PILLARSTONE CAPITAL REIT Unless the context otherwise requires, all references in this report to the
"Company," "we," "us" or "our" are to
Forward-Looking Statements
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as "may," "will," "should," "potential," "predicts," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:
• uncertainties related to the COVID-19 pandemic, including the unknown
duration and economic, operational and financial impacts of the COVID-19
pandemic and the actions taken or contemplated by U.S. and local
governmental authorities or others in response to the pandemic on our
business, employees and tenants, including, among others, (a) changes in
tenant demand for our properties; (b) financial challenges confronting
tenants, including as a result of decreased customers' willingness to
visit our tenants' businesses, and mandated shelter in place orders that
have prevented customers from visiting some of our tenants' businesses and
the impact of these issues on our ability to collect rent from our
tenants; (c) operational changes implemented by us, including remote
working arrangements, which may put increased strain on our technology
systems and create increased vulnerability to cybersecurity incidents; (d)
reduction in our liquidity due to the limited ability to access the
capital markets and other sources of financing on attractive terms or at
all, and (e) prolonged measures to contain the spread of COVID-19 or the
premature easing of government-imposed restrictions implemented to contain
the spread of COVID-19;
• uncertainties related to the national economy, the real estate industry in
general and in our specific markets;
• legislative or regulatory changes;
• adverse economic conditions in
• adverse changes in governmental rules and fiscal policies;
• increases in interest rates and operating costs;
• availability and terms of capital and financing, both to fund our
operations and to refinance our indebtedness as it matures;
• decreases in rental rates or increases in vacancy rates;
• litigation risks;
• lease-up risks, including leasing risks arising from exclusivity and
consent provisions in leases with significant tenants;
• the impact of public health crises and pandemics, such as the coronavirus
outbreak;
• cybersecurity attacks, loss of confidential information and other business
disruptions;
• our inability to renew tenants or obtain new tenants upon the expiration
of existing leases; and
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• our inability to generate sufficient cash flows due to market conditions,
competition, uninsured losses, changes in tax or other applicable laws.
In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation: • our cash resources are limited;
• we have a history of losses;
• we have not raised funds through a public equity offering;
• our trustees control a significant percentage of our voting shares;
• shareholders could experience possible future dilution through the
issuance of additional shares;
• we are dependent on a small number of key senior professionals who are
part-time employees; and
• we currently do not plan to distribute dividends to the holders of our shares.
Overview
The Company is a
As of
Brief History
Pillarstone was formed on
On
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On
The following is a discussion of our results of operations for the three month
periods ended
• Explanation of changes in the results of operations in the Condensed
Consolidated Statements of Operations for the three month periods ended
March 31, 2020 and 2019.
• Our critical accounting policies and estimates that require our subjective
judgment and are important to the presentation of our financial condition
and results of operations.
• Our primary sources and uses of cash for the three month periods ended
March 31, 2020 and 2019, and how we intend to generate cash for long-term
capital needs.
• Our current income tax status.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.
Comparison of the Three Month Periods Ended
Leasing Activity
For the three month period ended
Results of Operations
The following provides a general comparison of our results of operations for the
three month periods ended
Three Months Ended March 31,
2020 2019
Number of properties 8 11
Aggregate GLA (sq. ft.) 926,798 1,307,930
Ending occupancy rate 69 % 79 %
Total revenues $ 2,586 $ 3,856
Total operating expenses 2,164 2,646
Total other expenses 261 529
Provision for income taxes 2 67
Net income 159 614
Less: Non-controlling interest in subsidiary 218 568
Net income (loss) available to Common Shareholders $ (59 ) $ 46
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Revenues from Operations
We had total revenues for the three month periods ended
Expenses from Operations
Our operating expenses were approximately$2,164,000 for the three months endedMarch 31, 2020 compared to approximately$2,646,000 for the three months endedMarch 31, 2019 , a decrease of approximately$482,000 , or 18%. The overall decrease was mostly due to the sale of three Real Estate Assets as ofOctober 8, 2019 . The primary components of property expenses are detailed in the table below (in thousands): Three Months Ended March 31, 2020 2019 Change % Change Operating and maintenance $ 825 $ 834$ (9 ) (1 )% Real estate taxes 417 650 (233 ) (36 )% General and administrative 223 187 36 19 % Depreciation and amortization 551 763 (212 ) (28 )% Management fees 148 212 (64 ) (30 )% Total property expenses $ 2,164$ 2,646 $ (482 ) (18 )%
Liquidity and Capital Resources
Cash Flows
As of
During the three months ended
Future Obligations
As part of the Acquisition on
On
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Long Term Liquidity and Operating Strategies
Historically, we have financed our long term capital needs, including acquisitions, as follows:
• borrowings from new loans;
• additional equity issuances of our common and preferred shares; and
• proceeds from the sales of our Real Estate Assets.
