
(2)Reflects operating revenues and expenses for Lamar Station Plaza West and the retail portion of Midtown Row.
(3)Reflects operating revenues and expenses for Spotswood Valley Square Shopping Center and Dekalb Plaza.
Funds From Operations and Adjusted Funds from Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of real estate companies' operating performance. The National Association of Real Estate Investment Trusts (“Nareit”) defines FFO as follows: net income (loss), computed in accordance with GAAP, excluding (i) depreciation and amortization related to real estate, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and losses from change in control, (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and (v) after adjustments for unconsolidated partnerships and joint ventures calculated to reflect FFO on the same basis.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Considering the nature of our business as a real estate owner and operator, we believe that FFO is useful to investors in measuring our operating and financial performance because the definition excludes items included in net income that do not relate to or are not indicative of our operating and financial performance, such as depreciation and amortization related to
real estate, and items which can make periodic and peer analysis of operating and financial performance more difficult, such as gains and losses from the sale of certain real estate assets and impairment write-downs of certain real estate assets. Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating properties, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. Also, FFO should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
Adjusted FFO (“AFFO”) is calculated by excluding the effect of certain items that do not reflect ongoing property operations, including stock-based compensation expense, deferred financing and debt issuance cost amortization, non-real estate depreciation and amortization, straight-line rent, non-cash interest expense and other non-comparable or non-operating items. Management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO.
AFFO is not intended to represent cash flow or liquidity for the period and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) is the most directly comparable GAAP financial measure to AFFO. Management believes that AFFO is a widely recognized measure of the operations of real estate companies, and presenting AFFO enables investors to assess our performance in comparison to other real estate companies. AFFO should not be considered as an alternative to net income/(loss) (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
Our reconciliation of net income (loss) to FFO and AFFO for the years ended December 31, 2023, and 2022 is as follows:
For the Year Ended December 31,
(dollars in thousands)
Net loss
$
(7,017
)
$
(16,273
)
Gain on disposal of properties
(11,486
)
-
Impairment of real estate assets held for sale
2,353
-
Real estate depreciation and amortization
18,425
17,259
Amortization of direct leasing costs
FFO attributable to common shares and OP units
2,384
1,030
Stock-based compensation expense
1,477
1,937
Deferred financing and debt issuance cost amortization
1,512
Impairment of real estate assets
-
Intangibles amortization
(387
)
Non-real estate depreciation and amortization
Non-cash interest expense
1,253
Recurring capital expenditures
(1,347
)
(981
)
Straight-line rent revenue
(1,137
)
(945
)
Minimum return on preferred interests
(331
)
(1,112
)
Non-cash fair value adjustment
(1,652
)
AFFO attributable to common shares and OP units
$
3,017
$
1,951
Weighted average shares outstanding to common shares
Diluted
35,608,163
32,378,526
Earnings per share of common stock
Net loss per share attributable to stockholders - diluted (1)
$
(0.60
)
$
(0.47
)
Weighted average shares outstanding to common shares and OP units
Diluted
41,168,459
35,412,984
FFO per common share and OP unit
Diluted (2)
$
0.06
$
0.03
(1)The weighted average common shares outstanding used to compute net loss per diluted common share only includes the common shares. We have excluded the OP units since the conversion of OP units is anti-dilutive in the computation of diluted EPS for the periods presented.
(2)The weighted average common shares outstanding used to compute FFO per diluted common share includes OP units that were excluded from the computation of diluted EPS. Conversion of these OP units is dilutive in the computation of FFO per diluted common share but is anti-dilutive for the computation of diluted EPS for the periods presented.
Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre
We calculate EBITDAre in accordance with standards established by Nareit and define EBITDAre as net income or loss computed in accordance with GAAP (i) plus depreciation and amortization, interest expense and income tax expense, (ii) plus or minus losses or gains on the disposition of properties, (iii) plus impairment losses and (iv) with appropriate adjustments to reflect our share of EBITDAre of unconsolidated affiliates and consolidated affiliates with non-controlling interests, in each case as applicable. We define Adjusted EBITDAre as EBITDAre plus non-cash stock compensation, non-cash amortization related to above and below market leases and less straight-line rent revenue and non-cash fair value adjustment. Some of the adjustments can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates. EBITDAre and Adjusted EBITDAre are non-GAAP financial measures and should not be viewed as alternatives to net income or loss calculated in accordance with GAAP as a measurement of our operating performance. We believe that EBITDAre and Adjusted EBITDAre are helpful measures because they provide additional information to allow management, investors and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt. We also believe that EBITDAre and Adjusted EBITDAre can help facilitate comparisons of operating performance between periods and with other real estate companies.
Our reconciliation of net loss to EBIDTAre and Adjusted EBITDAre for the years ended December 31, 2023 and 2022 is as follows:
For the Year Ended December 31,
(unaudited, dollars in thousands)
Net loss
$
(7,017
)
$
(16,273
)
Interest expense
18,504
12,710
Income tax benefit
(3,628
)
(5,857
)
Depreciation and amortization expense
18,778
17,436
EBITDA
26,637
8,016
Gain on sale of real estate
(11,486
)
-
Impairment loss
3,326
-
EBITDAre
18,477
8,016
Stock-based compensation expense
1,477
1,937
Straight-line rent revenue
(1,137
)
(945
)
Amortization of above and below market lease, net
(387
)
Non-cash fair value adjustment
(1,652
)
Adjusted EBITDAre
$
17,484
$
9,134
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay any outstanding borrowings, fund and maintain our assets and operations and other general business needs.
Our short-term liquidity requirements consist primarily of debt service requirements, operating expenses, recurring capital expenditures (such as repairs and maintenance of our properties) and non-recurring capital expenditures (such as capital improvements and tenant improvements) and cash distributions on the Fortress Preferred Interest and Preferred OP units. Except as noted below, we expect to meet our short-term liquidity requirements through cash on hand and cash reserves and additional secured and unsecured debt. As of December 31, 2023 and March 25, 2024, we had unrestricted cash and cash equivalents of approximately $9.8 million and $15.1 million, respectively, available for current liquidity needs and restricted cash of approximately $4.0 million and $2.6 million, respectively, which is available for debt service shortfall requirements, certain capital expenditures, real estate taxes and insurance.
As of December 31, 2023, we had three mortgage loans on three properties (Vista Shops at Golden Mile, Hollinswood Shopping Center and Brookhill Shopping Center) totaling approximately $32.9 million that mature within twelve months of the date on which this report is filed with the SEC. One of the mortgage loans (Vista Shops at Golden Mile) with a balance of $11.3 million as of December 31, 2023, was refinanced on February 8, 2024. We are currently seeking to refinance the remaining loans prior to maturity in December 2024 and January 2025.
In addition, the Basis Term Loan has an outstanding balance of $8.5 million and matures on July 1, 2024. We exercised all our extension options and are in discussions with other parties to refinance the Basis Term Loan with new loans. As of March 25, 2024, we
have executed a nonbinding term sheet with a lender to refinance the Basis Term Loan. The lender is in the process of completing due diligence, and we are in the process of fulfilling the closing requirements. We expect to close the new loan in the second quarter of 2024. There can be no assurances that we will be successful in our efforts to refinance the Basis Term Loan on favorable terms, on the expected timeline or at all. If we fail to refinance or otherwise repay the Basis Term Loan and contribute the applicable properties to the Eagles Sub-OP by the applicable outside dates (as described below), it would be considered a Trigger Event under the Eagles Sub-OP Operating Agreement, upon which the Fortress Member has certain rights, including the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest. See “-Fortress Preferred Equity Investment” below.
In addition to our efforts to refinance the Basis Term Loan as previously described, management is in discussions with the current lenders as well as various other lenders to extend or refinance the other two mortgage loans prior to maturity. Although we have a history of demonstrating our ability to successfully refinance our loans as they come due, there can be no assurances that we will be successful in our efforts to refinance the loans on favorable terms or at all. While it is not our current plan, we also have the option to sell properties securing the loans and use the proceeds to satisfy the outstanding loan obligations. If we are ultimately unable to refinance these loans prior to maturity or sell the properties prior to maturity, the lenders have the right to place the loans in default and ultimately foreclose on the properties securing the loans. Under this circumstance, we would not have any further financial obligations to the lenders as the current estimated market values of these properties are in excess of the outstanding loan balances.
Our long-term liquidity requirements are expected to consist primarily of funds necessary for the repayment of debt at or prior to maturity, capital improvements, development and/or redevelopment of properties and property acquisitions. We expect to meet our long-term liquidity requirements through net cash from operations, additional secured and unsecured debt and, subject to market conditions, the issuance of additional shares of common stock, preferred stock or OP units.
Our access to capital depends upon a number of factors over which we have little or no control, including general market conditions, the market’s perception of our current and potential future earnings and cash distributions, our current debt levels and the market price of the shares of our common stock. Although our common stock is quoted on the OTCQX, there is a very limited trading market for our common stock, and if a more active trading market is not developed and sustained, we will be limited in our ability to issue equity to fund our capital needs. If we cannot obtain capital from third-party sources, we may not be able to meet the capital and operating needs of our properties, satisfy our debt service obligations or pay dividends to our stockholders. Until we have greater access to capital, we will likely structure future acquisitions through joint ventures or other syndicated structures in which outside investors will contribute a majority of the capital and we will manage the assets.
As described below, under our existing debt agreements, we are subject to continuing covenants. As of December 31, 2023, we were in compliance with all of the covenants under our debt agreements. In the event of a default, the lenders could accelerate the timing of payments under the applicable debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition and results of operations.
Consolidated Indebtedness and Preferred Equity
Indebtedness Summary
The following table sets forth certain information regarding our outstanding indebtedness as of December 31, 2023:
(dollars in thousands)
Maturity Date
Rate Type (1)
Interest
Rate
Balance Outstanding at December 31, 2023
Basis Term Loan (net of discount of $21)
July 1, 2024
Floating (2)
8.62%
$
8,491
(3)
Hollinswood Shopping Center Loan
December 1, 2024
SOFR + 2.36% (4)
4.06%
12,437
Avondale Shops Loan
June 1, 2025
Fixed
4.00%
2,868
Vista Shops at Golden Mile Loan (net of discount of $9) (5)
June 24, 2024
Fixed
7.73%
11,252
Brookhill Azalea Shopping Center Loan
January 31, 2025
SOFR + 2.75%
8.10%
9,198
Crestview Shopping Center Loan (net of discount of $53)
September 29, 2026
Fixed
7.83%
11,947
Lamar Station Plaza West Loan (net of discount of $73)
December 10, 2027
Fixed
5.67%
18,927
Highlandtown Village Shopping Center Loan (net of discount of $38) (6)
May 10, 2028
SOFR + 2.5%
6.09%
8,712
Cromwell Field Shopping Center Loan (net of discount of $60)
December 22, 2027
Fixed
6.71%
10,597
Midtown Row Loan (net of discount of $19)
December 1, 2027
Fixed
6.48%
75,981
Midtown Row/Fortress Mezzanine Loan (7)
December 1, 2027
Fixed
12.00%
16,187
Coral Hills Shopping Center Loan (net of discount of $189)
October 31, 2033
Fixed
6.95%
12,560
West Broad Shopping Center Loan (net of discount of $88)
December 21, 2033
Fixed
7.00%
11,712
The Shops at Greenwood Village Loan (net of discount of $80)
October 10, 2028
SOFR + 2.85% (8)
5.85%
22,218
233,087
Unamortized deferred financing costs, net
(2,038
)
Total
$
231,049
_____________________
(1)Beginning July 1, 2023, one-month London Inter-Bank Offered Rate (“LIBOR”) is no longer published and all remaining debt referencing LIBOR was replaced with the Secured Overnight Financing Rate (“SOFR”).
(2)The interest rate for the Basis Term Loan is the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. On November 23, 2022, we entered into an interest rate cap agreement to cap the SOFR interest rate at 4.65% effective January 1, 2023, which replaced the existing interest rate cap agreement that capped the SOFR interest rate at 3.5%.
(3)The outstanding balance includes less than $0.1 million of exit fees as of December 31, 2023.
(4)We have entered into an interest rate swap which fixes the interest rate of the loan at 4.06%. On May 3, 2023, the Hollinswood loan agreement was amended to replace LIBOR with SOFR, effective July 1, 2023.
(5)On June 28, 2023, we entered into an agreement to amend the interest rate to 7.73% and extend the maturity date of this loan to June 24, 2024. On February 8, 2024, we refinanced the Vista Shops at Golden Mile Loan to extend the maturity date to February 8, 2029 and entered into an interest rate swap which fixes the interest rate of the new loan at 6.90%.
(6)On May 5, 2023, we refinanced the Highlandtown Village Shopping Center Loan to extend the maturity date to May 10, 2028 and entered into an interest rate swap which fixes the interest rate of the new loan at 6.085% as described below under the heading “-Mortgage Indebtedness”. The prior loan carried an interest rate of 4.13%.
(7)The outstanding balance reflects the fair value of the debt.
(8)On October 6, 2021, we entered into an interest rate swap which fixes the interest rate of this loan at 4.082%. On May 1, 2023, the interest rate was amended to replace Prime with SOFR plus a spread of 2.85%. We terminated the existing interest rate swap and entered into a new interest rate swap agreement to fix the interest rate at 5.85%.
The following table sets forth our scheduled principal repayments and maturities during each of the next five years and thereafter as of December 31, 2023:
(dollars in thousands)
Year (1)
Amount
Due
Percentage
of Total
$
33,883
14.5
%
14,004
6.0
%
14,695
6.3
%
120,120
51.4
%
28,567
12.2
%
Thereafter
22,503
9.6
%
$
233,772
100.0
%
_____________________
(1)Does not reflect the exercise of any maturity extension options.
Basis Term Loan
In December 2019, six of our subsidiaries, as borrowers (collectively, the “Borrowers”), and Big Real Estate Finance I, LLC, a subsidiary of a real estate fund managed by Basis Management Group, LLC (“Basis”), as lender (the “Basis Lender”), entered into a loan agreement (the “Basis Loan Agreement”) pursuant to which the Basis Lender made a senior secured term loan of up to $66.9 million (the “Basis Term Loan”) to the Borrowers. Pursuant to the Basis Loan Agreement, the Basis Term Loan was originally secured by mortgages on the following properties: Coral Hills, Crestview, Dekalb, Midtown Colonial, Midtown Lamonticello and West Broad. As of December 31, 2023, the Basis Term Loan is secured by Midtown Colonial and Midtown Lamonticello. The Basis Term Loan initial maturity was January 1, 2023, subject to two one-year extension options, subject to certain conditions. On November 2, 2022, we exercised one of the one-year extension options and the maturity date was extended to January 1, 2024. On December 6, 2023, we exercised the remaining extension option and the maturity date was extended to July 1, 2024.
The Basis Loan Agreement was amended and restated on June 29, 2022 to replace LIBOR with SOFR. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. The Borrowers entered into an interest rate cap agreement that effectively capped the prior-LIBOR rate at 3.50% per annum. On August 1, 2022, the interest rate cap agreement was modified to cap the SOFR rate at 3.50% per annum. The interest rate cap expired on January 1, 2023. On November 23, 2022, we entered into an interest rate cap agreement, effective January 1, 2023, to cap the SOFR interest rate at 4.65%. As of December 31, 2023, the interest rate of the Basis Term Loan was 8.62%.
On July 20, 2023, we sold Dekalb and repaid $17.4 million of the outstanding principal balance on the Basis Term Loan with proceeds from the sale. On September 29, 2023, we received a loan secured by Crestview and repaid $14.3 million of the outstanding principal balance on the Basis Term Loan with proceeds from the new mortgage loan and with cash on hand. Also, on October 31, 2023, we received a loan secured by Coral Hills and repaid $12.8 million of the outstanding principal balance on the Basis Term Loan with proceeds from the new mortgage loan. Additionally, on December 21, 2023, we received a loan secured by West Broad and repaid $13.9 million of the outstanding principal balance on the Basis Term Loan with proceeds from the new mortgage loan and with cash on hand. As of December 31, 2023, the outstanding balance of the Basis Term Loan was $8.5 million.
Certain of the Borrowers’ obligations under the Basis Loan Agreement are guaranteed by the Company and by Michael Z. Jacoby, the Company’s chairman and chief executive officer, and Thomas M. Yockey, a director of the Company. The Company has agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan.
The Basis Loan Agreement contains certain customary representations and warranties and affirmative negative and restrictive covenants, including certain property related covenants for the properties securing the Basis Term Loan, including a requirement that certain capital improvements be made. The Basis Lender has certain approval rights over amendments or renewals of material leases (as defined in the Basis Loan Agreement) and property management agreements for the properties securing the Basis Term Loan.
If (i) an event of default exists, (ii) the Company's subsidiary serving as the property manager (“BSR”) or any other subsidiary of the Company serving as property manager for one of the secured parties becomes bankrupt, insolvent or a debtor in an insolvency proceeding, or there is a change of control of BSR or such other subsidiary without approval by the Basis Lender, (iii) a default occurs under the applicable management agreement, or (iv) the property manager has engaged in fraud, willful misconduct, misappropriation of funds or is grossly negligent with regard to the applicable property, the Basis Lender may require a Borrower to replace BSR or such other subsidiary of the Company as the property manager and hire a third party manager approved by the Basis Lender to manage the applicable property.
The Borrowers are generally prohibited from selling the properties securing the Basis Term Loan and the Company is prohibited from transferring any interest in any of the Borrowers, in each case without consent from the Basis Lender. The Company is prohibited from engaging in transactions that would result in a Change in Control (as defined in the Basis Loan Agreement) of the Company. Under the Basis Loan Agreement, among other things, it is deemed a Change in Control if Michael Z. Jacoby ceases to be the chairman and
chief executive officer of the Company and actively involved in the daily activities and operations of the Company and the Borrowers and a competent and experienced person is not approved by the Basis Lender to replace Mr. Jacoby within 90 days of him ceasing to serve in such roles.
The Basis Loan Agreement provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events and changes in control. If an event of default occurs and is continuing under the Basis Loan Agreement, the Basis Lender may, among other things, require the immediate payment of all amounts owed thereunder.
In addition, if there is a default by Mr. Jacoby under a certain personal loan as long as he has pledged OP units as collateral for such loan, and such default has not been waived or cured, then the Basis Lender will have the right to sweep the Borrowers’ cash account in which they collect and retain rental payments from the properties securing the Basis Term Loan on a daily basis in order for the Basis Lender to create a cash reserve that will serve as collateral for the Basis Term Loan.
The Basis Loan Agreement includes a debt service coverage calculation based on the trailing twelve month's results which includes an adjustment for tenants that are more than one-month delinquent in paying rent. A debt service coverage ratio below 1.10x is a Cash Trap Trigger Event (as defined in the Basis Loan Agreement), which gives the Basis Lender the right to institute a cash management period until the trigger is cured. A debt service coverage ratio below 1.05x for two consecutive calendar quarters gives the Basis Lender the right to remove the Company as manager of the properties. The debt service coverage calculation for the twelve months ended December 31, 2023, was approximately 1.89x.
Lamont Street Preferred Interest
In connection with the closing of the Highlandtown and Spotswood Mergers on May 21, 2021 and June 4, 2021, respectively, Lamont Street Partners LLC contributed an aggregate of $3.9 million in exchange for a 1.0% preferred membership interest in BSV Highlandtown Investors LLC and BSV Spotswood Investors LLC designated as Class A units (the “Lamont Street Preferred Interest”).
On May 5, 2023, we refinanced the Highlandtown mortgage loan and used a portion of the proceeds to redeem $1.9 million of the Lamont Street Preferred Interest. On June 30, 2023, we used a portion of the proceeds from the sale of the Spotswood property to redeem the remaining $2.3 million of the Lamont Street Preferred Interest in full.
Other Mortgage Indebtedness
As of December 31, 2023 and 2022, we had approximately $208.4 million and $180.3 million, respectively, of outstanding mortgage indebtedness secured by individual properties. The Hollinswood mortgage, Vista Shops mortgage, Brookhill mortgage, Crestview mortgage, Highlandtown mortgage, Cromwell mortgage, Lamar Station Plaza West mortgage, Midtown Row mortgage, Coral Hills mortgage, West Broad mortgage and Greenwood Village mortgage require us to maintain a debt service coverage ratio (as such terms are defined in the respective loan agreements) as follows in the table below.
Minimum Debt Service Coverage
Hollinswood Shopping Center
1.40 to 1.00
Vista Shops at Golden Mile
1.50 to 1.00
Brookhill Azalea Shopping Center
1.30 to 1.00
Crestview Shopping Center
1.25 to 1.00
Highlandtown Village Shopping Center
1.25 to 1.00
Cromwell Field Shopping Center (1)
1.20 to 1.00
Lamar Station Plaza West
1.30 to 1.00
Midtown Row
1.15 to 1.00
Coral Hills Shopping Center
1.20 to 1.00
West Broad Shopping Center
1.25 to 1.00
The Shops at Greenwood Village
1.40 to 1.00
(1)The debt service coverage ratio testing commenced December 31, 2023 with the following requirements: (i) 1.20 to 1.00 as of December 31, 2023; (ii) 1.55 to 1.00 as of December 31, 2024 and (iii) 1.35 to 1.00 as of December 31, 2025 and for the remaining term of the loan.