From 2006 until
Subsequent to the Acquisition, Pillarstone has been developing strategies for the Real Estate Assets in order to create value for the enterprise and our shareholders and selling assets to pay off some of its debt. To implement the strategy to create value with the Real Estate Assets additional capital will need to be raised.
COVID-19
The following discussion is intended to provide shareholders with certain
information regarding the impacts of the COVID-19 pandemic on our business and
management's efforts to respond to those impacts. Unless otherwise specified,
the statistical and other information regarding our portfolio and tenants are
estimates based on information available to us as of
The
Our portfolio and tenants have been impacted by these and other factors as
follows:
• All of our properties remained open and have been operating in
compliance with federal, state and local COVID-19 guidelines and
mandates.
• Approximately 67% of our tenants (based on GLA) have been designated
"essential businesses" in accordance with state guidelines. Of these
tenants, approximately 97% are open and operating.
• Approximately 87% of our tenants (based on GLA) are open and operating
and approximately 13% of our tenants are closed as of April 30, 2020 .
• As of April 30, 2020 , we have received payment of approximately 83% of
contractual base rent and common area maintenance reimbursables billed
for the month of April. As is believed to be the case with other
landlords across the U.S. , we have received a number of rent relief
requests from tenants, most often in the form of rent deferral
requests, which we are evaluating on a case-by-case basis.
We have taken a number of proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following:
• We have cash and cash equivalents of approximately$4,163,000 as ofMarch 31, 2020 . • We have taken a prudent pause in looking for acquisitions and are carefully evaluating development and redevelopment activities on a case-by-case basis. 24
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• We have put in place a temporary response team to address tenant
concerns. The response team is in constant communication with our
tenants and is assisting tenants in identifying local, state and
federal resources that may be available to support their businesses and
employees during the pandemic, including stimulus funds that may be
available under the Coronavirus Aid, Relief, and Economic Security Act
of 2020.
• We are proactively implementing expense reductions at the property
level to minimize cost pass-throughs to our tenants and at the
corporate level to preserve profitability.
• The health and safety of our employees, the staff that manages our
properties, and their respective families is a top priority. We have
adapted our operations to protect employees, including implementing a
work from home policy, and our technology systems have enabled our team
to work seamlessly. As of May 15, 2020 , none of our employees has
contracted nor tested positive for COVID-19.
Current Tax Status
As of
The income tax expense (income) included in the consolidated statements of
operations for the three months ended
Three Months Ended March 31,
2020 2019
Federal $ (12 ) $ -
Texas franchise tax 14 67
$ 2 $ 67
Interest Rates and Inflation
The Company was not significantly affected by inflation during the periods
presented in this report due primarily to the relative low nationwide inflation
rates and the Company having approximately 100% of its debt with fixed rates as
of
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Application of Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with
Revenue recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the consolidated statements of operations.
We recognize lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured. Additionally, we may have tenants who pay real estate taxes directly to the taxing authority. We exclude these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property operating expense.
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Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter.
Impairment. We review our properties for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying amount of
the assets, including accrued rental income, may not be recoverable through
operations. We determine whether an impairment in value has occurred by
comparing the estimated future cash flows (undiscounted and without interest
charges), including the estimated residual value of the property, with the
carrying cost of the property. If impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the property exceeds its
fair value. Management has determined that there has been no impairment in the
carrying value of our real estate assets as
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