On May 1, 2023, the interest rate on the mortgage loan secured by the Greenwood Village property was amended to replace Prime with SOFR plus a spread of 2.85%. We terminated the existing interest rate swap agreement and entered into a new interest rate swap agreement which fixed the interest rate of the loan at 5.85%.
On May 3, 2023, the loan agreement for our mortgage loan secured by the Hollinswood property was amended to replace the LIBOR interest rate with SOFR plus a spread of 2.36%.
On May 5, 2023, we refinanced the mortgage loan secured by Highlandtown Village Shopping Center. The new loan has a principal balance of $8.7 million, which bears interest at SOFR plus a spread of 2.5% per annum and matures on May 10, 2028. We entered into an interest rate swap which fixes the interest rate of the loan at 6.085%.
On June 28, 2023, the loan agreement for our mortgage loan secured by the Vista Shops at Golden Mile was amended to change the interest rate to 7.73% per annum and extend the maturity date to June 24, 2024. On February 8, 2024, we refinanced the mortgage loan. The new loan has a principal balance of $16.2 million, bears interest at SOFR plus a spread of 2.75% per annum and matures on February 8, 2029. We entered into an interest rate swap which fixes the interest rate of the loan at 6.90%.
On September 29, 2023, we received a $12.0 million loan secured by Crestview Shopping Center, which bears interest at a rate of 7.83% per annum and matures on September 29, 2026. We used the proceeds to pay down the Basis Term Loan.
On October 31, 2023, we received a $12.8 million loan secured by the Coral Hills property, which bears interest at a rate of 6.95% per annum and matures on October 31, 2033. We used the proceeds to pay down the Basis Term Loan.
On December 21, 2023, we received an $11.8 million loan secured by the West Broad property, which bears interest at a rate of 7.00% per annum and matures on December 21, 2033. We used the proceeds to pay down the Basis Term Loan.
As of December 31, 2023, we were in compliance with all of the covenants under our debt agreements.
Fortress Mezzanine Loan
In connection with the acquisition of Midtown Row, we entered into a $15.0 million mezzanine loan (the “Fortress Mezzanine Loan”) secured by 100% of the membership interests in the entity that owns Midtown Row. The mezzanine loan matures on December 1, 2027. Pursuant to the mezzanine loan agreement, a portion of the interest on the Fortress Mezzanine Loan is paid in cash (the “Current Interest”) and a portion of the interest is capitalized and added to the principal amount of the Fortress Mezzanine Loan each month (the “Capitalized Interest” and, together with the Current Interest, the “Mezzanine Loan Interest”). The initial Mezzanine Loan Interest rate was 12% per annum, comprised of a 5% Current Interest rate and a 7% Capitalized Interest rate. The Capitalized Interest rate increases each year by 1%. As of December 31, 2023, the Mezzanine Loan Interest rate was 13% per annum, comprised of a 5% Current Interest rate and a 8% Capitalized Interest rate. The Fortress Mezzanine Loan (including a prepayment penalty) will be due and payable in connection with a Qualified Public Offering. However, in connection with a Qualified Public Offering, the lender for the Fortress Mezzanine Loan has the right to convert all or a portion of the principal of the Fortress Mezzanine Loan and any prepayment penalty into shares of common stock at a price of $2.00 per share, subject to certain adjustments. The mezzanine loan agreement provides for cross-default in the event of a Trigger Event under the Eagles Sub-OP Operating Agreement or an event of default under the loan agreement for the Midtown Row mortgage.
Interest Rate Derivatives
We may use interest rate derivatives from time to time to manage our exposure to interest rate risks. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. On November 23, 2022, we entered into an interest rate cap agreement, effective January 1, 2023, on the full $66.9 million Basis Term Loan to cap the SOFR interest rate at 4.65%, which replaced a prior interest rate cap agreement for the Basis Term Loan that expired on January 1, 2023. As of December 31, 2023 and 2022, the effective interest rate of the Basis Term Loan was 8.62% and 6.125%, respectively.
We also entered into two interest rate swap agreements on the Hollinswood loan to fix the interest rate at 4.06%. The swap agreements are effective as of December 27, 2019 on the outstanding balance of $10.2 million and on July 1, 2021 for the additional availability of $3.0 million under the Hollinswood loan. On May 3, 2023, the Hollinswood loan agreement was amended to replace LIBOR with SOFR, effective July 1, 2023.
On October 6, 2021, we entered into an interest rate swap agreement on the Greenwood Village Loan to fix the interest rate at 4.082%. On May 1, 2023, we terminated the existing interest rate swap agreement and entered into a new interest rate swap agreement on the Greenwood Village Loan to fix the interest rate at 5.85%. We also received $2.2 million upon the termination of the prior interest rate swap agreement.
On May 5, 2023, we entered into an interest rate swap agreement on the Highlandtown Village Shopping Center mortgage loan to fix the interest rate at 6.085%.
On February 8, 2024, we entered into an interest rate swap agreement on the Vista Shops at Golden Mile mortgage loan to fix the interest rate at 6.90%.
We recognize all derivative instruments as assets or liabilities at their fair value in the consolidated balance sheets. Changes in the fair value of our derivatives that are not designated as hedges or do not meet the criteria of hedge accounting are recognized in earnings. For the years ended December 31, 2023 and 2022, we recognized a net loss of approximately $1.2 million and a net gain of approximately $3.4 million, respectively, as a component of "Derivative fair value adjustment" on the consolidated statement of operations.
Fortress Preferred Equity Investment
On November 22, 2022, the Company, the Operating Partnership and the Eagles Sub-OP entered into a Preferred Equity Investment Agreement with the Fortress Member, pursuant to which the Fortress Member invested $80.0 million in the Eagles Sub-OP in exchange for a preferred membership interest (such interest, the “Fortress Preferred Interest” and such investment, the “Preferred Equity Investment”). In connection with the Preferred Equity Investment, the Operating Partnership and the Fortress Member entered into the Eagles Sub-OP Operating Agreement, and the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East in November 2022, as well as Cromwell Field in December 2022. The subsidiaries of the Operating Partnership that indirectly own the following eight properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates: (i) Highlandtown, (ii) Spotswood and (iii) the six properties securing the Basis Term Loan (the “Portfolio Excluded Properties” and, collectively with Highlandtown and Spotswood the “Excluded Properties”). The outside dates for Highlandtown, the Portfolio Excluded Properties and Spotswood were originally May 6, 2023, June 30, 2023 and July 6, 2023, respectively. On May 5, 2023, the Operating Partnership contributed to the Eagles Sub-OP its subsidiary that owns Highlandtown. The Fortress Member has approved extensions of the Portfolio Excluded Properties outside date, which is currently April 30, 2024. With the approval of the Fortress Member, on June 30, 2023, we sold Spotswood and, on July 20, 2023, sold Dekalb, which was one of the Portfolio Excluded Properties. On September 29, 2023, October 31, 2023 and December 21, 2023, the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that own Crestview, Coral Hills and West Broad, which were Portfolio Excluded Properties.
Pursuant to the Eagles Sub-OP Operating Agreement, the Fortress Member is entitled to monthly distributions, a portion of which is paid in cash (the “Current Preferred Return”) and a portion that accrues on and is added to the Preferred Equity Investment each month (the “Capitalized Preferred Return” and, together with the Current Preferred Return, the “Preferred Return”). The initial Preferred Return was 12% per annum, comprised of a 5% Current Preferred Return and a 7% Capitalized Preferred Return, provided that, until the Portfolio Excluded Properties are contributed to the Eagles Sub-OP, the Capitalized Preferred Return is increased by 4.75%. The Capitalized Preferred Return increases each year by 1%. Commencing on November 22, 2027, the Preferred Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter. Upon (i) the occurrence of a Trigger Event, (ii) during a three-month period in which distributions on the Preferred Equity Investment are not made because such payments would cause a violation of Delaware law or (iii) if a Qualified Public Offering has not occurred on or prior to November 22, 2027, the entire Preferred Return shall accrue at the then-applicable Preferred Return plus 4% and shall be payable monthly in cash. As of December 31, 2023, the Preferred Return was 17.75% per annum, comprised of a 5% Current Preferred Return and a 12.75% Capitalized Preferred Return. As of December 31, 2023 and 2022, the Capitalized Preferred Return was approximately $11.3 million and $1.0 million, respectively, and is reflected within Redeemable noncontrolling Fortress preferred interest on the consolidated balance sheets. For the years ended December 31, 2023 and 2022, we recognized $4.3 million and $0.4 million, respectively, of Current Preferred Return and $10.3 million and $1.1 million, respectively, of Capitalized Preferred Return as a reduction to additional paid-in capital in the consolidated statements of equity.
Upon the closing of a Qualified Public Offering, unless earlier redeemed, the Eagles Sub-OP must redeem the entire Fortress Preferred Interest by payment in cash to the Fortress Member of the full Redemption Amount, provided that (i) the Eagles Sub-OP may elect, in its discretion, not to redeem $37.5 million of the Preferred Equity Investment and (ii) $25.0 million of the Preferred Equity Investment (less the amount of the Fortress Mezzanine Loan converted into common stock in connection with such Qualified Public Offering, if any) will be converted to shares of common stock at a price of $2.00 per share, subject to certain adjustments. The Operating Partnership may cause the Eagles Sub-OP to redeem the Fortress Preferred Interest in whole (but not in part), by payment in cash to the Fortress Member of the full Redemption Amount, as long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption. The “Redemption Amount” is equal to the sum of: (i) all outstanding loans advanced to the Eagles Sub-OP by the Fortress Member in accordance with the terms of the Eagles Sub-OP Operating Agreement, together with all accrued and unpaid return on such loans; (ii) the unredeemed balance of the Preferred Equity Investment; (iii) an amount equal to the greater of (x) all accrued and unpaid Preferred Return and (y) a 1.40x minimum multiple on the amount of all loans and capital contributions made by the Fortress Member to the Eagles Sub-OP in accordance with the terms of the Eagles Sub-OP Operating Agreement, which minimum multiple shall be reduced to 1.30x upon the consummation of a Qualified Public Offering; and (iv) all other payments, fees, costs and expenses due or payable to the Fortress Member under the Eagles Sub-OP Operating Agreement, including a $10.0 million exit fee unless the Redemption Amount is paid upon or following the completion of a Qualified Public Offering.
The Operating Partnership serves as the managing member of the Eagles Sub-OP. However, the Fortress Member has approval rights over certain Major Actions (as defined in the Eagles Sub-OP Operating Agreement), including, but not limited to (i) the adoption and approval of annual corporate and property budgets, (ii) the amendment, renewal, termination or modification of Material Contracts, leases over 5,000 square feet and certain loan documents, (iii) the liquidation, dissolution, or winding-up of the Eagles Sub-OP, the Company or any of its subsidiaries, (iv) taking actions of bankruptcy or failing to defend an involuntary bankruptcy action of the Eagles Sub-OP, the Company or any of its subsidiaries, (v) effecting any reorganization or recapitalization of the Eagles Sub-OP, the Company or any of its subsidiaries, (vi) declaring or paying distributions on any equity security of the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (vii) issuing any equity securities in the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (viii) conducting a merger or consolidation of the Eagles Sub-OP, the Company or the
Operating Partnership or selling substantially all the assets of the Company and its subsidiaries or the Eagles Sub-OP and its subsidiaries, (ix) amending, terminating or otherwise modifying the loans secured by the properties indirectly owned by the Eagles Sub-OP, subject to certain exceptions, (x) incurring additional indebtedness or making prepayments on indebtedness, subject to certain exceptions; (xi) acquiring any property outside the ordinary course of business of the Company and (xii) selling any property below the minimum release price for such property.
In addition, we are required to maintain separate bank accounts for tenant improvement costs and leasing costs as well as the net proceeds from the Spotswood and Dekalb dispositions. Prior written consent of the Fortress Member is required for the disbursement and use of cash held in such accounts, which had a combined balance of $3.1 million as of December 31, 2023 and is reflected in cash and cash equivalents on the consolidated balance sheets.
Under the Eagles Sub-OP Operating Agreement, “Trigger Events” include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property owned by the Company or any of its subsidiaries; (ii) a Bankruptcy Event with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Eagles Sub-OP Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the Fortress Mezzanine Loan or the mortgage loans secured by properties owned directly or indirectly by the Eagles Sub-OP (including the Excluded Properties); (v) failure to meet the minimum Total Yield requirements under the Eagles Sub-OP Operating Agreement; (vi) failure to pay the Current Preferred Return (subject to a limited cure period) or failure to make distributions as required by the Eagles Sub-OP Operating Agreement; (vii) the occurrence of a Change of Control; (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Mr. Jacoby (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of common stock and OP units, in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under certain other agreements related to the Preferred Equity Investment.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest by payment to the Fortress Member of the full Redemption Amount upon not less than 90 days prior written notice to the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
Under certain circumstances, including in the event of a Trigger Event or if a Qualified Public Offering has not occurred by November 22, 2027, the Fortress Member has the right (among other rights) to (i) remove the Operating Partnership as the managing member of the Eagles Sub-OP and to serve as the managing member until the Fortress Member is paid the Redemption Amount, (ii) cause the Eagles Sub-OP to sell one or more properties until the entire Fortress Preferred Interest has been redeemed for the Redemption Amount, (iii) cause the Eagles Sub-OP to use certain reserve accounts to pay the Fortress Member the full Redemption Amount, and (iv) terminate all property management and other service agreements with affiliates of the Company.
The obligations of the Operating Partnership under the Eagles Sub-OP are guaranteed by the Company. In addition, Messrs. Jacoby and Yockey guaranteed the full payment of the Redemption Amount in the event of a bankruptcy event of the Company or its subsidiaries without the consent of the Fortress Member or certain other events that interfere with the rights of the Fortress Member under certain other agreements related to the Preferred Equity Investment.
Cash Flows
The table below sets forth the sources and uses of cash reflected in our consolidated statements of cash flows for the years ended December 31, 2023 and 2022.
For the year ended December 31,
(in thousands)
Change
Cash and cash equivalents and restricted cash at beginning of period
$
17,031
$
11,024
$
6,007
Net cash used in operating activities
(3,778
)
(4,101
)
Net cash provided by (used in) investing activities
38,806
(135,491
)
174,297
Net cash (used in) provided by financing activities
(38,262
)
145,599
(183,861
)
Cash and cash equivalents and restricted cash at end of period
$
13,797
$
17,031
$
(3,234
)
Operating Activities- Cash used in operating activities decreased by approximately $0.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Operating cash flows were primarily impacted by an increase in cash receipts relating to rental income as a result of the acquisitions of two properties in the fourth quarter of 2022. This was partially offset by (i) a net decrease in changes in operating assets and liabilities of approximately $1.9 million, of which $1.7 million was related to the net change in accounts payable and (ii) an increase in interest payments primarily related to the acquisition of two properties in the fourth quarter of 2022.
Investing Activities- Cash provided by investing activities during the year ended December 31, 2023 increased by approximately $174.3 million compared to the year ended December 31, 2022. This increase resulted primarily from (i) the acquisition of two properties
and a real estate parcel during 2022, which resulted in an increase in net cash outflow of approximately $129.5 million in 2022 and was not repeated during 2023; (ii) an increase of net cash flow during 2023 of approximately $44.8 million from the sales of the Spotswood property and the Dekalb property and (iii) an increase of net cash flow during 2023 of approximately $2.0 million from insurance proceeds relating to a wind storm that damaged the roof at one of our retail properties. These increases were partially offset by an approximately $1.8 million increase in capital expenditures for real estate during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Financing Activities- Cash used in financing activities for the year ended December 31, 2023 increased by approximately $183.9 million compared to the year ended December 31, 2022. The increase resulted primarily from a decrease in net borrowings during 2023, which includes (i) a $91.0 million decrease related to the financing of the Midtown Row acquisition in 2022; (ii) an $80.0 million decrease related to the Fortress Preferred Equity Investment in 2022; (iii) the $58.7 million repayment of a portion of the Basis Term Loan in 2023 with proceeds from the sale of the Dekalb property and the new loans secured by Coral Hills, Crestview and West Broad; (iv) the $11.9 million repayment of the Spotswood mortgage loan in 2023 with proceeds from the sale of the Spotswood property; (v) $4.2 million of the Preferred Return on the Preferred Equity Investment during 2023; (vi) the $3.9 million redemption of the Lamont Street Preferred Interest in 2023 with proceeds from the sale of the Spotswood property and the refinancing of the mortgage loan secured by Highlandtown; (vii) a net decrease of $2.4 million related to the refinancing of Lamar Station Plaza West and (viii) a net decrease of $1.5 million in proceeds from a related party. The net decreases were partially offset by net borrowings which included the following: (i) $12.8 million related to the new mortgage loan secured by Coral Hills in 2023; (ii) $12.0 million related to the new mortgage loan secured by Crestview in 2023; (iii) $11.8 million related to the new mortgage loan secured by West Broad in 2023; (iv) a $7.8 million increase related to the payoff of the Basis Preferred Interest in 2022; (v) a net $5.3 million increase related to the payoff of loans from MVB Bank, Inc. in 2022; (vi) a net increase of $4.2 million due to the refinancing of the Cromwell mortgage loan and payoff of the mezzanine loan; (vii) a $3.5 million increase related to the payoff of the Lamar Station Plaza East mortgage loan in 2022; (viii) $3.5 million related to the new mortgage loan secured by Highlandtown in 2023 and (ix) net proceeds of $1.4 million related to the Greenwood Village interest rate swap. The net decreases were also partially offset by a decrease in scheduled principal payments on loans of approximately $0.6 million as compared to the prior year. Additionally, debt origination and discount fees decreased by approximately $6.2 million during the year ended December 31, 2023 compared to the prior year.
Inflation
Inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and repair and maintenance costs. In addition, inflation could also impact our general and administrative expenses, the interest on our debt if variable or refinanced in a high-inflationary environment, our cost of capital, and our cost of development, redevelopment, maintenance or other operating activities. Substantially all of our leases provide for the recovery of increases in real estate taxes and operating expenses. In addition, substantially all of our leases provide for annual rent increases. We believe that inflationary increases may be offset in part by the contractual rent increases and expense escalations previously described. In addition, our leases for the residential portion of Midtown Row generally have lease terms of 11.5 months or nine months, which we believe reduces our exposure to the effects of inflation, although an extreme and sustained escalation in costs could have a negative impact on our residents and their ability to absorb rent increases.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined in Item 10 of Regulation S-K, the Company is not required to provide this information.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Broad Street Realty, Inc.
Index to Consolidated Financial Statements
and Financial Statement Schedules
Page
Report of Independent Registered Public Accounting Firm (Cherry Bekaert, LLP, Richmond, Virginia, PCAOB ID #677)
Report of Independent Registered Public Accounting Firm (BDO USA, LLP, Potomac, Maryland, PCAOB ID #243)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedules
Schedule III- Real Estate and Accumulated Depreciation
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Broad Street Realty, Inc. and Subsidiaries
Reston, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Broad Street Realty, Inc. and its Subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for the year ended December 31, 2023, and the related notes and schedule III (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 Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) and are required to be independent with respect to the Company 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 audit 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 Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
Liquidity
As discussed in Note 1 to the consolidated financial statements, as of December 31, 2023, the Company has mortgage and other indebtedness with a combined principal balance of $41.4 million which is currently scheduled to mature within one year of issuance of the consolidated financial statements. Note 1 describes the Company’s future liquidity plans. Our opinion is not modified with respect to that matter.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.
Evaluation of Real Estate Properties for Impairment
Description of Matter
At December 31, 2023, the Company’s real estate properties totaled $325.2 million, net. As more fully described in Note 3 to the consolidated financial statements, the Company evaluates its real estate properties for impairment whenever events or changes in circumstances indicate that the carrying value of a real estate investment may not be recoverable. Management evaluates various qualitative factors in determining whether or not events or changes in circumstances indicate that the carrying amount of a real estate investment may not be recoverable. Auditing the Company’s impairment assessment involved subjectivity due to the assumptions in its consideration of events or changes in circumstances to identify whether there are indications of impairment.
How We Addressed the Matter in Our Audit
To test the Company’s evaluation of real estate properties for impairment, we performed audit procedures that included, among others, obtaining an understanding of the internal controls and processes in place over the Company’s investment property impairment review process, assessing the methodologies applied, evaluating the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used in the analysis. We reviewed qualitative factors to determine whether any events or circumstances indicated that the carrying amount of the Company’s investment properties may not be recoverable.
Valuation of Mezzanine Loan
Description of Matter
At December 31, 2023, the Company has entered into a mezzanine loan (the “Mezzanine Loan”) that the Company has elected to measure at fair value in accordance with the fair value option. Calculations and accounting for the Mezzanine Loan require management’s judgments related to subsequent recognition, use of a valuation model, and determination of the appropriate inputs used in the selected valuation model. As more fully described in Note 15 to the consolidated financial statements, the Company utilizes a binomial lattice model valuation technique in measuring the fair value. Auditing management’s valuations of the Mezzanine Loan was challenging due to the complexity of the valuation model and the inputs that are highly sensitive to changes such as the common stock market price, volatility, risk free rates, and yields.
How We Addressed the Matter in Our Audit
Our audit procedures included, among others, obtaining an understanding of the internal controls and processes in place over the Company’s process used in determining the valuation of the Mezzanine Loan, evaluating the Company’s use of the models used and testing the significant assumptions used in the models, evaluating the completeness and accuracy of underlying data used in supporting the assumptions and estimates, and involving valuation specialists to assist in assessing the significant assumptions and methodologies used by the Company.
Valuation of Derivative Liabilities
Description of Matter
At December 31, 2023, the Company has a preferred equity investment which provides the investor with certain redemption features upon the occurrence of certain events. Features identified as embedded derivatives that are material are recognized separately as a derivative asset or liability in the consolidated financial statements. Calculations and accounting for the embedded conversion features require management’s judgments related to initial and subsequent recognition, use of a valuation model, and determination of the appropriate inputs used in the selected valuation model. As more fully described in Note 15 to the consolidated financial statements, the Company utilizes a binomial lattice model valuation technique in measuring the fair value. Auditing management’s valuations of the derivative liabilities was challenging due to the complexity of the valuation model and the inputs that are highly sensitive to changes such as the common stock market price, volatility, risk free rates, and yields.
How We Addressed the Matter in Our Audit
Our audit procedures included, among others, obtaining an understanding of the internal controls and processes in place over the Company’s process used in determining the valuation of the derivative liabilities, evaluating the Company’s use of the models used and testing the significant assumptions used in the models, evaluating the completeness and accuracy of underlying data used in supporting the assumptions and estimates, and involving valuation specialists to assist in assessing the significant assumptions and methodologies used by the Company.
/s/ Cherry Bekaert LLP
We have served as the Company’s auditor since 2023.
Richmond, Virginia
April 1, 2024
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Broad Street Realty, Inc.
Reston, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Broad Street Realty, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, comprehensive loss, equity, and cash flows for the year then ended, and the related notes and financial statement schedule listed in the accompanying index (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 Company at December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has loans with varying debt maturities through January 2024 for which there can be no guarantee that the Company will be able to refinance or extend the maturity date of the loans. This condition raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 Company 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 audit 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 Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company's auditor from 2018 to 2023.
Potomac, Maryland
April 28, 2023
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31, 2023
December 31, 2022
Assets
Real estate properties
Land
$
54,936
$
67,225
Building and improvements
281,598
300,699
Intangible lease assets
33,374
41,228
Construction in progress
5,462
4,231
Furniture and equipment
1,711
1,711
Less accumulated depreciation and amortization
(51,890
)
(42,047
)
Total real estate properties, net
325,191
373,047
Cash and cash equivalents
9,779
12,356
Restricted cash
4,018
4,675
Straight-line rent receivable
3,090
2,397
Tenant and accounts receivable, net of allowance of $194 and $165, respectively
1,918
1,874
Derivative assets
3,426
Other assets, net
6,327
4,511
Total Assets
$
351,119
$
402,286
Liabilities and Equity
Liabilities
Mortgage and other indebtedness, net (includes $16,187 and $17,895, respectively, at fair value under the fair value option)
$
231,049
$
267,616
Accounts payable and accrued liabilities
15,457
15,411
Unamortized intangible lease liabilities, net
1,553
Payables due to related parties
Deferred tax liabilities, net
-
3,968
Deferred revenue
1,252
Total liabilities
248,029
289,844
Commitments and contingencies
Temporary Equity
Redeemable noncontrolling Fortress preferred interest
87,288
73,697
Permanent Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized: Series A preferred stock, 20,000 shares authorized, 500 shares issued and outstanding at December 31, 2023 and 2022, respectively
-
-
Common stock, $0.01 par value, 300,000,000 and 50,000,000 shares authorized,
33,417,101 and 32,256,974 issued and outstanding at December 31, 2023 and 2022, respectively
Additional paid in capital
55,186
72,097
Accumulated deficit
(36,387
)
(33,294
)
Accumulated other comprehensive income
Total Broad Street Realty, Inc. stockholders' equity
19,680
39,182
Noncontrolling interest
(3,878
)
(437
)
Total permanent equity
15,802
38,745
Total Liabilities, Temporary Equity and Permanent Equity
$
351,119
$
402,286
The accompanying notes are an integral part of these consolidated financial statements.
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
For the Year Ended December 31,
Revenues
Rental income
$
38,990
$
29,871
Commissions
2,897
2,523
Management and other income
Total revenues
42,169
32,951
Operating Expenses
Cost of services
1,928
1,917
Property operating
11,653
8,672
Depreciation and amortization
18,778
17,436
Impairment of real estate assets
-
Impairment of real estate assets held for sale
2,353
-
Bad debt expense
General and administrative
12,456
13,513
Total operating expenses
48,275
41,773
Gain on disposal of properties
11,486
-
Operating gain (loss)
5,380
(8,822
)
Other income (expense)
Net interest and other income
Derivative fair value adjustment
(692
)
2,638
Net gain (loss) on fair value change on debt held under the fair value option
2,344
(3,151
)
Interest expense
(18,504
)
(12,710
)
Loss on extinguishment of debt
(43
)
(59
)
Other expense
(68
)
(52
)
Total other expense
(16,025
)
(13,308
)
Net loss before income taxes
(10,645
)
(22,130
)
Income tax benefit, net
3,628
5,857
Net loss
$
(7,017
)
$
(16,273
)
Less: Preferred equity return on Fortress preferred equity
(14,641
)
(1,492
)
Less: Preferred equity accretion to redemption value
(3,247
)
-
Less: Preferred OP units return
(483
)
(48
)
Plus: Net loss attributable to noncontrolling interest
3,924
2,522
Net loss attributable to common stockholders
$
(21,464
)
$
(15,291
)
Earnings per share of common stock
Net loss per share attributable to stockholders - basic and diluted
$
(0.60
)
$
(0.47
)
Weighted average shares outstanding
Basic and diluted
35,608,163
32,378,526
The accompanying notes are an integral part of these consolidated financial statements.
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(in thousands)
For the Year Ended December 31,
Net loss
$
(7,017
)
$
(16,273
)
Other comprehensive income:
Change in fair value due to credit risk on debt held under the fair value option
Total other comprehensive income
Comprehensive loss
$
(6,526
)
$
(16,217
)
The accompanying notes are an integral part of these consolidated financial statements.
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Equity
(in thousands, except share amounts)
Preferred Stock
Common Stock
Shares
Par Value
Shares
Par Value
Additional
Paid-In Capital
Accumulated Deficit
Accumulated Other Comprehensive Income
Non-controlling Interest
Total Equity
Balance at December 31, 2021
$
-
31,873,428
$
$
70,022
$
(19,543
)
$
-
$
(2,674
)
$
48,124
Issuance of Common Stock
-
-
96,170
-
-
(296
)
-
Grants of restricted stock
-
-
138,262
-
-
-
-
-
-
Forfeiture of restricted stock
-
-
(21,987
)
-
-
-
-
-
-
Shares surrendered for taxes upon vesting
-
-
(4,307
)
-
(5
)
-
-
-
(5
)
Issuance of warrants
-
-
-
-
2,397
-
-
-
2,397
Stock-based compensation
-
-
175,408
1,935
-
-
-
1,937
Tax effect of change in ownership percentage of OP
-
-
-
-
(1,006
)
-
-
-
(1,006
)
Issuance of common OP units
-
-
-
-
-
-
-
Issuance of preferred OP units
-
-
-
-
-
-
-
4,220
4,220
Preferred equity return on Fortress preferred equity investment
-
-
-
-
(1,492
)
-
-
-
(1,492
)
Preferred OP units return
-
-
-
-
(48
)
-
-
(20
)
Other comprehensive income
-
-
-
-
-
-
-
Net loss
-
-
-
-
-
(13,751
)
-
(2,522
)
(16,273
)
Balance at December 31, 2022
-
32,256,974
72,097
(33,294
)
(437
)
38,745
Grants of restricted stock
-
-
697,393
-
-
-
-
-
-
Forfeitures of restricted stock
-
-
(21,856
)
-
-
-
-
-
-
Shares surrendered for taxes upon vesting
-
-
(4,126
)
-
(6
)
-
-
-
(6
)
Stock-based compensation
-
-
488,716
1,466
-
-
-
1,477
Preferred equity return on Fortress preferred equity investment
-
-
-
-
(14,641
)
-
-
-
(14,641
)
Preferred equity accretion
-
-
-
-
(3,247
)
-
-
-
(3,247
)
Preferred OP units return
-
-
-
-
(483
)
-
-
-
Other comprehensive income
-
-
-
-
-
-
-
Net loss
-
-
-
-
-
(3,093
)
-
(3,924
)
(7,017
)
Balance at December 31, 2023
$
-
33,417,101
$
$
55,186
$
(36,387
)
$
$
(3,878
)
$
15,802
The accompanying notes are an integral part of these consolidated financial statements.
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended December 31,
Cash flows from operating activities
Net loss
$
(7,017
)
$
(16,273
)
Adjustments to reconcile net loss to net cash used in operating activities
Deferred income taxes
(3,968
)
(5,857
)
Depreciation and amortization
18,778
17,436
Amortization of deferred financing costs and debt discounts
1,510
Amortization and (accretion) of above and below market lease intangibles, net
(387
)
Minimum return on basis preferred interest
(331
)
(1,112
)
Loss on extinguishment of debt
Gain on disposal of property
(11,486
)
-
Impairment of real estate assets
-
Impairment of real estate assets held for sale
2,353
-
Straight-line rent receivable
(1,137
)
(945
)
Amortization of operating lease right-of-use assets
(16
)
(35
)
Stock-based compensation
1,477
1,937
Change in fair value of derivatives
(2,638
)
Change in fair value on debt held under the fair value option
(2,344
)
3,151
Bad debt expense
Write-off of related party receivables
-
Changes in operating assets and liabilities
Accounts receivable
(192
)
(110
)
Other assets
(28
)
(838
)
Receivables due from related parties
(4
)
Accounts payable and accrued liabilities
(2,515
)
(786
)
Payables due to related parties
Deferred revenues
(362
)
Net cash used in operating activities
(3,778
)
(4,101
)
Cash flows from investing activities
Cash received on disposition of real estate, net of selling costs
44,754
-
Acquisitions of real estate, net of cash and restricted cash received
-
(129,534
)
Insurance proceeds
2,022
-
Capitalized pre-acquisition costs, net of refunds
-
Capital expenditures for real estate
(7,970
)
(6,154
)
Net cash provided by (used in) investing activities
38,806
(135,491
)
Cash flows from financing activities
Borrowings under debt agreements
46,836
121,601
Preferred equity investment
-
80,000
Repayments under debt agreements
(81,010
)
(49,995
)
Proceeds related to interest rate swap
2,171
-
Payments related to interest rate swap
(773
)
-
Taxes remitted upon vesting of restricted stock
(6
)
(5
)
Distributions to preferred noncontrolling interests
-
(20
)
Preferred equity return on preferred equity investment
(4,297
)
(100
)
Debt and temporary equity origination and discount fees
(1,230
)
(7,382
)
Proceeds from related parties
1,917
Payments to related parties
-
(417
)
Net cash (used in) provided by financing activities
(38,262
)
145,599
(Decrease) increase in cash, cash equivalents, and restricted cash
(3,234
)
6,007
Cash, cash equivalents and restricted cash at beginning of period
17,031
11,024
Cash, cash equivalents and restricted cash at end of period
$
13,797
$
17,031
The accompanying notes are an integral part of these consolidated financial statements.
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
For the Year Ended December 31,
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents
$
9,779
$
12,356
Restricted cash
4,018
4,675
Cash, cash equivalents and restricted cash at end of period
$
13,797
$
17,031
Supplemental Cash Flow Information
Interest paid
$
17,217
$
11,297
Taxes paid, net
$
$
Supplemental disclosure of non-cash investing and financing activities
Acquisition of real estate
$
-
$
(20,884
)
Common OP units issued in acquisitions
$
-
$
Preferred OP units issued in acquisition
$
-
$
4,220
Debt assumed in Mergers
$
-
$
15,466
Warrants issued in acquisition
$
-
$
Warrants issued with Preferred Equity Investment and Mezzanine Loan
$
-
$
2,006
Capitalized Preferred Return
$
(10,301
)
$
(1,047
)
Accrued Current Preferred Return
$
(389
)
$
(445
)
Capitalized interest on Mezzanine Loan
$
(1,126
)
$
-
Accrued acquisition costs
$
-
$
Accrued pre-acquisition costs
$
-
$
Accrued capital expenditures for real estate
$
1,890
$
1,254
The accompanying notes are an integral part of these consolidated financial statements.
Broad Street Realty, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
Note 1 - Organization and Nature of Business
Broad Street Realty, Inc. (the “Company”) is focused on owning and managing essential grocery-anchored and mixed-use assets located in densely populated technology employment hubs and higher education centers within the Mid-Atlantic, Southeast, and Colorado markets. As of December 31, 2023, the Company had gross real estate assets of $373.9 million (gross real estate properties less gross real estate intangibles liabilities) in 15 real estate properties. In addition, the Company provides commercial real estate brokerage services for its own portfolio and third-party office, industrial and retail operators and tenants.
(in thousands)
Property Name
City/State
Total Gross Real Estate Assets at December 31, 2023
Avondale Shops
Washington, D.C.
$
8,422
Brookhill Azalea Shopping Center
Richmond, VA
18,290
Cromwell Field Shopping Center
Glen Burnie, MD
20,287
Coral Hills Shopping Center
Capitol Heights, MD
16,680
Crestview Square Shopping Center
Landover Hills, MD
18,699
The Shops at Greenwood Village
Greenwood Village, CO
31,611
Highlandtown Village Shopping Center
Baltimore, MD
7,450
Hollinswood Shopping Center
Baltimore, MD
24,587
Lamar Station Plaza East
Lakewood, CO
8,737
Lamar Station Plaza West
Lakewood, CO
23,762
Midtown Colonial
Williamsburg, VA
17,585
Midtown Lamonticello
Williamsburg, VA
16,047
Midtown Row
Williamsburg, VA
126,816
Vista Shops at Golden Mile
Fredrick, MD
15,020
West Broad Commons Shopping Center
Richmond, VA
19,942
$
373,935
The Company is structured as an “Up-C” corporation with substantially all of its operations conducted through Broad Street Operating Partnership, LP (the “Operating Partnership”) and its direct and indirect subsidiaries. As of December 31, 2023, the Company owned 85.7% of the Class A common units of limited partnership interest in its Operating Partnership (“Common OP units”) and Series A preferred units of limited partnership interest in its Operating Partnership (“Preferred OP units” and, together with the Common OP units, “OP units”) and is the sole member of the sole general partner of the Operating Partnership. The Company began operating in its current structure on December 27, 2019 upon the completion of the Initial Mergers (as defined below) and operates as a single reporting segment.
Merger with MedAmerica Properties Inc.
On May 28, 2019, MedAmerica Properties Inc. and certain of its subsidiaries (“MedAmerica”) entered into 19 separate agreements and plans of merger (collectively, the “Merger Agreements”) with each of Broad Street Realty, LLC (“BSR”), Broad Street Ventures, LLC (“BSV”) and each of the separate 17 separate entities (collectively with BSR and BSV, the “Broad Street Entities”) that owned the properties acquired by the Company in the Initial Mergers (as defined below) and the additional Mergers (as defined below). The Merger Agreements relate to a series of 19 mergers (“Mergers”) whereby BSR, BSV and each other Broad Street Entity became subsidiaries of the Company.
On December 27, 2019, the Company completed 11 of the Mergers (the “Initial Mergers”), including the Mergers with BSR and BSV and the Mergers with nine other Broad Street Entities. Upon completion of the Initial Mergers, MedAmerica’s name was changed to “Broad Street Realty, Inc.”
On December 31, 2019, the Company completed one additional Merger whereby it acquired Brookhill Azalea Shopping Center. On July 2, 2020, the Company closed one Merger whereby it acquired Lamar Station Plaza East. During 2021, the Company closed four additional Mergers whereby it acquired Highlandtown Village Shopping Center, Cromwell Field Shopping Center, Spotswood Valley Square Shopping Center and The Shops at Greenwood Village on May 21, 2021, May 26, 2021, June 4, 2021, and October 6, 2021, respectively.
On November 23, 2022, the Company completed the last Merger whereby it acquired Lamar Station Plaza West. The Company terminated the merger agreement related to the Cypress Point property due to the performance of the property.
As consideration for the Mergers, the Company issued an aggregate 28,744,641 shares of common stock and 3,401,433 Common OP units to prior investors in the Broad Street Entities. In addition, certain prior investors in the Broad Street Entities received an aggregate of approximately $1.9 million in cash as a portion of the consideration for the Mergers.
Liquidity and Management’s Plan
The Company’s rental revenue and operating results depend significantly on the occupancy levels at its properties and the ability of its tenants to meet their rent and other obligations to the Company. The Company’s projected operating model reflects sufficient cash flow to cover its obligations over the next twelve months, except as noted below.
The Company’s financing is generally comprised of mortgage loans secured by the Company’s properties that typically mature within three to five years of origination. The Company is currently in contact with lenders and brokers in the marketplace to restructure the Company’s debt.
As of December 31, 2022, we disclosed debt of approximately $95.5 million that was scheduled to mature within twelve months of the date that the financial statements as of and for the year ended December 31, 2022 were issued, which created substantial doubt about the Company’s ability to continue as a going concern. This debt included three mortgage loans with a combined principal balance outstanding of approximately $28.6 million and the Basis Term Loan (as defined below) with an outstanding balance of $66.9 million, in each case as of December 31, 2022. However, as discussed below, substantial doubt about the Company’s ability to continue as a going concern was alleviated through management’s plans as of December 31, 2023. In July 2023, the Company sold one of the properties that was collateral for the Basis Term Loan and used the proceeds from the sale to repay $17.4 million of the outstanding principal balance of the Basis Term Loan. During the year ended December 31, 2023, the Company also refinanced three loans that were collateral for the Basis Term Loan and repaid $41.0 million of the Basis Term Loan with proceeds from the new mortgage loans. As of December 31, 2023, the remaining outstanding balance on the Basis Term Loan was $8.5 million. Also, during the year ended December 31, 2023, the Company sold one of the three properties that was the collateral for a mortgage loan and used the proceeds to repay the outstanding mortgage loan. On May 3, 2023, the Company refinanced one of the three mortgage loans and on June 28, 2023, the loan agreement for the third mortgage loan was amended and the maturity date was extended to June 24, 2024. As discussed below, in February 2024, the Company refinanced this mortgage loan.
As of December 31, 2023, the Company had three mortgage loans on three properties with a combined principal balance outstanding of approximately $32.9 million that mature within twelve months of the date that these financial statements are issued. One of the mortgage loans with a balance of $11.3 million as of December 31, 2023 was refinanced on February 8, 2024. The Company is seeking to refinance the remaining loans prior to maturity in December 2024 and January 2025.
In addition, the Basis Term Loan has an outstanding balance of $8.5 million and matures on July 1, 2024. The Company exercised all its extension options and is in discussions with other parties to refinance the Basis Term Loan with new loans. As of March 25, 2024, the Company has executed a nonbinding term sheet with a lender to refinance the Basis Term Loan. The lender is in the process of completing due diligence, and the Company is in the process of fulfilling the closing requirements. The Company expects to close the new loan in the second quarter of 2024. There can be no assurances that the Company will be successful in its efforts to refinance the Basis Term Loan on favorable terms, on the expected timeline or at all. If the Company fails to refinance or otherwise repay the Basis Term Loan and contribute the applicable properties to the Eagles Sub-OP (as defined below) by the applicable outside dates (as described below), it would be considered a Trigger Event (as defined below) under the Eagles Sub-OP Operating Agreement (as defined below), upon which the Fortress Member (as defined below) has certain rights, including the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest (as defined below). See Note 9 below.
In addition to its efforts to refinance the Basis Term Loan as previously described, management is in discussions with the current lenders as well as various other lenders to extend or refinance the other two mortgage loans prior to maturity. Although the Company has a history of demonstrating its ability to successfully refinance its loans as they come due, there can be no assurances that the Company will be successful in its efforts to refinance the loans on favorable terms or at all. While it is not the Company’s current plan, the Company also has the option to sell properties securing the loans and use the proceeds to satisfy the outstanding loan obligations. If the Company is ultimately unable to refinance these loans or sell the properties prior to maturity, the lenders have the right to place the loans in default and ultimately foreclose on the properties securing the loans. Under this circumstance, the Company would not have any further financial obligations to the lenders as the current estimated market values of these properties are in excess of the outstanding loan balances.
The Company's access to capital depends upon a number of factors over which the Company has little or no control, including general market conditions, the market's perception of the Company's current and potential future earnings and cash distributions, the Company's current debt levels and the market price of the shares of the Company's common stock. Although the Company's common stock is quoted on the OTCQX Best Market, an over-the-counter stock market, there is a very limited trading market for the Company's common stock, and if a more active trading market is not developed and sustained, the Company will be limited in its ability to issue equity to fund its capital needs. If the Company cannot obtain capital from third-party sources, the Company may not be able to meet the capital and operating needs of its properties, satisfy its debt service obligations or pay dividends to its stockholders.
Under the Company's debt agreements, the Company is subject to certain covenants. In the event of a default, the lenders could accelerate the timing of payments under the applicable debt obligations and the Company may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on the Company's liquidity, financial condition and results of operations. The Company was in compliance with all covenants under its debt agreements as of December 31, 2023.
Note 2 - Accounting Policies and Related Matters
Use of Estimates
The preparation of the consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the amounts of revenue and expense reported in the period. Significant estimates are made for the valuation of real estate and any related intangibles and fair value assessments with respect to purchase price allocations, valuation of the Fortress Preferred Equity Investment (as defined below) embedded derivatives and valuation of the Fortress Mezzanine Loan (as defined below). Actual results may differ from those estimates.
Change in Presentation
The Company has made certain reclassifications to prior period financial statements in order to enhance the comparability with the financial statements for the current period.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries and subsidiaries in which the Company has a controlling interest. All intercompany transactions and balances have been eliminated in consolidation. There are no material differences between the Company and the Operating Partnership as of December 31, 2023.
When the Company obtains an economic interest in an entity, management evaluates the entity to determine: (i) whether the entity is a variable interest entity (“VIE”), (ii) in the event that the entity is a VIE, whether the Company is the primary beneficiary of the entity, and (iii) in the event the entity is not a VIE, whether the Company otherwise has a controlling financial interest. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
The Company consolidates: (i) entities that are VIEs for which the Company is deemed to be the primary beneficiary and (ii) entities that are not VIEs which the Company controls. If the Company has an interest in a VIE but is not determined to be the primary beneficiary, the Company accounts for its interest under the equity method of accounting. Similarly, for those entities which are not VIEs and the Company does not have a controlling financial interest, the Company accounts for its interest under the equity method of accounting. The Company continually reconsiders its determination of whether an entity is a VIE and whether the Company qualifies as its primary beneficiary. The Company consolidates the Operating Partnership, Broad Street BIG First OP, LLC, BSV Highlandtown (as defined in Note 7 under the heading “-Lamont Street Preferred Interest”), BSV Spotswood (as defined in Note 7 under the heading “-Lamont Street Preferred Interest”) and the Eagles Sub-OP (as defined in Note 9), VIEs in which the Company is considered the primary beneficiary. The preferred membership interests in Broad Street BIG First OP, LLC were redeemed in full in 2022, and, as of December 31, 2023, it is a wholly owned subsidiary.
Noncontrolling Interest
The portion of equity not owned by the Company in entities controlled by the Company, and thus consolidated, is presented as noncontrolling interest and classified as a component of consolidated equity, separate from total stockholders’ equity on the Company’s consolidated balance sheets. The amount recorded will be based on the noncontrolling interest holder’s initial investment in the consolidated entity, adjusted to reflect the noncontrolling interest holder’s share of earnings or losses in the consolidated entity, any distributions received or additional contributions made by the noncontrolling interest holder and conversion of OP units into common stock. The earnings or losses from the entity attributable to noncontrolling interests are reflected in “net income (loss) attributable to noncontrolling interest” in the consolidated statements of operations.
Segment Reporting
The Company owns, operates, develops and redevelops primarily grocery-anchored shopping centers, street retail-based properties and mixed-use assets. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single reportable segment.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The majority of the Company’s cash and cash equivalents are held at major commercial banks which at times may exceed the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses to date on invested cash. As of December 31, 2023 and 2022, the Company had no cash equivalents.
Amounts included in restricted cash represents escrow deposits held for real estate taxes, property maintenance, insurance and other requirements at specific properties as required by lending institutions.
Revenue Recognition
The Company earns revenue from the following: Leases of Real Estate Properties, Leasing Commissions, Property and Asset Management, Engineering Services, Development Services, and Capital Transactions.
Leases of Real Estate Properties: At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses the terms and conditions to determine the proper lease classification. Currently, all of the Company’s lease arrangements are classified as operating leases. Rental revenue for operating leases is recognized on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If the Company determines that future lease payments are not probable of collection, the Company will account for these leases on a cash basis. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of the tenant improvements is subject to significant judgment. If the Company’s assessment of the owner of the tenant improvements for accounting purposes were different, the timing and amount of revenue recognized would be impacted.
A majority of the Company’s leases require tenants to make estimated payments to the Company to cover their proportional share of operating expenses, including, but not limited to, real estate taxes, property insurance, routine maintenance and repairs, utilities and property management expenses. The Company collects these estimated expenses and is reimbursed by tenants for any actual expense in excess of estimates or reimburses tenants if collected estimates exceed actual operating results. The reimbursements are recorded in rental income and the expenses are recorded in property-related expenses.
The Company adopted Accounting Standards Codification ("ASC") Topic 842, Leases effective January 1, 2019 under the modified retrospective approach and elected the optional transition method to apply the provisions of ASC 842 as of the effective date, rather than the earliest period presented. The Company elected the "package of practical expedients," which permits it not to reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. The Company made an accounting policy election to exempt short-term leases of 12 months or less from balance sheet recognition requirements associated with the new standard. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being material to the Company. The Company also elected the practical expedient for lessors to combine the lease and non-lease components (primarily impacts common area maintenance reimbursements).
Contractual rent increases of renewal options are often fixed at the time of the initial lease agreement which may result in tenants being able to exercise their renewal options at amounts that are less than the fair value of the rent at the date of the renewal. In addition to fixed base rents, certain rental income derived from the Company's tenant leases is variable and may be dependent on percentage rent. Variable lease payments from percentage rents are earned by the Company in the event the tenant's gross sales exceed certain amounts. Terms of percentage rent are agreed upon in the tenant’s lease and will vary based on the tenant's sales. Variable lease payments consisted of percentage rent and tenant expense reimbursements of operating expenses, common area maintenance expenses, real estate taxes and insurance of the respective properties amounted to $7.7 million and $6.9 million for the years ended December 31, 2023 and 2022, respectively. These amounts have been included in rental income on the consolidated statements of operations.
The Company recognizes lease termination fees, which are included in rental income on the consolidated statements of operations, in the year that the lease is terminated and collection of the fee is reasonably assured. Upon early lease terminations, the Company records gains (losses) related to unrecovered tenant-specific intangibles and other assets in impairment of real estate assets on the consolidated statements of operations, which was a $1.0 million loss for the year ended December 31, 2023. There were no early lease terminations during the year ended December 31, 2022.
Leasing Commissions: The Company earns leasing commissions as a result of providing strategic advice and connecting tenants to third-party property owners in the leasing of retail space. The Company records commission revenue on real estate leases at the point in time when the performance obligation is satisfied, which is generally upon lease execution. Terms and conditions of a commission agreement may include, but are not limited to, execution of a signed lease agreement and future contingencies, including tenant’s occupancy, payment of a deposit or payment of first month’s rent (or a combination thereof). The Company’s performance obligation will typically be satisfied upon execution of a lease and the portion of the commission that is contingent on a future event will likely be recognized if deemed not subject to significant reversal, based on the Company’s estimates and judgments. The Company accounts for leasing commissions under ASC Topic 606, Revenue from Contracts with Customers.
Property and Asset Management Fees: The Company provides real estate management services for owners of properties, representing a series of daily performance obligations delivered over time. Pricing is generally in the form of a monthly management fee based upon property-level cash receipts or some other variable metric.
When accounting for reimbursements of third-party expenses incurred on a client’s behalf, the Company determines whether it is acting as a principal or an agent in the arrangement. When the Company is acting as a principal, the Company’s revenue is reported on a gross basis and comprises the entire amount billed to the client and reported cost of services includes all expenses associated with the client. When the Company is acting as an agent, the Company’s fee is reported on a net basis as revenue for reimbursed amounts is netted against the related expenses. The control of the service before transfer to the customer is the focal point of the principal versus agent assessments. The Company is a principal if it controls the services before they are transferred to the client. The presentation of revenues and expenses pursuant to these arrangements under either a gross or net basis has no impact on net loss or cash flows. Property and asset management fees are included in Management and other income on the consolidated statements of operations. The Company accounts for property and asset management fees under ASC Topic 606, Revenue from Contracts with Customers.
Engineering Services: The Company provides engineering services to third-party property owners on an as needed basis at the properties where the Company is the property or asset manager. The Company receives consideration at agreed upon fixed rates for the time incurred plus a reimbursement for costs incurred and revenue is recognized over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. The Company accounts for performance obligations using the right to invoice practical expedient. The Company applies the right to invoice practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contract. Under this practical expedient, the Company recognizes revenue in an amount that corresponds directly with the value to the customer of performance completed to date and for which there is a right to invoice the customer. Engineering services fees are included in Management and other income on the consolidated statements of operations. The Company accounts for engineering services under ASC Topic 606, Revenue from Contracts with Customers.
Development Services: The Company provides construction-related services ranging from general contracting to project management for third-party owners and third-party occupiers of real estate. Depending on the terms of the engagement, the Company’s performance obligation is either to arrange for the completion of a project or to assume responsibility for completing a project on behalf of a client. The Company’s obligations to clients are satisfied over time due to the continuous transfer of control of the underlying asset. Therefore, the Company recognizes revenue over time, generally using input measures (e.g., to-date costs incurred relative to total estimated costs at completion). Typically, the Company is entitled to consideration at distinct milestones over the term of an engagement. The Company may receive variable consideration which can include, but is not limited to, a fee paid upon return of an investor’s original investment in a project. The Company assesses variable consideration on a contract-by-contract basis, and when appropriate, recognizes revenue based on its assessment of the outcome and historical results. The Company recognizes revenue related to variable consideration if it is deemed probable there will not be a significant reversal in the future. Development services fees are included in management and other fee income on the consolidated statements of operations. The Company accounts for development services under ASC Topic 606, Revenue from Contracts with Customers.
Capital Transactions: The Company provides brokerage and other services for capital transactions, such as real estate sales, real estate acquisitions or other financing. The Company’s performance obligation is to facilitate the execution of capital transactions, and the Company is generally entitled to the full consideration at the point in time upon which its performance obligation is satisfied, at which time the Company recognizes revenue. Capital transaction fees are included in management and other fee income on the consolidated statements of operations.
Contract Assets and Contract Liabilities
Contract assets include amounts recognized as revenue for which the Company is not yet entitled to payment for reasons other than the passage of time, but that do not constrain revenue recognition. As of December 31, 2023 and 2022, the Company did not have any contract assets.
Contract liabilities include advance payments related to performance obligations that have not yet been satisfied and are included in deferred revenue on its consolidated balance sheets. The Company recognizes the contract liability as revenue once it has transferred control of service to the customer and all revenue recognition criteria are met. As of December 31, 2022, the Company had approximately $0.2 million of contract liabilities. There were no contract liabilities at December 31, 2023.
Accounts Receivable Under Contracts with Customers
The Company records accounts receivable for its unconditional rights to consideration arising from its performance under contracts with customers. Additionally, the Company records other receivables, included in Other assets, net on the consolidated balance sheets, which represents commission advances to employees. Further, the Company records receivables from affiliated properties. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates its allowance for doubtful accounts for specific accounts and other receivable balances based on historical collection trends, the age of the outstanding accounts and other receivables and existing economic conditions associated with the receivables.
Past-due accounts receivable balances are written off to bad debt expense when the Company’s internal collection efforts have been unsuccessful or the advance has been forgiven. As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between its transfer of a promised service to a customer and when the customer pays for that service will be one year or less. The Company does not typically include extended payment terms in its contracts with customers. As of December 31, 2023, the Company had approximately $1.9 million of accounts receivable under contracts with customers, of which $1.2 million and $0.7 million is reflected in other assets and tenant and accounts receivable, net, respectively, on the consolidated balance sheet. As of December 31, 2022, the Company had approximately $2.1 million of accounts receivable under contracts with customers, of which $1.4 million and $0.7 million is reflected in other assets and tenant and accounts receivable, net, respectively, on the consolidated balance sheet. There was no allowance at December 31, 2023 and 2022.
Tenant and Other Receivables and Lease Inducements
Tenant receivables relate to the amounts currently owed to the Company under the terms of the Company’s lease agreements and is included in Tenant and accounts receivable, net of allowance on the consolidated balance sheets. Straight-line rent receivables relate to the difference between the rental revenue recognized on a straight-line basis and the amounts currently due to the Company according to the contractual agreement. Lease inducements result from value provided by the Company to the lessee, at the inception, modification or renewal of the lease, and are amortized as a reduction of rental income over the non-cancellable lease term. This is included in Other assets, net on the consolidated balance sheets.
The Company assesses the probability of collecting substantially all payments under the Company’s leases based on several factors, including, among other things, payment history of the lessee, the financial strength of the lessee and any guarantors, historical operations and operating trends and current and future economic conditions and expectations of performance. If the Company’s evaluation of these factors indicates it is probable that the Company will be unable to collect substantially all rents, the Company recognizes a charge to rental income and recognizes income when cash is collected. If the Company changes its conclusion regarding the probability of collecting rent payments required by a lessee, the Company may recognize an adjustment to rental income in the period the Company makes a change to its prior conclusion.
Allocation of Purchase Price of Acquired Real Estate
As part of the purchase price allocation process of acquisitions, management estimates the fair value of each component for asset acquisitions and business combinations by using judgments regarding market-based assumptions used in the estimated cash flow projections, including forecasts of future revenue and operating expense growth rates, market lease rates, comparable land values, lease-up periods, capitalization rates, discount rates and calculation and analysis of the income tax positions related to the purchase price allocation. The Company assesses the relative fair value of acquired assets and acquired liabilities in accordance with ASC Topic 805 Business Combinations and allocates the purchase price based on these assessments. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market and economic conditions that may affect the property.
The Company records above-market and below-market lease values, if any, which are based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding acquired leases, measured over a period equal to the remaining non-cancelable term of the lease, or, for below-market acquired leases, including any bargain renewal option terms. The Company amortizes any resulting capitalized above-market lease values as a reduction of rental income over the lease term. The Company amortizes any resulting capitalized below-market lease values as an increase to rental income over the lease term. As of December 31, 2023 and 2022, the Company had above-market leases with a gross value of approximately $4.2 million and $5.2 million, respectively, included in intangible lease assets on the consolidated balance sheets and below-market lease liabilities with a gross value of approximately $3.1 million and $5.0 million, respectively, included in unamortized intangible lease liabilities, net on the consolidated balance sheets.
In-place lease intangibles are valued considering factors such as an estimate of carrying costs during the expected lease-up periods and estimates of lost rental revenue during the expected lease-up periods based on evaluation of current market demand. The Company amortizes the value of in-place leases to amortization expense over the initial term of the respective leases. If a lease is terminated, the unamortized portion of the in-place lease value is charged to amortization expense. As of December 31, 2023 and 2022, the Company had in-place leases with a gross value of approximately $29.2 million and $36.1 million, respectively, included in intangible lease assets on the consolidated balance sheets.
Depreciation and amortization of real estate assets and liabilities is provided for on a straight-line basis over the estimated useful lives of the assets:
Building
12.5 to 49 years
Improvements
5 to 15 years
Lease intangibles and tenant improvements
1 month to 19 years
Furniture and equipment
3 to 7 years
Asset Impairment- Real Estate Properties
Real estate asset impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the property are less than its carrying amount. Management assesses if there are triggering events including macroeconomic conditions, loss of an anchor tenant, changes in occupancy, and the ability to re-tenant the space, nature or real estate properties, significant and persistent delinquencies, operating and collections performance compared to historical data and government-mandated compliance with an adverse effect to the Company's cost basis or operating costs. If management concludes triggering events are present for any property, management then assesses the recoverability of the individual property’s carrying value. Management analyzes recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the property. If the analysis indicates that the carrying value of a property is not recoverable from its estimated undiscounted future cash flows, an impairment loss is recognized. Impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used. In determining the fair value, the Company uses current appraisals or other third-party opinions of value and other estimates of fair value such as estimated discounted future cash flows. The determination of future cash flows requires significant estimates by management. In management’s estimate of cash flows, it considers factors such as expected future sale of an asset, capitalization rates, holding periods and estimated net operating income. Subsequent changes in estimated cash flows could affect the determination of whether an impairment exists. During 2023 and 2022, the Company did not record any impairment.
Real Estate Held For Sale
The Company records properties held for sale, and any associated mortgage payable, assets and other liabilities associated with such properties as real estate held for sale on the Company's consolidated balance sheets when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected to occur within one year. Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell, an impairment expense is recognized. The Company estimates fair value, less estimated costs to sell, based on similar real estate sales transactions or the property’s sale price if available. During 2023, the Company recorded $2.4 million of impairment expenses on assets held for sale. No properties were reclassified as held for sale at December 31, 2023 and 2022.
Casualty Gains and Losses
The Company records income resulting from insurance recoveries for business interruption when proceeds are received or contingencies related to the insurance recoveries are resolved.
In December 2021, there was a wind storm that damaged the roof of one of the properties we acquired in 2022. The Company received $2.5 million of insurance proceeds and recorded $0.5 million of business interruption insurance income during the year ended December 31, 2023, which is included in net interest and other income on the consolidated statement of operations. The remaining proceeds were recorded to accounts payable and accrued liabilities on the consolidated balance sheets.
Earnings Per Share
Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined based on the weighted average common number of shares outstanding during the period combined with the incremental average common shares that would have been outstanding assuming the conversion of all potentially dilutive common shares into common shares as of the earliest date possible.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability method and recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under this method, the Company determines deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes the Company to change its judgment about expected future tax consequences of events, is included in the tax provision when such change occurs. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes the Company to change its judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The estimate of the Company’s tax liabilities relating to uncertain tax positions requires management to assess uncertainties and to make judgments about the application of complex tax laws and regulations. The Company recognizes interest and penalties associated with uncertain tax positions as part of income tax expense. Generally, for federal and state purposes, the Company's 2020 through 2023 tax years remain open for examination by tax authorities.
Deferred Costs
Costs incurred prior to the completion of offerings of stock or other capital instruments that directly relate to the offering are deferred and netted against proceeds received from the offering. Following the issuance, these offering costs are reclassified to the equity section of the balance sheet as a reduction of proceeds raised. Additionally, deferred costs include costs incurred prior to the completion of asset acquisitions which, upon completion of the acquisition, are allocated to the various components of the acquisition based upon the relative fair value of each component. The Company will also incur costs relating to any new financing. These costs are deferred and netted against the proceeds.
The Company incurs leasing commission costs relating to new leases. Leasing commission costs over $5,000 are deferred and amortized over the life of the lease as depreciation and amortization on the Company's consolidated statements of operations.
Stock-Based Compensation
The fair value of stock-based awards is calculated on the date of grant. Stock based compensation for restricted stock awards is measured based on the closing stock price of the Company’s common stock on the date of grant. The Company recognizes compensation expense for awards with performance conditions based on an estimate of shares expected to vest using the closing price of the Company’s common stock as of the grant date. The Company amortizes the stock-based compensation expense on a straight-line basis over the period that the awards are expected to vest, net of any forfeitures. Forfeitures of stock-based awards are recognized as they occur.
Fair Value Measurement and the Fair Value Option
Fair value is defined as the price that would be received from selling an asset, or paid in transferring a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.
A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
•Level 1- quoted prices for identical instruments in active markets;
•Level 2- quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3- fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or 3 even though there may be some significant inputs that are readily observable. Valuation techniques used by the Company include the use of third-party valuations and internal valuations, which may include discounted cash flow models. For the year ended December 31, 2022, the Company has recorded all acquisitions based on estimated fair values. The fair values were obtained from third-party appraisals based on comparable properties (using the market approach, which involved Level 3 inputs in the fair value hierarchy). There were no acquisitions during the year ended December 31, 2023.
The Company may choose to elect the fair value option for certain eligible financial instruments, such as the Fortress Mezzanine Loan (as defined below), in order to simplify the accounting treatment. Items for which the fair value option has been elected are presented at fair value in the consolidated balance sheets and any change in fair value unrelated to credit risk is recorded in net gains (losses) on debt in the consolidated statements of operations. Changes in fair value related to credit risk is recognized in other comprehensive income.
Derivatives
In the normal course of business, the Company is subject to risk from adverse fluctuations in interest rates. The Company has chosen to manage this risk through the use of derivative financial instruments, primarily interest rate swaps and interest rate caps. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes. The Company’s objective in managing exposure to interest risk is to limit the impact of interest rate changes on cash flows.
The Company recognizes all derivative instruments as assets or liabilities at their fair value in the consolidated balance sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For the years ended December 31, 2023 and 2022, the Company recognized approximately $(0.7) million and $2.6 million, respectively, as a component of "Derivative fair value adjustment" on the consolidated statements of operations.
Accounting Guidance
Adoption of Accounting Standards
In March 2020, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. Reference rate reform has not had a material impact on any of the Company's existing contracts. The Company will assess future changes in its contracts and the impact of electing to apply the optional practical expedients and exceptions provided by Topic 848 as they occur, but expects their application will not have a material effect on the Company's consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The standard also requires additional disclosures related to significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. Operating lease receivables are excluded from the scope of this guidance. The amended guidance is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2023. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the Current Expected Credit Losses model and enhances the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. The ASU also requires a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This ASU is effective for the Company for fiscal years, and interim periods within those years, beginning January 1, 2023. The adoption of this standard did not have an impact on the Company’s consolidated financial statements and related disclosures.
Issued Accounting Standards Not Yet Adopted
In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures, which requires entities to annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). This ASU is effective for the Company for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of the guidance.
In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, which requires entities to provide disclosures of significant segment expenses and other significant segment items, as well as provide in interim periods all disclosures about a reportable segments' profit or loss and assets that are currently required annually. Additionally, entities with a single reportable segment have to provide all of the disclosures required by ASC 280, including the significant segment expense disclosures. The ASU is applied retrospectively to all periods presented in the financial statements, unless it is impracticable. This ASU is effective for the Company for fiscal years beginning after December 15, 2023, and for interim period beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of this guidance.
Note 3 - Real Estate
2023 Disposal of Real Estate
On June 30, 2023, the Company completed the sale of the Spotswood Valley Square Shopping Center for a sales price of $23.0 million in cash and recognized a net gain of $11.6 million in its consolidated statements of operations. The Company used $11.8 million of the proceeds to repay the mortgage loan secured by the Spotswood Valley Square Shopping Center, $2.3 million to redeem the Lamont Street Preferred Interest (as defined below) and $0.6 million to pay transaction costs.
On July 20, 2023, the Company completed the sale of Dekalb Plaza for a sales price of $23.1 million in cash and recognized a net loss of $0.1 million in its consolidated statements of operations. The Company used $17.4 million of the proceeds to paydown a portion
of the Basis Term Loan and $0.7 million to pay transaction costs. The Company recognized approximately $2.4 million of impairment expenses on assets held for sale for the year ended December 31, 2023 in its consolidated statements of operations.
2022 Real Estate Acquisitions
On November 23, 2022, the Company completed the acquisition of the mixed-use property known as Midtown Row. As consideration for Midtown Row, the Company paid $118.7 million in cash and the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units. The cash portion of the purchase price was funded with proceeds generated from a $76.0 million mortgage loan secured by the property, a $15.0 million mezzanine loan and $28.4 million from the Fortress Preferred Equity Investment (as defined below). The Company incurred approximately $1.4 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition.
In addition, on November 23, 2022, the Company completed the Merger to acquire Lamar Station Plaza West. Total consideration for the property included the issuance of 573,529 Common OP units and the repayment of approximately $7.8 million bonds and loans held by Lamont Street Partners, LLC (“Lamont Street”). In connection with the Merger, the Company incurred approximately $0.3 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition. The Company also assumed the $15.5 million mortgage loan secured by the property and issued Lamont Street warrants to purchase 500,000 shares of the Company's common stock.
The following table provides additional information regarding total consideration for the properties acquired during 2022.
(in thousands)
Cash paid to prior owners using Preferred Equity Investment
$
28,426
Cash paid to prior owners
Fair value of Common OP units issued
Fair value of Preferred OP units issued
4,220
Fair value of warrants issued
Prior owner debt paid off at closing using Preferred Equity Investment
7,759
Cash paid to prior owners using net proceeds from mortgage and mezzanine debt
89,750
Transaction costs
1,750
Cash acquired in acquisition
(943
)
Total Cost of Acquisition
$
132,610
The following table reflects the relative fair value of assets acquired and liabilities assumed related to the properties acquired during 2022.
(in thousands)
Land
$
16,734
Building
116,908
Building and site improvements
6,459
Intangible lease assets
5,939
Furniture and equipment
1,681
Total real estate assets acquired
147,721
Other assets
3,645
Total assets acquired
151,366
Accounts payable and accrued liabilities
(3,077
)
Intangible lease liabilities
(213
)
Assumed mortgage indebtedness
(15,466
)
Total liabilities assumed
(18,756
)
Assets acquired net of liabilities assumed
$
132,610
On February 8, 2022, the Company entered into a purchase and sale agreement (the “Initial Colfax Agreement”) to acquire a parcel for a purchase price of $2.5 million in cash. On July 1, 2022, the Initial Colfax Agreement automatically terminated in accordance with its terms as a result of the closing not occurring by June 30, 2022. In connection with the termination of the Initial Colfax Agreement, the Company forfeited its $0.3 million deposit. During the year ended December 31, 2022, the Company recognized approximately $0.3 million of real estate related acquisition costs within general and administrative in its consolidated statements of operations related to the forfeiture of the deposit.
On September 29, 2022, the Company entered into a second purchase and sale agreement (the “Second Colfax Agreement”) to acquire the above land parcel for $2.3 million in cash (the “Colfax Parcel Acquisition”). Pursuant to the Second Colfax Agreement, the Company made a deposit of $0.1 million in October 2022. On November 23, 2022, the Company completed the Colfax Parcel Acquisition and recorded approximately $0.1 million of transaction costs that were capitalized since the transaction was accounted for as an asset acquisition.
Note 4 - Intangibles
The following is a summary of the carrying amount of the Company’s intangible assets and liabilities as of December 31, 2023 and 2022.
(in thousands)
December 31, 2023
December 31, 2022
Assets:
Above-market leases
$
4,153
$
5,150
Above-market leases accumulated amortization
(2,469
)
(2,199
)
In-place leases
29,221
36,078
In-place leases accumulated amortization
(20,094
)
(18,251
)
Total net real estate intangible assets
$
10,811
$
20,778
Liabilities
Below-market leases
3,146
4,992
Below-market leases accumulated amortization
(2,513
)
(3,439
)
Total net real estate intangible liabilities
$
$
1,553
For the years ended December 31, 2023 and 2022, the Company recognized amortization related to in-place leases of approximately $6.5 million and $7.9 million, respectively, and net amortization related to above-market leases and below-market leases for the years ended December 31, 2023 and 2022 of approximately $0.3 million and $(0.4) million, respectively, in its consolidated statements of operations.
The following table represents expected amortization of existing real estate intangible assets and liabilities as of December 31, 2023.
(in thousands)
Amortization of
in-place leases
Amortization of
above-market leases
Amortization of
below-market leases
Total amortization, net
$
2,952
$
$
(291
)
$
3,236
2,069
(161
)
2,357
1,479
(91
)
1,641
(47
)
1,082
(26
)
Thereafter
1,145
(17
)
1,256
Total
$
9,127
$
1,684
$
(633
)
$
10,178
The Company amortizes the value of in-place leases to amortization expense, the value of above-market leases as a reduction of rental income and the value of below-market leases as an increase to rental income over the initial term of the respective leases.
As of December 31, 2023, the weighted average remaining amortization period of in-place lease intangibles, above-market lease intangible assets and below-market lease intangibles is approximately 2.4 years, 3.0 years and 1.3 years, respectively.
Note 5 - Other Assets
Items included in other assets, net on the Company’s consolidated balance sheets as of December 31, 2023 and 2022 are detailed in the table below. Certain amounts in the prior year presentation were reclassified to enhance the comparability to the current year's presentation.
(in thousands)
December 31, 2023
December 31, 2022
Prepaid assets and deposits
$
1,380
$
1,722
Leasing commission costs and incentives, net
2,141
Right-of-use assets, net
1,494
Pre-acquisition costs
Other receivables, net
Corporate property, net
Receivables from related parties
1,127
1,170
Total
$
6,327
$
4,511
Receivables due from related parties as of December 31, 2023 and 2022, respectively, are described further in Note 17 “Related Party Transactions.”
Note 6 - Accounts Payable and Accrued Liabilities
Items included in accounts payable and accrued liabilities on the Company's consolidated balance sheets as of December 31, 2023 and 2022 are detailed in the table below:
(in thousands)
December 31, 2023
December 31, 2022
Trade payable
$
2,372
$
2,476
Security deposit
2,340
2,529
Real estate tax payable
1,222
1,231
Interest payable
1,213
1,570
Derivative liability
1,208
Lease payable
1,521
Income tax payable
-
Other
5,781
5,659
Accounts payable and accrued liabilities
$
15,457
$
15,411
Note 7 - Mortgage and Other Indebtedness
The table below details the Company’s debt balance as of December 31, 2023 and 2022, as well as the effective interest rates as of December 31, 2023:
(dollars in thousands)
Maturity Date
Rate Type (1)
Interest Rate
December 31, 2023
December 31, 2022
Basis Term Loan (net of discount of $21 and $79, respectively)
July 1, 2024
Floating (2)
8.62%
$
8,491
(3)
$
67,086
(3)
Hollinswood Shopping Center Loan
December 1, 2024
SOFR + 2.36% (4)
4.06%
12,437
12,760
Avondale Shops Loan
June 1, 2025
Fixed
4.00%
2,868
2,985
Vista Shops at Golden Mile Loan (net of discount of $9 and $12, respectively) (5)
June 24, 2024
Fixed
7.73%
11,252
11,478
Brookhill Azalea Shopping Center Loan
January 31, 2025
SOFR + 2.75%
8.10%
9,198
8,762
Crestview Shopping Center Loan (net of discount of $53 and $0, respectively)
September 29, 2026
Fixed
7.83%
11,947
-
Lamar Station Plaza West Loan (net of discount of $73 and $95, respectively)
December 10, 2027
Fixed
5.67%
18,927
18,317
Lamont Street Preferred Interest (net of discount of $0 and $29, respectively) (6)
September 30, 2023
Fixed
13.50%
-
4,241
Highlandtown Village Shopping Center Loan (net of discount of $38 and $14, respectively) (7)
May 10, 2028
SOFR + 2.5%
6.09%
8,712
5,241
Cromwell Field Shopping Center Loan (net of discount of $60 and $77, respectively)
December 22, 2027
Fixed
6.71%
10,597
10,113
Midtown Row Loan (net of discount of $19 and $25, respectively)
December 1, 2027
Fixed
6.48%
75,981
75,975
Midtown Row/Fortress Mezzanine Loan (8)
December 1, 2027
Fixed
12.00%
16,187
17,895
Spotswood Valley Square Shopping Center Loan (net of discount of $0 and $31, respectively)
July 6, 2023
Fixed
4.82%
-
11,849
Coral Hills Shopping Center Loan (net of discount of $189 and $0, respectively)
October 31, 2033
Fixed
6.95%
12,560
-
West Broad Shopping Center Loan (net of discount of $88 and $0, respectively)
December 21, 2033
Fixed
7.00%
11,712
-
The Shops at Greenwood Village Loan (net of discount of $80 and $94, respectively)
October 10, 2028
SOFR + 2.85% (9)
5.85%
22,218
22,772
$
233,087
$
269,474
Unamortized deferred financing costs, net
(2,038
)
(1,858
)
Total Mortgage and Other Indebtedness
$
231,049
$
267,616
(1)Beginning July 1, 2023, one-month London Inter-Bank Offered Rate (“LIBOR”) is no longer published and all remaining debt referencing LIBOR was replaced with the Secured Overnight Financing Rate (“SOFR”).
(2)The interest rate for the Basis Term Loan is the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. On November 23, 2022, the Company entered into an interest rate cap agreement to cap the SOFR interest rate at 4.65% effective January 1, 2023, which replaced the existing interest rate cap agreement that capped the SOFR interest rate at 3.5%.
(3)The outstanding balance includes less than $0.1 million and $0.3 million of exit fees at December 31, 2023 and 2022, respectively.
(4)The Company has entered into an interest rate swap which fixes the interest rate of this loan at 4.06%. On May 3, 2023, the Hollinswood loan agreement was amended to replace LIBOR with SOFR, effective July 1, 2023.
(5)On June 28, 2023, the Company entered into an agreement to amend the interest rate to 7.73% and extend the maturity date of this loan to June 24, 2024. On February 8, 2024, the Company refinanced the Vista Shops at Golden Mile Loan to extend the maturity date to February 8, 2029 and entered into an interest rate swap which fixes the interest rate of the new loan at 6.90%.
(6)The outstanding balance includes approximately $0.3 million of indebtedness as of December 31, 2022 related to the Lamont Street Minimum Multiple Amount (as defined below) owed to Lamont Street as described below under the heading “-Lamont Street Preferred Interest.”
(7)On May 5, 2023, the Company refinanced the Highlandtown Village Shopping Center Loan to extend the maturity date to May 10, 2028 and entered into an interest rate swap which fixes the interest rate of the new loan at 6.085% as described below under the heading “-Mortgage Indebtedness”. The prior loan carried an interest rate of 4.13%.
(8)The outstanding balance reflects the fair value of the debt.
(9)On October 6, 2021, the Company entered into an interest rate swap which fixes the interest rate of this loan at 4.082%. On May 1, 2023, the interest rate was amended to replace Prime with SOFR plus a spread of 2.85%. The Company terminated the existing interest rate swap and entered into a new interest rate swap agreement to fix the interest rate at 5.85%.
Basis Term Loan
In December 2019, six of the Company’s subsidiaries, as borrowers (collectively, the “Borrowers”), and Big Real Estate Finance I, LLC, a subsidiary of a real estate fund managed by Basis Management Group, LLC (“Basis”), as lender (the “Basis Lender”), entered into a loan agreement (the “Basis Loan Agreement”) pursuant to which the Basis Lender made a senior secured term loan of up to $66.9 million (the “Basis Term Loan”) to the Borrowers. Pursuant to the Basis Loan Agreement, the Basis Term Loan was originally secured by mortgages on the following properties: Coral Hills, Crestview, Dekalb, Midtown Colonial, Midtown Lamonticello and West Broad. As of December 31, 2023, the Basis Term Loan is secured by Midtown Colonial and Midtown Lamonticello. The Basis Term Loan initial maturity was January 1, 2023, subject to two one-year extension options, subject to certain conditions. On November 2, 2022, the Company exercised one of the one-year extension options and the maturity date was extended to January 1, 2024. On December 6, 2023, the Company exercised the remaining extension option and the maturity date was extended to July 1, 2024.
The Basis Loan Agreement was amended and restated on June 29, 2022 to replace LIBOR with SOFR. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. The Borrowers entered into an interest rate cap agreement that effectively capped the prior-LIBOR rate at 3.50% per annum. On August 1, 2022, the interest rate cap agreement was modified to cap the SOFR rate at 3.50% per annum. The interest rate cap expired on January 1, 2023. On November 23, 2022, the Company entered into an interest rate cap agreement, effective January 1, 2023, to cap the SOFR interest rate at 4.65%. As of December 31, 2023, the interest rate of the Basis Term Loan was 8.62%.
On July 20, 2023, the Company sold Dekalb and repaid $17.4 million of the outstanding principal balance on the Basis Term Loan with proceeds from the sale. On September 29, 2023, the Company received a loan secured by Crestview and repaid $14.3 million of the outstanding principal balance on the Basis Term Loan with proceeds from the new mortgage loan. Also on October 31, 2023, the Company received a loan secured by Coral Hills and repaid $12.8 million of the outstanding principal balance on the Basis Term Loan with proceeds from the new mortgage loan. Additionally, on December 21, 2023, the Company received a loan secured by West Broad and repaid $13.9 million of the outstanding principal balance on the Basis Term Loan with proceeds from the new mortgage loan. As of December 31, 2023, the outstanding balance of the Basis Term Loan was $8.5 million.
Certain of the Borrowers’ obligations under the Basis Loan Agreement are guaranteed by the Company and by Michael Z. Jacoby, the Company’s chairman and chief executive officer, and Thomas M. Yockey, a director of the Company. The Company has agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan.
The Basis Loan Agreement contains certain customary representations and warranties and affirmative negative and restrictive covenants, including certain property related covenants for the properties securing the Basis Term Loan, including a requirement that
certain capital improvements be made. The Basis Lender has certain approval rights over amendments or renewals of material leases (as defined in the Basis Loan Agreement) and property management agreements for the properties securing the Basis Term Loan.
If (i) an event of default exists, (ii) BSR or any other subsidiary of the Company serving as property manager for one of the secured parties becomes bankrupt, insolvent or a debtor in an insolvency proceeding, or there is a change of control of BSR or such other subsidiary without approval by the Basis Lender, (iii) a default occurs under the applicable management agreement, or (iv) the property manager has engaged in fraud, willful misconduct, misappropriation of funds or is grossly negligent with regard to the applicable property, the Basis Lender may require a Borrower to replace BSR or such other subsidiary of the Company as the property manager and hire a third party manager approved by the Basis Lender to manage the applicable property.
The Borrowers are generally prohibited from selling the properties securing the Basis Term Loan and the Company is prohibited from transferring any interest in any of the Borrowers, in each case without consent from the Basis Lender. The Company is prohibited from engaging in transactions that would result in a Change in Control (as defined in the Basis Loan Agreement) of the Company. Under the Basis Loan Agreement, among other things, it is deemed a Change in Control if Michael Z. Jacoby ceases to be the chairman and chief executive officer of the Company and actively involved in the daily activities and operations of the Company and the Borrowers and a competent and experienced person is not approved by the Basis Lender to replace Mr. Jacoby within 90 days of him ceasing to serve in such roles.
The Basis Loan Agreement provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events and changes in control. If an event of default occurs and is continuing under the Basis Loan Agreement, the Basis Lender may, among other things, require the immediate payment of all amounts owed thereunder.
In addition, if there is a default by Mr. Jacoby under a certain personal loan as long as he has pledged OP units as collateral for such loan, and such default has not been waived or cured, then the Basis Lender will have the right to sweep the Borrowers’ cash account in which they collect and retain rental payments from the properties securing the Basis Term Loan on a daily basis in order for the Basis Lender to create a cash reserve that will serve as collateral for the Basis Term Loan.
The Basis Loan Agreement includes a debt service coverage calculation based on the trailing twelve month's results which includes an adjustment for tenants that are more than one-month delinquent in paying rent. A debt service coverage ratio below 1.10x is a Cash Trap Trigger Event (as defined in the Basis Loan Agreement), which gives the Basis Lender the right to institute a cash management period until the trigger is cured. A debt service coverage ratio below 1.05x for two consecutive calendar quarters gives the Basis Lender the right to remove the Company as manager of the properties.
The Company was in compliance with the Basis Loan Agreement's debt service coverage calculation for the twelve months ended December 31, 2023.
Lamont Street Preferred Interest
In connection with the closing of the Highlandtown and Spotswood Mergers on May 21, 2021 and June 4, 2021, respectively, Lamont Street Partners LLC (“Lamont Street”) contributed an aggregate of $3.9 million in exchange for a 1.0% preferred membership interest in BSV Highlandtown Investors LLC (“BSV Highlandtown”) and BSV Spotswood Investors LLC (“BSV Spotswood”) designated as Class A units (the “Lamont Street Preferred Interest”).
Lamont Street was entitled to a cumulative annual return of 13.5% (the “Lamont Street Class A Return”), of which 10.0% was paid current and 3.5% was accrued. Lamont Street’s interests were to be redeemed on or before September 30, 2023 (the “Lamont Street Redemption Date”). The Lamont Street Redemption Date could be extended by the Company to September 30, 2024 and September 30, 2025, in each case subject to certain conditions, including the payment of a fee equal to 0.25% of Lamont Street’s net invested capital for the first extension option and a fee of 0.50% of Lamont Street’s net invested capital for the second extension option. If the redemption price was paid on or before the Lamont Street Redemption Date, then the redemption price was equal to (a) all unreturned capital contributions made by Lamont Street, (b) all accrued but unpaid Lamont Street Class A Return and (c) all costs and other expenses incurred by Lamont Street in connection with the enforcement of its rights under the agreements. Additionally, at the Lamont Street Redemption Date, Lamont Street was entitled to (i) a redemption fee of 0.50% of the capital contributions returned and (ii) an amount equal to (a) the product of (i) the aggregate amount of capital contributions made and (ii) 0.26 less (b) the aggregate amount of Lamont Street Class A Return payments made to Lamont Street (the “Lamont Street Minimum Multiple Amount”).
On May 5, 2023, the Company refinanced the Highlandtown mortgage loan and used a portion of the proceeds to redeem $1.9 million of the Lamont Street Preferred Interest. On June 30, 2023, the Company used a portion of the proceeds from the sale of the Spotswood property to redeem the remaining $2.3 million of the Lamont Street Preferred Interest, which amount includes the remaining Lamont Street Minimum Multiple Amount.
Mortgage Indebtedness
In addition to the indebtedness described above, as of December 31, 2023 and 2022, the Company had approximately $208.4 million and $180.3 million, respectively, of outstanding mortgage indebtedness secured by individual properties. The Hollinswood
mortgage, Vista Shops mortgage, Brookhill mortgage, Crestview mortgage, Highlandtown mortgage, Cromwell mortgage, Lamar Station Plaza West mortgage, Midtown Row mortgage, Coral Hills mortgage, West Broad mortgage and Greenwood Village mortgage require the Company to maintain a minimum debt service coverage ratio (as such terms are defined in the respective loan agreements) as follows in the table below.
Minimum Debt Service Coverage
Hollinswood Shopping Center
1.40 to 1.00
Vista Shops at Golden Mile
1.50 to 1.00
Brookhill Azalea Shopping Center
1.30 to 1.00
Crestview Shopping Center
1.25 to 1.00
Highlandtown Village Shopping Center
1.25 to 1.00
Cromwell Field Shopping Center (1)
1.20 to 1.00
Lamar Station Plaza West
1.30 to 1.00
Midtown Row
1.15 to 1.00
Coral Hills Shopping Center
1.20 to 1.00
West Broad Shopping Center
1.25 to 1.00
The Shops at Greenwood Village
1.40 to 1.00
(1)The debt service coverage ratio testing commenced December 31, 2023 with the following requirements: (i) 1.20 to 1.00 as of December 31, 2023; (ii) 1.55 to 1.00 as of December 31, 2024 and (iii) 1.35 to 1.00 as of December 31, 2025 and for the remaining term of the loan.
On October 6, 2021, the Company entered into a $23.5 million mortgage loan secured by the Greenwood Village property, which bears interest at prime rate less 0.35% per annum and matures on October 10, 2028. The Company entered into an interest rate swap which fixed the interest rate of the loan at 4.082%. On May 1, 2023, the interest rate was amended to replace Prime with SOFR plus a spread of 2.85%. The Company terminated the existing interest rate swap agreement and entered into a new interest rate swap agreement which fixes the interest rate of the loan at 5.85%.
On May 3, 2023, the loan agreement for the Company's mortgage loan secured by the Hollinswood property was amended to replace the LIBOR interest rate with SOFR plus a spread of 2.36%.
On May 5, 2023, the Company refinanced the mortgage loan secured by Highlandtown Village Shopping Center. The new loan has a principal balance of $8.7 million, which bears interest at SOFR plus a spread of 2.5% per annum and matures on May 10, 2028. The Company has entered into an interest rate swap which fixes the interest rate of the loan at 6.085%.
On June 28, 2023, the loan agreement for the Company's mortgage loan secured by the Vista Shops at Golden Mile was amended to change the interest rate to 7.73% per annum and extend the maturity date to June 24, 2024. On February 8, 2024, the Company refinanced the mortgage loan. The new loan has a principal balance of $16.2 million, bears interest at SOFR plus a spread of 2.75% per annum and matures on February 8, 2029. The Company entered into an interest rate swap which fixes the interest rate of the loan at 6.90%.
On September 29, 2023, the Company received a $12.0 million loan secured by Crestview Shopping Center, which bears interest at a rate of 7.83% per annum and matures on September 29, 2026. The Company used the proceeds to pay down the Basis Term Loan.
On October 31, 2023, the Company received a $12.8 million loan secured by the Coral Hills property, which bears interest at a rate of 6.95% per annum and matures on October 31, 2033. The Company used the proceeds to pay down the Basis Term Loan.
On December 21, 2023, the Company received an $11.8 million loan secured by the West Broad property, which bears interest at a rate of 7.00% per annum and matures on December 21, 2033. The Company used the proceeds to pay down the Basis Term Loan.
As of December 31, 2023, the Company was in compliance with all covenants under its debt agreements.
Fortress Mezzanine Loan
In connection with the acquisition of Midtown Row, the Company entered into a $15.0 million mezzanine loan (the “Fortress Mezzanine Loan”) secured by 100% of the membership interests in the entity that owns Midtown Row. The mezzanine loan matures on December 1, 2027. Pursuant to the mezzanine loan agreement, a portion of the interest on the Fortress Mezzanine Loan is paid in cash (the “Current Interest”) and a portion of the interest is capitalized and added to the principal amount of the Fortress Mezzanine Loan each month (the “Capitalized Interest” and, together with the Current Interest, the “Mezzanine Loan Interest”). The initial Mezzanine Loan Interest rate was 12% per annum, comprised of a 5% Current Interest rate and a 7% Capitalized Interest rate. The Capitalized Interest rate increases each year by 1%. As of December 31, 2023, the Mezzanine Loan Interest rate was 13% per annum, comprised of a 5% Current Interest rate and a 8% Capitalized Interest rate. The Fortress Mezzanine Loan (including a prepayment penalty) will be due and payable in connection with an underwritten public offering by the Company meeting certain conditions (a “Qualified Public Offering”). However, in connection with a Qualified Public Offering, the lender for the Fortress Mezzanine Loan has the right to convert all or a portion of the principal of the Fortress Mezzanine Loan and any prepayment penalty into shares of common stock at a price of
$2.00 per share, subject to certain adjustments. The mezzanine loan agreement provides for cross-default in the event of a Trigger Event under the Eagles Sub-OP Operating Agreement or an event of default under the loan agreement for the Midtown Row mortgage. The Company elected to measure the Fortress Mezzanine Loan at fair value in accordance with the fair value option. The fair value at December 31, 2023 and December 31, 2022 was $16.2 million and $17.9 million, respectively. For the years ended December 31, 2023 and 2022, the Company recognized a net gain of $2.3 million and a net loss of $3.1 million, respectively, in net gain (loss) on fair value change on debt held under the fair value option in the consolidated statements of operations and $0.5 million and $0.1 million, respectively, in Change in fair value due to credit risk on debt held under the fair value option in the consolidated statements of comprehensive loss. For the years ended December 31, 2023 and 2022, the Company recognized $1.9 million and $0.2 million, respectively, of interest expense in the consolidated statements of operations, which includes $1.1 million and $0.1 million, respectively, of Capitalized Interest recorded in the consolidated balance sheets.
Deferred Financing Costs and Debt Discounts
The total amount of deferred financing costs associated with the Company’s debt as of December 31, 2023 and 2022 was $3.4 million, gross ($2.0 million, net) and $3.2 million, gross ($1.9 million, net), respectively. Debt discounts associated with the Company’s debt as of December 31, 2023 and 2022 was $1.3 million, gross ($0.6 million, net) and $2.1 million, gross ($0.4 million, net), respectively. Deferred financing costs and debt discounts are netted against the debt balance outstanding on the Company’s consolidated balance sheets and will be amortized to interest expense through the maturity date of the related debt.
The Company recognized amortization expense of deferred financing costs and debt discounts, included in interest expense in the consolidated statements of operations, of approximately $0.8 million and $1.5 million for the years ended December 31, 2023 and 2022, respectively.
Debt Maturities
The following table details the Company’s scheduled principal repayments and maturities during each of the next five years and thereafter as of December 31, 2023:
Year ending December 31,
(in thousands)
2024 (1)
$
33,883
14,004
14,695
120,120
28,567
Thereafter
22,503
233,772
Unamortized debt discounts and deferred financing costs, net and fair value option adjustment
(2,723
)
Total
$
231,049
(1)Includes $11.2 million of debt that was repaid on February 8, 2024 in connection with the refinance of the mortgage loan secured by the Vista Shops at Golden Mile.
Interest Rate Cap and Interest Rate Swap Agreements
To mitigate exposure to interest rate risk, the Company entered into an interest rate cap agreement, effective December 27, 2019, on the full $66.9 million Basis Term Loan to cap the previously variable LIBOR interest rate at 3.5%. On June 29, 2022, the Basis Loan Agreement was amended and restated to replace LIBOR with SOFR. The Basis Term Loan bears interest at a rate equal to the greater of (i) SOFR plus 3.97% per annum and (ii) 6.125% per annum. On August 1, 2022, the interest rate cap for the Basis Term Loan was modified to cap the SOFR rate at 3.5%. On November 23, 2022, the Company entered into an interest rate cap agreement, effective January 1, 2023, on the full $66.9 million Basis Term Loan to cap the SOFR interest rate at 4.65%. As of December 31, 2023 and 2022, the effective interest rate of the Basis Term Loan was 8.62% and 6.125%, respectively.
The Company also entered into two interest rate swap agreements on the Hollinswood Loan to fix the interest rate at 4.06%. The swap agreements are effective as of December 27, 2019 on the outstanding balance of $10.2 million and on July 1, 2021 for the additional availability of $3.0 million under the Hollinswood Loan. On May 3, 2023, the Hollinswood loan agreement was amended to replace LIBOR with SOFR, effective July 1, 2023.
On October 6, 2021, the Company entered into an interest rate swap agreement on the Greenwood Village Loan to fix the interest rate at 4.082%. On May 1, 2023, the Company terminated the existing interest rate swap agreement and entered into a new interest rate swap agreement on the Greenwood Village Loan to fix the interest rate at 5.85%. The Company also received $2.2 million upon the termination of the prior interest rate swap agreement.
On May 5, 2023, the Company entered into an interest rate swap agreement on the Highlandtown Village Shopping Center mortgage loan to fix the interest rate at 6.085%.
On February 8, 2024, the Company entered into an interest rate swap agreement on the Vista Shops at Golden Mile mortgage loan to fix the interest rate at 6.90%.
The Company recognizes all derivative instruments as assets or liabilities at their fair value in the consolidated balance sheets. Changes in the fair value of the Company’s derivatives that are not designated as hedges or do not meet the criteria of hedge accounting are recognized in earnings. For the years ended December 31, 2023 and 2022, the Company recognized a net loss of approximately $1.2 million and a net gain of approximately $3.4 million, respectively, as a component of "Derivative fair value adjustment" on the consolidated statements of operations.
The fair value of the Company’s derivative financial instruments as of December 31, 2023 and 2022 was an interest rate swap asset of approximately $0.8 million and $3.2 million, respectively, and an interest rate cap asset of $0.2 million at December 31, 2022. The interest rate cap asset and interest rate swap asset are included in Other assets, net on the consolidated balance sheets.
Covenants
The Company’s loan agreements contain customary financial and operating covenants including debt service coverage ratios and aggregate minimum unencumbered cash covenants. As of December 31, 2023, the Company was in compliance with all covenants under its debt agreements.
Note 8 - Commitments and Contingencies
Commitments
The Company has no outstanding commitments as of December 31, 2023.
Leases, as lessee
At the inception of a lease and over its term, the Company evaluates each lease to determine the proper lease classification. Certain of these leases provide the Company with the contractual right to use and economically benefit from all of the space specified in the lease. Therefore, the Company has determined that they should be evaluated as lease arrangements. As of December 31, 2023, the Company was obligated under operating lease agreements consisting primarily of the Company’s office leases and equipment leases. The majority of the Company’s office leases contain provisions for specified annual increases over the rents of the prior year and are computed based on a specified annual increase over the prior year’s rent, generally 3.0%. The Company’s office leases have initial terms ranging from 2 to 51 years.
In accordance with the adoption of ASC 842, Leases, the Company recorded right-of-use assets (included in Other assets, net on the consolidated balance sheet) and related lease liabilities (included in Accounts payable and accrued expenses on the consolidated balance sheet) for these leases. As of December 31, 2023, the Company’s weighted average remaining lease term is approximately 14.5 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 6.5%. The Company has not recognized a right-of-use asset and lease liability for leases with terms of 12 months or less and without an option to purchase the underlying asset.
In calculating the right-of-use assets and related lease liabilities, the Company’s lease payments are typically discounted at its incremental borrowing rate because the interest rate implicit in the lease cannot be readily determined in the absence of key inputs which are typically not reported by the Company’s lessors. Judgment was used to estimate the secured borrowing rate associated with the Company’s leases and reflects the lease term specific to each lease.
The Company remeasures its lease liabilities monthly at the present value of the future lease payments using the discount rate determined at lease commencement. Rent expense relating to the operating leases, including straight-line rent, was approximately $0.4 million and $0.5 million, respectively, for the years ended December 31, 2023 and 2022, and is recorded in general and administrative in the statements of operations.
The Company’s future minimum lease payments for its operating leases recorded in accounts payable and accrued liabilities as of December 31, 2023 were as follows:
(in thousands)
For the year ending:
$
Thereafter
1,222
Total undiscounted future minimum lease payments
2,584
Discount
(1,063
)
Operating lease liabilities
$
1,521
Litigation
From time to time, the Company or its properties may be subject to claims and suits in the ordinary course of business. The Company’s lessees and borrowers have indemnified, and are obligated to continue to indemnify, the Company against all liabilities arising from the operations of the properties and are further obligated to indemnify it against environmental or title problems affecting the real estate underlying such facilities. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
Note 9 - Fortress Preferred Equity Investment
On November 22, 2022, the Company, the Operating Partnership and Broad Street Eagles JV LLC, a newly formed subsidiary of the Operating Partnership (the “Eagles Sub-OP”), entered into a Preferred Equity Investment Agreement with CF Flyer PE Investor LLC (the “Fortress Member”), an affiliate of Fortress Investment Group LLC, pursuant to which the Fortress Member invested $80.0 million in the Eagles Sub-OP in exchange for a preferred membership interest (such interest, the “Fortress Preferred Interest” and such investment, the “Preferred Equity Investment”). The Company consolidates the Eagles Sub-OP under the guidance set forth in ASC 810 “Consolidation.” The Company evaluated whether the Eagles Sub-OP met the criteria for classification as a VIE or, alternatively, as a voting interest entity and concluded that that the Eagles Sub-OP met the criteria of a VIE. The Company is considered to have a controlling financial interest in the Eagles Sub-OP because the Company determined that it is the primary beneficiary because it is most closely associated with the Eagles Sub-OP.
In connection with the Preferred Equity Investment, the Operating Partnership and the Fortress Member entered into the Eagles Sub-OP Operating Agreement, and the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that, directly or indirectly, own Brookhill Azalea Shopping Center, Vista Shops, Hollinswood Shopping Center, Avondale Shops, Greenwood Village Shopping Center and Lamar Station Plaza East in November 2022, as well as Cromwell Field in December 2022. The subsidiaries of the Operating Partnership that indirectly own the following eight properties were not contributed to the Eagles Sub-OP in connection with the closing of the Preferred Equity Investment but are required to be contributed to the Eagles Sub-OP on or prior to the applicable outside dates: (i) Highlandtown, (ii) Spotswood and (iii) the six properties securing the Basis Term Loan (the “Portfolio Excluded Properties” and, collectively with Highlandtown and Spotswood the “Excluded Properties”). The outside dates for Highlandtown, the Portfolio Excluded Properties and Spotswood were originally May 6, 2023, June 30, 2023 and July 6, 2023, respectively. On May 5, 2023, the Operating Partnership contributed to the Eagles Sub-OP its subsidiary that owns Highlandtown. The Fortress Member has approved extensions of the Portfolio Excluded Properties outside date, which is currently April 30, 2024. With the approval of the Fortress Member, on June 30, 2023, the Company sold Spotswood and, on July 20, 2023, sold Dekalb, which was one of the Portfolio Excluded Properties. On September 29, 2023, October 31, 2023 and December 21, 2023, the Operating Partnership contributed to the Eagles Sub-OP its subsidiaries that own Crestview, Coral Hills and West Broad, which were Portfolio Excluded Properties.
Pursuant to the Amended and Restated Limited Liability Company Agreement of the Eagles Sub-OP (the “Eagles Sub-OP Operating Agreement”), the Fortress Member is entitled to monthly distributions, a portion of which is paid in cash (the “Current Preferred Return”) and a portion that accrues on and is added to the Preferred Equity Investment each month (the “Capitalized Preferred Return” and, together with the Current Preferred Return, the “Preferred Return”). The initial Preferred Return was 12% per annum, comprised of a 5% Current Preferred Return and a 7% Capitalized Preferred Return, provided that, until the Portfolio Excluded Properties are contributed to the Eagles Sub-OP, the Capitalized Preferred Return is increased by 4.75%. The Capitalized Preferred Return increases each year by 1%. Commencing on November 22, 2027, the Preferred Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter. Upon (i) the occurrence of a Trigger Event, (ii) during a three-month period in which distributions on the Preferred Equity Investment are not made because such payments would cause a violation of Delaware law or (iii) if a Qualified Public Offering has not occurred on or prior to November 22, 2027, the entire Preferred Return shall accrue at the then-applicable Preferred Return plus 4% and shall be payable monthly in cash. As of December 31, 2023, the Preferred
Return was 17.75% per annum, comprised of a 5% Current Preferred Return and a 12.75% Capitalized Preferred Return. As of December 31, 2023 and 2022, the Capitalized Preferred Return was approximately $11.3 million and $1.0 million, respectively, and is reflected within Redeemable noncontrolling Fortress preferred interest on the consolidated balance sheets. For the years ended December 31, 2023 and 2022, the Company recognized $4.3 million and $0.4 million, respectively, of Current Preferred Return and $10.3 million and $1.1 million, respectively, of Capitalized Preferred Return as a reduction to additional paid-in capital in the consolidated statements of equity.
Upon the closing of a Qualified Public Offering, unless earlier redeemed, the Eagles Sub-OP must redeem the entire Fortress Preferred Interest by payment in cash to the Fortress Member of the full Redemption Amount (as defined below), provided that (i) the Eagles Sub-OP may elect, in its discretion, not to redeem $37.5 million of the Preferred Equity Investment and (ii) $25.0 million of the Preferred Equity Investment (less the amount of the Fortress Mezzanine Loan converted into common stock in connection with such Qualified Public Offering, if any) will be converted to shares of common stock at a price of $2.00 per share, subject to certain adjustments. The Operating Partnership may cause the Eagles Sub-OP to redeem the Fortress Preferred Interest in whole (but not in part), by payment in cash to the Fortress Member of the full Redemption Amount, as long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption. The “Redemption Amount” is equal to the sum of: (i) all outstanding loans advanced to the Eagles Sub-OP by the Fortress Member in accordance with the terms of the Eagles Sub-OP Operating Agreement, together with all accrued and unpaid return on such loans; (ii) the unredeemed balance of the Preferred Equity Investment; (iii) an amount equal to the greater of (x) all accrued and unpaid Preferred Return and (y) a 1.40x minimum multiple on the amount of all loans and capital contributions made by the Fortress Member to the Eagles Sub-OP in accordance with the terms of the Eagles Sub-OP Operating Agreement, which minimum multiple shall be reduced to 1.30x upon the consummation of a Qualified Public Offering; and (iv) all other payments, fees, costs and expenses due or payable to the Fortress Member under the Eagles Sub-OP Operating Agreement, including a $10.0 million exit fee unless the Redemption Amount is paid upon or following the completion of a Qualified Public Offering.
The Operating Partnership serves as the managing member of the Eagles Sub-OP. However, the Fortress Member has approval rights over certain Major Actions (as defined in the Eagles Sub-OP Operating Agreement), including, but not limited to (i) the adoption and approval of annual corporate and property budgets, (ii) the amendment, renewal, termination or modification of material contracts, leases over 5,000 square feet and certain loan documents, (iii) the liquidation, dissolution, or winding-up of the Eagles Sub-OP, the Company or any of its subsidiaries, (iv) taking actions of bankruptcy or failing to defend an involuntary bankruptcy action of the Eagles Sub-OP, the Company or any of its subsidiaries, (v) effecting any reorganization or recapitalization of the Eagles Sub-OP, the Company or any of its subsidiaries, (vi) declaring or paying distributions on any equity security of the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (vii) issuing any equity securities in the Eagles Sub-OP, the Company or any of its subsidiaries, subject to certain exceptions, (viii) conducting a merger or consolidation of the Eagles Sub-OP, the Company or the Operating Partnership or selling substantially all the assets of the Company and its subsidiaries or the Eagles Sub-OP and its subsidiaries, (ix) amending, terminating or otherwise modifying the loans secured by the properties indirectly owned by the Eagles Sub-OP, subject to certain exceptions, (x) incurring additional indebtedness or making prepayments on indebtedness, subject to certain exceptions; (xi) acquiring any property outside the ordinary course of business of the Company and (xii) selling any property below the minimum release price for such property.
In addition, the Company is required to maintain separate bank accounts for tenant improvement costs and leasing costs as well as the net proceeds from the Spotswood and Dekalb dispositions. Prior written consent of the Fortress Member is required for the disbursement and use of cash held in such accounts, which had a combined balance of $3.1 million as of December 31, 2023 and is reflected in cash and cash equivalents on the consolidated balance sheets.
Under the Eagles Sub-OP Operating Agreement, “Trigger Events” include, but are not limited to, the following: (i) fraud, gross negligence, willful misconduct, criminal acts or intentional misappropriation of funds with respect to a property owned by the Company or any of its subsidiaries; (ii) a bankruptcy event with respect to the Company or any of its subsidiaries, except for an involuntary bankruptcy that is dismissed within 90 days of commencement; (iii) a material breach of certain provisions of the Eagles Sub-OP Operating Agreement; (iv) monetary defaults or material non-monetary defaults under the Fortress Mezzanine Loan or the mortgage loans secured by properties owned directly or indirectly by the Eagles Sub-OP (including the Excluded Properties); (v) failure to meet the minimum Total Yield requirements under the Eagles Sub-OP Operating Agreement; (vi) failure to pay the Current Preferred Return (subject to a limited cure period) or failure to make distributions as required by the Eagles Sub-OP Operating Agreement; (vii) the occurrence of a Change of Control (as defined in the Eagles Sub-OP Operating Agreement); (viii) failure to contribute the Excluded Properties and consummate the related transactions by the applicable outside date; (ix) Mr. Jacoby (A) ceasing to be employed as the chief executive officer of the Company, (B) not being activity involved in the management of the Company or (C) failing to hold an aggregate of at least 3,802,594 shares of common stock and OP units, in each case subject to the Company’s right to appoint a replacement chief executive officer reasonably acceptable to the Fortress Member within 90 days; and (x) material breaches or material defaults of the Company, the Operating Partnership or their subsidiaries under certain other agreements related to the Preferred Equity Investment.
Upon the occurrence of a Trigger Event, the Fortress Member has the right to cause the Eagles Sub-OP to redeem the Fortress Preferred Interest by payment to the Fortress Member of the full Redemption Amount upon not less than 90 days prior written notice to
the Eagles Sub-OP, unless the Trigger Event is in connection with a Bankruptcy Event, in which case the redemption must occur as of the date of such Trigger Event.
Under certain circumstances, including in the event of a Trigger Event or if a Qualified Public Offering has not occurred by November 22, 2027, the Fortress Member has the right (among other rights) to (i) remove the Operating Partnership as the managing member of the Eagles Sub-OP and to serve as the managing member until the Fortress Member is paid the Redemption Amount, (ii) cause the Eagles Sub-OP to sell one or more properties until the entire Fortress Preferred Interest has been redeemed for the Redemption Amount, (iii) cause the Eagles Sub-OP to use certain reserve accounts to pay the Fortress Member the full Redemption Amount, and (iv) terminate all property management and other service agreements with affiliates of the Company.
The obligations of the Operating Partnership under the Eagles Sub-OP are guaranteed by the Company. In addition, Messrs. Jacoby and Yockey guaranteed the full payment of the Redemption Amount in the event of a bankruptcy event of the Company or its subsidiaries without the consent of the Fortress Member or certain other events that interfere with the rights of the Fortress Member under certain other agreements related to the Preferred Equity Investment.
The Fortress Member’s interest in the Eagles Sub-OP under the Eagles Sub-OP Operating Agreement is a financial instrument with both equity and debt characteristics and is classified as mezzanine equity in these consolidated financial statements. The instrument was initially recognized at fair value net of issuance costs. As discussed above, the Preferred Equity Investment is redeemable at a determinable date (at year five (5), prior to year five if a Qualified Public Offering occurs or at any time so long as the Fortress Mezzanine Loan is repaid in full before or concurrently with such redemption) and therefore, at each subsequent reporting period we will accrete the carrying value to the Redemption Amount based on the effective interest method over the remaining term. All financial instruments that are classified as mezzanine equity are evaluated for embedded derivative features by evaluating each feature against the nature of the host instrument (e.g. more equity-like or debt-like). Features identified as embedded derivatives that are material are recognized separately as a derivative asset or liability in the consolidated financial statements. The Company has evaluated the Preferred Equity Investment and determined that its nature is that of a debt host and certain embedded derivatives exist that would require bifurcation on the Company’s consolidated balance sheets. For the years ended December 31, 2023 and 2022, the Company recognized a gain of $0.5 million and a loss of $0.8 million, respectively, in derivative fair value adjustment in the consolidated statements of operations. The derivative liability was $0.7 million and $1.2 million at December 31, 2023 and 2022, respectively, and is reflected in accounts payable and accrued liabilities in the consolidated balance sheets.
The following table summarizes the preferred equity investment activities for the years ended December 31, 2023 and 2022.
(thousands)
Preferred Equity Investment
Balance at December 31, 2021
$
-
Investment in preferred equity
80,000
Financing costs
(5,589
)
Discount on preferred equity
(1,689
)
Bifurcation of embedded derivatives
(417
)
Preferred equity return
1,392
Balance at December 31, 2022
73,697
Preferred equity return
14,641
Preferred equity payment
(4,297
)
Preferred equity accretion
3,247
Balance at December 31, 2023
$
87,288
Note 10 - Equity
Common Stock
On January 3, 2022, the Company issued 165,700 shares of common stock to its directors. On April 1, 2022, the Company issued 9,708 shares of common stock to certain of its directors in lieu of such directors’ cash retainers. Also, on April 1, 2022 and July 1, 2022, the Company issued 60,106 and 36,064 shares of common stock, respectively, in connection with the redemption of OP units.
On January 3, 2023, the Company issued 166,125 shares of common stock to its directors, which includes 16,125 shares of common stock issued to one of the Company’s directors in lieu of such director’s cash retainer. On April 3, 2023, July 3, 2023 and October 3, 2023, the Company issued 32,904, 25,500 and 9,348 shares of common stock, respectively, to certain of its directors in lieu of such directors’ cash retainers. On April 3, 2023, the Company issued 254,839 shares of common stock to Mr. Jacoby in lieu of cash payment of 50% of his bonus pursuant to the cash bonus plan approved by the compensation committee of the Company’s board of directors for the year ended December 31, 2022. The foregoing shares were issued under the Company's Amended and Restated 2020 Equity Incentive Plan (the “Plan”).
On October 23, 2023, the Company amended and restated its certificate of incorporation, which effected an increase to the Company's total number of authorized shares of common stock from 50,000,000 shares to 300,000,000 shares.
On January 2, 2024, the Company issued 11,945 shares of common stock to one of its directors in lieu of such director’s cash retainer.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, in one or more series, with a $0.01 par value per share, of which 20,000 shares have been designated as Series A preferred stock, $0.01 par value per share (the “Series A preferred stock”).
As of December 31, 2023 and 2022, the Company had 500 shares of Series A preferred stock outstanding, all of which were assumed from MedAmerica upon completion of the Initial Mergers. The holders of Series A preferred stock are entitled to receive, out of funds legally available for that purpose, cumulative, non-compounded cash dividends on each outstanding share of Series A preferred stock at the rate of 10.0% of the $100 per share issuance price (“Series A preferred dividends”). The Series A preferred dividends are payable semiannually to the holders of Series A preferred stock, when and as declared by the Company’s board of directors, on June 30 and December 31 of each year, that shares of Series A preferred stock are outstanding; provided that due and unpaid Series A preferred dividends may be declared and paid on any date declared by the Company’s board of directors. As of December 31, 2023, less than $0.1 million of Series A preferred dividends were undeclared.
In the event of any voluntary or involuntary liquidation, sale, merger, consolidation, dissolution or winding up of the Company, before any distribution of assets shall be made to the holders of the Company’s common stock, each holder of Series A preferred stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount equal to the $100 issue price plus all Series A preferred dividends accrued and unpaid on such shares up to the date of distribution of the available assets (such amount, the “Liquidation Preference”). The amount deemed distributed for purposes of determining the Liquidation Preference shall be the cash or the fair market value of the property, rights or securities distributed to the holders of Series A preferred stock as determined in good faith by the Company’s board of directors. If, upon a liquidation event, the available assets are insufficient to pay the Liquidation Preference to the holders of Series A preferred stock in full, then the available assets shall be distributed ratably among the holders of Series A preferred stock in proportion to their respective ownership of shares of Series A preferred stock.
Shares of Series A preferred stock, excluding accrued Series A preferred dividends, which will be paid as described above, may, in the sole discretion of the holder of such shares of Series A preferred stock and by written notice to the Company, be converted into shares of the Company’s common stock, at a conversion price of $0.20 per share, subject to certain adjustments, in whole or in part at any time.
Holders of Series A preferred stock are generally not entitled to voting rights.
Noncontrolling Interest
As of December 31, 2023 and 2022, the Company owned an 85.7% interest and a 85.3% interest, respectively, in the Operating Partnership. On November 23, 2022, the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units in connection with the acquisition of Midtown Row, as well as 573,529 Common OP units in connection with the Merger related to Lamar Station Plaza West. Commencing on the 12-month anniversary of the date on which the Common OP units were issued, each limited partner of the Operating Partnership (other than the Company) has the right, subject to certain terms and conditions, to require the Operating Partnership to redeem all or a portion of the Common OP units held by such limited partner in exchange for cash based on the market price of the Company’s common stock or, at the Company’s option and sole discretion, for shares of the Company’s common stock on a one-for-one basis. Holders of Preferred OP units have the right to convert each Preferred OP unit into one Common OP unit, plus a cash payment for each Preferred OP unit so converted equal to (i) (A) the liquidation preference of the Preferred OP unit at such time, minus (B) $2.00 and (ii) all accrued and unpaid monthly distributions (to the extent not already added to the liquidation preference) (the “Conversion Liquidation Payment”). The liquidation preference means the sum of (i) $2.00 and (ii) the accrued Capitalized Preferred OP Unit Return (as defined below). On the date that the common stock is first listed on the New York Stock Exchange, the NYSE American or the Nasdaq Stock Market, each Preferred OP unit will automatically convert into one Common OP unit and the right to receive the Conversion Liquidation Payment. Pursuant to the amended Agreement of Limited Partnership of the Operating Partnership, a portion of the return on the Preferred OP units will be paid in cash (the “Current Preferred OP Unit Return”) and a portion of the return will accrue on and be added to the liquidation preference of the Preferred OP units each month (the “Capitalized Preferred OP Unit Return” and, together with the Current Preferred OP Unit Return, the "Preferred OP Unit Return"). The initial Preferred OP Unit Return was 12% per annum, comprised of a 5% Current Preferred OP Unit Return and a 7% Capitalized Preferred OP Unit Return. The Capitalized Preferred OP Unit Return increases each year by 1%. After November 23, 2027, the Preferred OP Unit Return will be 19% per annum, all payable in cash, and will increase an additional 3% each year thereafter. As of December 31, 2023, the Preferred OP Unit Return was 13% per annum, comprised of a 5% Current Preferred OP Unit Return and an 8% Capitalized Preferred OP Unit Return. The Preferred OP units have no voting rights.
On April 1, 2022 and July 1, 2022, the Company issued 60,106 and 36,064 shares of common stock, respectively, in connection with the redemption of Common OP units.
Amended and Restated 2020 Equity Incentive Plan
On September 15, 2021, the Company’s board of directors approved the Plan, which increased the number of shares of the Company’s common stock reserved for issuance under the Plan by 1,500,000 shares, from 3,620,000 shares to 5,120,000 shares. The Plan provides for the grant of stock options, share awards (including restricted stock and restricted stock units), share appreciation rights, dividend equivalent rights, performance awards, annual cash incentive awards and other equity based awards, including LTIP units, which are convertible on a one-for-one basis into Common OP units. As of December 31, 2023, there were 404,876 shares available for future issuance under the Plan, subject to certain adjustments set forth in the Plan. Each share subject to an award granted under the Plan will reduce the available shares under the Plan on a one-for-one basis. The Plan is administered by the compensation committee of the Company’s board of directors.
Restricted Stock
Awards of restricted stock are awards of the Company’s common stock that are subject to restrictions on transferability and other restrictions as established by the Company’s compensation committee on the date of grant that are generally subject to forfeiture if employment (or service as a director) terminates prior to vesting. Upon vesting, all restrictions would lapse. Except to the extent restricted under the award agreement, a participant awarded restricted stock will have all of the rights of a stockholder as to those shares, including, without limitation, the right to vote and the right to receive dividends on the shares. The value of the awards is determined based on the market value of the Company’s common stock on the date of grant. The Company expenses the cost of restricted stock ratably over the vesting period.
The following table summarizes the stock-based award activity under the Plan for the years ended December 31, 2023 and 2022.
Restricted Stock Awards
Weighted-Average Grant Date
Fair Value Per Restricted Stock Award
Outstanding as of December 31, 2021
237,621
$
1.26
Granted
138,262
2.20
Vested
(194,457
)
1.00
Forfeited
(21,987
)
2.35
Outstanding as of December 31, 2022
159,439
1.62
Granted
697,393
0.78
Vested
(59,607
)
2.25
Forfeited
(21,856
)
1.60
Outstanding as of December 31, 2023
775,369
$
0.99
Of the restricted shares that vested during 2023 and 2022, 4,126 and 4,307 shares, respectively, were surrendered by certain employees to satisfy their tax obligations.
Compensation expense related to these share-based payments for the year ended December 31, 2023 and 2022 was $0.3 million and $0.2 million, respectively, and was included in general and administrative expenses on the consolidated statements of operations. The remaining unrecognized costs from stock-based awards as of December 31, 2023 was approximately $0.4 million and will be recognized over a weighted-average period of 0.9 years.
On April 1, 2022, the Company granted 138,262 restricted shares of common stock to certain employees, which vest ratably on January 1, 2023, January 1, 2024, and January 1, 2025, subject to continued service through such dates. The total value of these awards is calculated to be approximately $0.3 million.
On April 3, 2023, the Company granted 419,618 restricted shares of common stock to certain employees, which vest ratably on January 1, 2024, January 1, 2025, and January 1, 2026, subject to continued service through such dates. The total value of these awards is calculated to be approximately $0.3 million.
On December 7, 2023, the Company granted 277,775 restricted shares of common stock to its directors, which will vest on October 23, 2024. The total value of these awards is calculated to be approximately $0.3 million.
Restricted Stock Units
The Company’s restricted stock unit (“RSU”) awards represent the right to receive unrestricted shares of common stock based on the achievement of Company performance objectives as determined by the Company’s compensation committee. Grants of RSUs generally entitle recipients to shares of common stock equal to 0% up to 300% of the number of units granted on the vesting date. RSUs are not eligible to vote or to receive dividends prior to vesting. Dividend equivalents are credited to the recipient and are paid only to the extent that the RSUs vest based on the achievement of the applicable performance objectives.
On October 1, 2021, the Company granted certain employees RSUs with an aggregate target number of 1,220,930 RSUs, of which 0% to 300% will vest based on the Company’s Implied Equity Market Capitalization (defined as (i) the sum of (a) the number of shares of common stock of the Company outstanding and (b) the number of Common OP units outstanding (not including Common OP units held by the Company), in each case, as of the last day of the applicable performance period, multiplied by (ii) the value per share of common stock at the end of the performance period) on December 31, 2024, the end of the performance period, subject to the executive’s continued service on such date. If, however, the maximum amount of the award is not earned as of December 31, 2024, the remaining RSUs may be earned based on the Company’s Implied Equity Market Capitalization as of December 31, 2025. To the extent performance is between any two designated amounts, the percentage of the target award earned will be determined using a straight-line linear interpolation between the two designated amounts. The value of the awards is determined by using a Monte Carlo simulation model in estimating the market value of the RSUs as of the date of grant. The Company expenses the cost of RSUs ratably over the vesting period. On February 28, 2023, 232,558 RSUs were forfeited as a result of an employee's resignation. The remaining unrecognized costs from RSU awards as of December 31, 2023 was approximately $2.0 million and will be recognized over 2.0 years.
Option Awards
In connection with the completion of the Initial Mergers, the Company assumed option awards previously issued to directors and officers of MedAmerica. Details of these options for the years ended December 31, 2023 and 2022, are presented in the table below:
Number of Shares Underlying Options
Weighted Average Exercise Price Per Share
Weighted Average Fair Value at Grant Date
Weighted Average Remaining Contractual Life
Intrinsic Value
Balance at December 31, 2021
70,000
$
7.71
$
-
1.76
$
-
Options granted
-
-
-
-
-
Options exercised
-
-
-
-
-
Options expired
(60,000
)
(8.00
)
-
-
-
Balance at December 31, 2022
10,000
$
6.00
$
-
0.45
$
-
Options granted
-
-
-
-
-
Options exercised
-
-
-
-
-
Options expired
(10,000
)
(6.00
)
-
-
-
Balance at December 31, 2023
-
$
-
$
-
-
$
-
The fair values of stock options are estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the five-year treasury rate at the date of grant. The expected life is based on the contractual life of the options at the date of grant. All 10,000 options at December 31, 2022 were fully vested at grant date. The exercise price of the outstanding options exceeded the closing price of the Company’s common stock at December 31, 2022. The intrinsic value is not material. There were no outstanding options at December 31, 2023.
Warrants
On June 4, 2021, the Company issued to Lamont Street warrants to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.50 per share (the “2021 Lamont Warrants”). The 2021 Lamont Warrants were issued in connection with the issuance of the Lamont Street Preferred Interest described in Note 6 under the heading “-Lamont Street Preferred Interest.” The fair value of these warrant liabilities is estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the U.S. Treasury rate at the date of grant. The expected life is based on the contractual life of the warrants at the date of grant, which is 4.3 years.
On November 22, 2022, the Company issued to the Fortress Member warrants to purchase 2,560,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments (the “Fortress Warrants”). The Fortress Warrants may be exercised on a cashless basis. The Fortress Warrants will automatically be deemed exercised in full on a cashless basis upon the occurrence of a Qualified Public Offering. The fair value of these warrant liabilities are estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the U.S. Treasury rate of the date of grant. The expected life is based on the contractual life of the warrants at the date of grant, which is 10 years. The fair value of the Fortress Warrants is allocated to Redeemable noncontrolling Fortress preferred interest and the Fortress Mezzanine Loan on a relative fair market basis.
The table below provides the input that was used in the Black-Scholes model at November 22, 2022:
November 22, 2022
Expected dividend yield
-
Risk-free interest rate
3.8
%
Expected volatility
69.3
%
Expected Life
10.0
On November 23, 2022, the Company issued to Lamont Street warrants to purchase 500,000 shares of common stock at an exercise price of $0.01 per share, subject to certain adjustments (the “2022 Lamont Warrants”). The 2022 Lamont Warrants may be exercised on a cashless basis. The fair value of these warrant liabilities are estimated using the Black-Scholes method, which takes into account variables such as estimated volatility, expected holding period, dividend yield, and the risk-free interest rate. The risk-free interest rate is the U.S. Treasury rate of the date of grant. The expected life is based on the contractual life of the warrants at the date of grant, which is 5 years. The fair value of the 2022 Lamont Warrants is included as part of the purchase price for Lamar Station Plaza West and allocated on a relative fair market basis among the assets.
The table below provides the input that was used in the Black-Scholes model at November 23, 2022:
November 23, 2022
Expected dividend yield
-
Risk-free interest rate
3.9
%
Expected volatility
87.7
%
Expected Life
5.0
Note 11 - Revenues
Disaggregated Revenue
The following table represents a disaggregation of revenues from contracts with customers for the years ended December 31, 2023 and 2022 by type of service:
Year Ended December 31,
(in thousands)
Topic 606
Revenue Recognition
Topic 606 Revenues
Leasing commissions
Point in time
$
2,601
$
1,767
Property and asset management fees
Over time
Sales commissions
Point in time
Development fees
Over time
-
Engineering services
Over time
Topic 606 Revenue
3,141
3,000
Out of Scope of Topic 606 revenue
Rental income
38,990
29,871
Sublease income
Total Out of Scope of Topic 606 revenue
39,028
29,951
Total Revenue
$
42,169
$
32,951
Leasing Operations
Minimum cash rental payments due to the Company in future periods under executed non-cancelable operating leases in place for the Company’s properties as of December 31, 2023 are as follows:
(in thousands)
For the year ending December 31:
$
29,322
24,632
17,138
14,755
11,982
Thereafter
37,271
Total
$
135,100
Note 12 - Concentrations of Credit Risks
The following table contains information regarding the geographic concentration of the properties in the Company’s portfolio as of December 31, 2023 and 2022.
(dollars in thousands)
Number of Properties at December 31,
Gross Real Estate Assets at December 31,
Percentage of Total Gross Real Estate Assets at December 31,
Rental income for the year ended December 31,
Location
Maryland
$
102,723
$
100,335
27.5
%
24.5
%
$
12,486
$
12,896
Virginia (1)
198,680
210,641
53.1
%
51.4
%
16,243
8,614
Pennsylvania (2)
-
-
27,201
0.0
%
6.6
%
1,501
2,325
Washington D.C.
8,422
8,422
2.3
%
2.0
%
Colorado
64,110
63,503
17.1
%
15.5
%
8,166
5,330
$
373,935
$
410,102
100.0
%
100.0
%
$
38,990
$
29,871
(1)Rental income includes Spotswood Valley Square Shopping Center, which was sold on June 30, 2023 and had rental income of $1.2 million and $2.4 million for the years ended December 31, 2023 and 2022, respectively.
(2)Rental income related solely to Dekalb Plaza, which was sold on July 20, 2023.
Note 13 - Employee Benefit Plan
The Company has a 401(k) retirement plan (the “401(k) Plan”), which permits all eligible employees to defer a portion of their compensation under the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the provisions of the 401(k) Plan, the Company may make discretionary contributions on behalf of the eligible employees. The Company made contributions to the 401(k) Plan of approximately $0.1 million for each of the years ended December 31, 2023 and 2022.
Note 14 - Earnings per Share
Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined based on the weighted average number of shares outstanding during the period combined with the incremental average shares that would have been outstanding assuming the conversion of all potentially dilutive common shares into common shares as of the earliest date possible. Potentially dilutive securities include stock options, convertible preferred stock, restricted stock, warrants, RSUs and OP units, which, subject to certain terms and conditions, may be tendered for redemption by the holder thereof for cash based on the market price of the Company’s common stock or, at the Company’s option and sole discretion, for shares of the Company’s common stock on a one-for-one basis. Stock options, convertible preferred stock, restricted stock, warrants, RSUs and OP units have been omitted from the Company’s denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the denominator would have no dilutive impact due to the net loss position. The weighted average number of anti-dilutive convertible preferred stock, restricted stock, RSUs and OP units outstanding for the year ended December 31, 2023 and 2022 was approximately 7.0 million and 4.4 million, respectively.
The following table sets forth the computation of earnings per common share for the years ended December 31, 2023 and 2022:
For the Year Ended December 31,
(in thousands, except per share data)
Numerator:
Net loss
$
(7,017
)
$
(16,273
)
Less: Preferred equity return on Fortress preferred equity
(14,641
)
(1,492
)
Less: Preferred equity accretion to redemption value
(3,247
)
-
Less: Preferred OP units return
(483
)
(48
)
Plus: Net loss attributable to noncontrolling interest
3,924
2,522
Net loss attributable to common stockholders
$
(21,464
)
$
(15,291
)
Denominator
Basic weighted-average common shares
35,608
32,379
Dilutive potential common shares
-
-
Diluted weighted-average common shares
35,608
32,379
Net loss per common share- basic and diluted
$
(0.60
)
$
(0.47
)
Note 15 - Fair Value of Financial Instruments
The Company uses fair value measures to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. GAAP establishes a three-level hierarchy that prioritizes inputs into the valuation techniques used to measure fair value. Fair value measurements associated with assets and liabilities are categorized into one of the following levels of the hierarchy based upon how observable the valuation inputs are that are used in the fair value measurements.
•Level 1 - The valuation is based upon quoted prices in active markets for identical instruments.
•Level 2 - The valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or derived from a model in which significant inputs or significant value drivers are observable in active markets.
•Level 3 - The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management's own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Financial Assets and Liabilities Measured at Fair Value
The Company’s financial assets and liabilities measured at fair value on a recurring basis currently include derivative financial instruments and the Fortress Mezzanine Loan. The following tables present the carrying amounts of these assets and liabilities that are measured at fair value on a recurring basis by instrument type and based upon the level of the fair value hierarchy within which fair value measurements of the Company’s assets and liabilities are categorized:
Fair Value Measurements
(in thousands)
December 31, 2023
Level 1
Level 2
Level 3
Assets:
Derivative instruments
$
$
-
$
$
-
Liabilities:
Derivative instruments (1)
$
$
-
$
$
-
Fortress Mezzanine Loan
16,187
-
16,187
-
(1)Derivative liabilities are included in Accounts payable and accrued liabilities on the consolidated balance sheets.
Fair Value Measurements
(in thousands)
December 31, 2022
Level 1
Level 2
Level 3
Assets:
Derivative instruments
$
3,426
$
-
$
3,426
$
-
Liabilities:
Derivative instruments (1)
$
1,208
$
-
$
1,208
$
-
Fortress Mezzanine Loan
17,895
-
17,895
-
(1)Derivative liabilities are included in Accounts payable and accrued liabilities on the consolidated balance sheets.
The derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate caps and interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy. See Note 7 “-Interest Rate Cap and Interest Rate Swap Agreements” for further discussion regarding the Company’s interest rate cap and interest rate swap agreements.
The Preferred Equity Investment contains embedded features that are required to be bifurcated from the temporary equity-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815, Derivatives and Hedging. The fair value of the embedded derivative liability was valued using a binomial lattice-based model which takes into account variables such as estimated volatility, expected holding period, stock price, the exit fee and the risk-free interest rate. The risk-free interest rate is the five-year treasury rate at the valuation date. This technique incorporates Level 1 and Level 2 inputs.
The Company elected to measure the Fortress Mezzanine Loan at fair value in accordance with the fair value option. The Fortress Mezzanine Loan is a debt host financial instrument containing embedded features which would otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value
measurements under ASC 815, Derivatives and Hedging. The fair value option election for the Fortress Mezzanine Loan is due to the number and complexity of features that would require separate bifurcation absent this election. The fair value of the Fortress Mezzanine Loan is valued using a binomial lattice-based model which takes into account variables such as estimated volatility, expected holding period, stock price, the exit fee and the risk-free interest rate. The risk-free interest rate is the five-year treasury rate at the valuation date. This technique incorporates Level 1 and Level 2 inputs.
Financial Assets and Liabilities Not Carried at Fair Value
The tables below provide information about the carrying amounts and fair values of those financial instruments of the Company for which fair value is not measured on a recurring basis and organizes the information based upon the level of the fair value hierarchy within which fair value measurements are categorized.
At December 31, 2023
Fair Value
(in thousands)
Carrying Amount
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
9,779
$
9,779
$
-
$
-
Restricted cash
4,018
4,018
-
-
Liabilities:
Mortgage and other indebtedness, net - variable rate
$
61,056
$
-
$
61,056
$
-
Mortgage and other indebtedness, net - fixed rate
155,844
-
159,065
-
At December 31, 2022
Fair Value
(in thousands)
Carrying Amount
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
12,356
$
12,356
$
-
$
-
Restricted cash
4,675
4,675
-
-
Liabilities:
Mortgage and other indebtedness, net - variable rate
$
111,380
$
-
$
111,380
$
-
Mortgage and other indebtedness, net - fixed rate
140,199
-
139,447
-
The carrying amounts of cash and cash equivalents, restricted cash, receivables and payables are reasonable estimates of their fair value as of December 31, 2023 and 2022 due to the short-term nature of these instruments (Level 1).
At December 31, 2023 and 2022, the Company’s indebtedness was comprised of borrowings that bear interest at variable and fixed rates. The fair value of the Company’s borrowings under variable rates as of December 31, 2023 and 2022 approximate their carrying values as the debt is at variable rates currently available and resets on a monthly basis.
The fair value of the Company’s fixed rate debt as of December 31, 2023 and 2022 is estimated by using Level 2 inputs such as discounting the estimated future cash flows using current market rates for similar loans that would be made to borrowers with similar credit ratings and for the same remaining maturities.
Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible.
Note 16- Taxes
The income tax benefit consisted of the following for the years ended December 31, 2023 and 2022:
For the Year Ended December 31,
(in thousands)
Current:
Federal
$
$
-
State
-
Total current tax expense
-
Deferred:
Federal
$
(2,853
)
$
(4,214
)
State
(1,115
)
(1,643
)
Total deferred tax benefit
(3,968
)
(5,857
)
Total income tax benefit
$
(3,628
)
$
(5,857
)
The Company’s effective income tax rate for the years ended December 31, 2023 and 2022 reconciles with the federal statutory rate as follows:
For the Year Ended December 31,
Federal statutory rate
21.0
%
21.0
%
Permanent items
(0.2
)%
0.0
%
State income taxes, net of federal tax benefit
5.4
%
6.0
%
Change in valuation allowance
(12.0
)%
-
Other
-
(1.0
)%
Rate change
0.3
%
-
Prior year adjustment
-
1.7
%
Effective income tax rate on income before taxes
14.5
%
27.7
%
The difference between the Company’s effective tax rate and federal statutory rate for the years ended December 31, 2023 and 2022 is (6.5)% and 6.7%, respectively, which is primarily due to the change in valuation allowance, state taxes and permanent items.
Deferred income tax assets (liabilities) are comprised of the following as of December 31, 2023 and 2022:
For the Year Ended December 31,
(in thousands)
Deferred tax assets
NOL carryforwards
$
5,197
$
6,646
Valuation allowance
(3,001
)
-
Equity compensation
Other
Total deferred tax assets
$
2,879
$
7,110
Deferred tax liabilities
Investment in the Operating Partnership
$
(2,879
)
$
(11,078
)
Total deferred tax liabilities
$
(2,879
)
$
(11,078
)
Net deferred tax assets (liabilities)
$
-
$
(3,968
)
At December 31, 2023 and 2022, the Company had pre-tax federal and state income tax NOL carryforwards of approximately $19.6 million and $24.6 million, respectively, which will carry forward indefinitely for federal purposes and for most states. As of December 31, 2023, the Company maintained a full valuation allowance on its deferred tax assets as the timing of the utilization of its net operating losses is uncertain. For the year ended December 31, 2023, the Company recorded a valuation allowance of $3.0 million against the deferred tax assets.
The Company had no uncertain tax positions as of December 31, 2023 and 2022. Generally, for federal and state purposes, the Company's 2020 through 2023 tax years remain open for examination by tax authorities. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the Internal Revenue Service. The Company’s policy is to recognize interest and penalties associated with uncertain tax positions as part of income tax expense.
Note 17 - Related Party Transactions
Receivables and Payables
As of December 31, 2023 and 2022, the Company had $1.1 million and $1.2 million, respectively, in receivables due from related parties, included in Other assets, net on the consolidated balance sheets. The amounts at December 31, 2023 and 2022 relate to the Merger pursuant to which the Company acquired Lamar Station Plaza West, including the note receivable due from a related party. Additionally, as of December 31, 2023 and 2022, the Company had approximately $0.1 million and less than $0.1 million, respectively, in payables due to properties managed by the Company related to amounts borrowed by the Company for working capital, which are reflected in Payables due to related parties on the consolidated balance sheets. On October 6, 2022, the entity that owned Lamar Station Plaza West, a property managed by the Company and acquired in November 2022, advanced the Company $1.1 million for deposits related to the Company’s financing in November 2022. Such amount is eliminated in consolidation.
Approximately $0.4 million of the Company’s total revenue for the year ended December 31, 2022 was generated from related parties. No income was generated from related parties for the year ended December 31, 2023. Additionally, approximately $0.1 million of the Company’s accounts receivable, net balance at December 31, 2022 was owed from related parties. There were no accounts receivable owed from related parties at December 31, 2023.
The Mergers
As consideration in the Mergers, as a result of their interests in the Broad Street Entities party to such Mergers, (i) Mr. Jacoby received 2,533,650 shares of the Company’s common stock and 993,018 Common OP units, (ii) Mr. Yockey received 2,533,650 shares of the Company’s common stock and 556,736 Common OP units, (iii) Alexander Topchy, the Company’s Chief Financial Officer, received an aggregate of 137,345 shares of the Company’s common stock and 62,658 Common OP units, (iv) Daniel J.W. Neal, a member of the Company’s board of directors, received, directly or indirectly, 878,170 shares of the Company’s common stock and (v) Samuel M. Spiritos, a member of the Company’s board of directors, indirectly received 13,827 shares of the Company’s common stock.
Management Fees
During the year ended December 31, 2022, the Company provided management services for Lamar Station Plaza West, which was acquired during 2022 in the remaining Merger, and the Cypress Point property. The Company received a management fee ranging from 3.0% to 4.0% of such properties’ gross income. Messrs. Jacoby, Yockey and Topchy had interests in the entity that owned Lamar Station Plaza West. Messrs. Jacoby, Yockey, Topchy and Neal had interests in the entity that owned the Cypress Point property. In the third quarter of 2022, the Company terminated the merger agreement related to the Cypress Point property due to the performance of the property.
Messrs. Jacoby and Yockey along with Mr. Topchy, Mr. Neal, Jeffrey H. Foster, a member of the Company’s board of directors, and Aras Holden, the Company’s former Vice President of Asset Management and Acquisitions, had indirect ownership interests in BBL Current Owner, LLC (“BBL Current”), which owned Midtown Row. Mr. Jacoby also served as the chief executive officer and a director of BBL Current. On December 21, 2021, the Company entered into a purchase and sale agreement (the “MTR Agreement”) with BBL Current to acquire Midtown Row for a purchase price of $122.0 million in cash. On July 1, 2022, the MTR Agreement automatically terminated in accordance with its terms. On September 1, 2022, the Company and BBL Current entered into a third amendment and reinstatement of the MTR Agreement (the “MTR Amendment”), pursuant to which the MTR Agreement was fully reinstated, subject to the terms of the MTR Amendment. The MTR Amendment increased the purchase price for the Midtown Row Acquisition to $123.3 million, to be payable in paid in cash and not less than $5.0 million of Common OP units and Preferred OP Units. On November 23, 2022, the Company completed the acquisition of Midtown Row and paid $118.7 million in cash and the Operating Partnership issued 448,180 Common OP units and 1,842,917 Preferred OP units. As consideration in the acquisition of Midtown Row, as a result of their direct or indirect interests in BBL Current, (i) Mr. Jacoby received 97,086 Common OP units, (ii) Mr. Neal indirectly received 202,861 Common OP units, (iii) Mr. Foster received 33,810 Common OP units, (iv) Mr. Yockey received 97,086 Common OP units and (v) Mr. Topchy received 17,337 Common OP units. The Company served as the development manager for Midtown Row and serves as the property manager and the leasing broker for the retail portion of Midtown Row.
Tax Protection Agreements
On December 27, 2019 the Company and the Operating Partnership entered into tax protection agreements (the “Initial Tax Protection Agreements”) with each of the prior investors in BSV Colonial Investor LLC, BSV Lamonticello Investors LLC and BSV Patrick Street Member LLC, including Messrs. Jacoby, Yockey and Topchy, in connection with their receipt of Common OP units in certain of the Initial Mergers. On April 4, 2023, the Company and the Operating Partnership entered into a tax protection agreement (together with the Initial Tax Protection Agreements, the “Tax Protection Agreements”), with each of the prior investors in BSV Lamont
Investors LLC, including Messrs. Jacoby, Yockey and Topchy, in connection with their receipt of Common OP units in the Merger whereby the Company acquired Lamar Station Plaza West. Pursuant to the Tax Protection Agreements, until the seventh anniversary of the completion of the applicable Merger, the Company and the Operating Partnership may be required to indemnify the other parties thereto for their tax liabilities related to built-in gain that exists with respect to the properties known as Midtown Colonial, Midtown Lamonticello, Vista Shops at Golden Mile and Lamar Station Plaza West (the “Protected Properties”). Furthermore, until the seventh anniversary of the completion of the applicable Merger, the Company and the Operating Partnership will be required to use commercially reasonable efforts to avoid any event, including a sale of the Protected Properties, that triggers built-in gain to the other parties to the Tax Protection Agreements, subject to certain exceptions, including like-kind exchanges under Section 1031 of the Code.
Guarantees
The Company’s subsidiaries’ obligations under the Eagles Sub-OP Operating Agreement, Basis Loan Agreement and the Brookhill mortgage loan are guaranteed by Messrs. Jacoby and Yockey. The Company has agreed to indemnify Mr. Yockey for any losses he incurs as a result of his guarantee of the Basis Term Loan and the Brookhill mortgage loan. Mr. Jacoby is also a guarantor under the Cromwell mortgage loan agreement.
Legal Fees
Mr. Spiritos is the managing partner of Shulman Rogers LLP, which represents the Company in certain real estate matters. During the years ended December 31, 2023 and 2022, the Company paid approximately $0.3 million and $0.4 million, respectively, in legal fees to Shulman Rogers LLP, which is reflected in general and administrative in the consolidated statements of operations.
BROAD STREET REALTY, INC. AND SUBSIDIARIES
Schedule III
Real Estate and Accumulated Depreciation
(dollars in thousands)
Initial Cost to Company
Gross Amount at Which Carried at Close of Period
Property Name
Location
Property Type
Encumbrances (1)
Land
Building and improvements, intangible lease assets and liabilities and furniture and equipment
Cost Capitalized Subsequent to Acquisition
Land
Building and improvements, intangible lease assets and liabilities, construction in progress, furniture and equipment
Total (2)
Accumulated Depreciation and Amortization (2) (3)
Date of Construction/
Renovation
Date Acquired
Avondale Shops
Washington, D.C.
Shopping Center
$
2,868
$
1,776
$
6,593
$
$
1,776
$
6,646
$
8,422
$
(1,183
)
Brookhill Azalea Shopping Center
Richmond, VA
Shopping Center
9,198
1,344
15,554
1,392
1,344
16,946
18,290
(3,521
)
Coral Hills Shopping Center
Capitol Heights, MD
Shopping Center
12,560
2,186
14,317
2,186
14,494
16,680
(3,978
)
Crestview Square Shopping Center
Landover Hills, MD
Shopping Center
11,947
2,853
15,717
2,853
15,846
18,699
(4,108
)
Hollinswood Shopping Center
Baltimore, MD
Shopping Center
12,436
5,907
15,050
3,630
5,907
18,680
24,587
(4,179
)
Midtown Colonial (4)
Williamsburg, VA
Shopping Center
4,440
3,963
10,014
3,607
3,963
13,621
17,584
(2,108
)
Midtown Lamonticello (4)
Williamsburg, VA
Shopping Center
4,051
3,108
12,659
3,108
12,939
16,047
(1,854
)
Vista Shops at Golden Mile
Frederick, MD
Shopping Center
11,252
4,342
10,219
4,342
10,679
15,021
(3,308
)
West Broad Commons Shopping Center
Richmond, VA
Shopping Center
11,712
1,324
18,180
1,324
18,619
19,943
(3,886
)
Lamar Station Plaza East
Lakewood, CO
Shopping Center
-
1,826
3,183
2,650
2,904
5,833
8,737
(1,587
)
Cromwell Field Shopping Center
Glen Burnie, MD
Shopping Center
10,597
2,256
15,618
2,413
2,256
18,031
20,287
(3,631
)
Highlandtown Village Shopping Center
Baltimore, MD
Shopping Center
8,712
2,998
4,341
2,998
4,452
7,450
(2,112
)
The Shops at Greenwood Village
Greenwood Village, CO
Shopping Center
22,218
3,170
27,560
3,242
28,369
31,611
(6,182
)
Lamar Station Plaza West
Lakewood, CO
Shopping Center
18,927
8,774
13,996
8,773
14,989
23,762
(1,963
)
Midtown Row
Williamsburg, VA
Mixed-Use
92,169
7,960
116,778
2,077
7,960
118,855
126,815
(5,777
)
Total
$
233,087
$
53,787
$
299,779
$
19,220
$
54,936
$
318,999
$
373,935
$
(49,377
)
(1)Includes fair market value of debt adjustments and debt discount, net
(2)The changes in total real estate and accumulated depreciation and amortization for the years ended December 31, 2023 and 2022 is as follows:
For the year ended December 31,
(in thousands)
Cost
Balance at beginning of period
$
410,102
$
253,125
Acquisitions
-
149,956
Dispositions and write off
(44,774
)
-
Capitalized costs
8,607
7,021
Balance at end of period
$
373,935
$
410,102
Accumulated depreciation and amortization
Balance at beginning of period
$
38,608
$
21,620
Depreciation and amortization
18,967
16,988
Dispositions and write off
(8,198
)
-
Balance at end of period
$
49,377
$
38,608
The unaudited aggregate tax value of real estate assets for federal income tax purposes as of December 31, 2023 is estimated to be $269.6 million.
(3)The cost of building and improvements is depreciated on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 5 to 49 years. The cost of intangible lease assets and liabilities is amortized on a straight-line basis over the initial term of the related leases, ranging up to 19 years. See Note 2 to the consolidated financial statements for information on useful lives used for depreciation and amortization.
(4)The loan is encumbered by the Basis Term Loan.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2023, the end of the period covered by this report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described above.
Management’s Annual Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management determined that our internal controls over financial reporting are effective as of December 31, 2023.
Remediation of Prior Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As previously discussed in Item 9A “Controls and Procedures” of our Annual Reports on Form 10-K for the years ended December 31, 2019 through 2022 and Item 4 “Controls and Procedures” of our Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30 during the years ended December 31, 2020 through 2023, we did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and monitoring activities to prevent or detect material misstatements to the consolidated financial statements in a timely manner. The deficiencies were attributed to (i) a lack of structure and responsibility, insufficient number of qualified resources, and inadequate oversight and accountability over the performance of controls, (ii) insufficient appropriate evidence to support the execution of our control activities, (iii) insufficient review of the completeness and accuracy of information used in the operation of our control activities across substantially all financial statement areas, including key assumptions used in determining significant estimates, (iv) ineffective identification and assessment of risks impacting internal control over financial reporting, and (v) ineffective evaluation and determination as to whether the components of internal control were present and functioning. These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information technology environment: (i) we did not design and implement general information technology controls in the areas of user access, program change management, and segregation of duties within systems supporting substantially all the Company's business processes; (ii) we did not maintain effective controls over the review of manual journal entries; (iii) we did not design and implement management review controls at a sufficient level of precision around complex accounting areas and disclosures, including asset acquisitions; (iv) we did not design and implement controls over the completeness and accuracy over commissions revenue and lease classifications, including accuracy and valuation of rental revenue; and (v) we did not design and implement controls over the review and approval of related party transactions.
During the years ended December 31, 2020 through 2023, management conducted a remediation plan to address our material weaknesses, which included the following remediation efforts: (i) hiring additional internal resources, including a Vice President of Finance and Reporting; (ii) engaging outside consultants to assist with various accounting and financial reporting matters; and (iii) retaining the services of external information technology resources.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts for our material weaknesses described above, there were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
During the three months ended December 31, 2023, none of our directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2024 Annual Meeting of Stockholders to be filed with the SEC no later than April 29, 2024.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2024 Annual Meeting of Stockholders to be filed with the SEC no later than April 29, 2024.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2024 Annual Meeting of Stockholders to be filed with the SEC no later than April 29, 2024.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2024 Annual Meeting of Stockholders to be filed with the SEC no later than April 29, 2024.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2024 Annual Meeting of Stockholders to be filed with the SEC no later than April 29, 2024.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of the report
The following documents are filed as part of this report:
(1)Financial Statements
The consolidated financial statements of the Company, together with the independent registered public accounting firm’s report thereon, are included herein and are incorporated by reference. See “Item 8. Financial Statements and Supplementary Data”, filed herewith, for a list of financial statements.
(2)Financial Statement Schedule:
The following financial statement schedule is included in Item 8 and are filed as part of this report. Schedule III-Combined Real Estate Accumulated Depreciation
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions, are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
(3)Exhibits:
The exhibits listed in the accompanying Exhibit Index, which is incorporated herein by reference, are filed or furnished as part of this report.