Form 10-Q Hartman Short Term Incom For: Mar 31

May 23, 2022 2:25 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
____________

Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2022

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-53912
__________

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
(Exact name of registrant as specified in its charter)
Maryland26-3455189
(State or Other Jurisdiction of Incorporation or of Organization)(I.R.S. Employer Identification Number)
2909 Hillcroft
Suite 420
Houston
Texas77057
(Address of principal executive offices)(Zip Code)
_______________

(713) 467-2222
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
None
None


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company Emerging Growth Company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒







As of May 1, 2022, there were 34,975,377 shares of the Registrant’s common stock issued and outstanding.



Hartman Short Term Income Properties XX, Inc. and Subsidiaries
Table of Contents


1


PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2022December 31, 2021
ASSETS (Unaudited)
Real estate assets, at cost$623,699 $620,585 
Accumulated depreciation and amortization(179,557)(173,040)
Real estate assets, net444,142 447,545 
Cash and cash equivalents81 285 
Restricted cash10,338 18,972 
Accrued rent and accounts receivable, net15,420 13,238 
Note receivable - related party1,726 1,726 
Deferred leasing commission costs, net10,443 10,487 
Goodwill250 250 
Prepaid expenses and other assets1,232 2,100 
Real estate held for development10,403 10,403 
Due from related parties, net528 115 
Investment in affiliate201 201 
Total assets$494,764 $505,322 
LIABILITIES AND EQUITY
Liabilities:
Notes payable, net$307,974 $303,777 
Accounts payable and accrued expenses28,856 38,471 
Tenants' security deposits5,767 5,756 
Total liabilities342,597 348,004 
Stockholders' equity:
Preferred stock, $0.001 par value, 200,000,000 convertible, non-voting shares authorized, 1,000 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
  
Common stock, $0.001 par value, 750,000,000 authorized, 34,975,377 shares and 35,110,421 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
35 35 
Additional paid-in capital296,156 297,335 
Accumulated distributions and net loss(166,298)(162,355)
Total stockholders' equity129,893 135,015 
Noncontrolling interests in subsidiaries22,274 22,303 
Total equity152,167 157,318 
Total liabilities and equity$494,764 $505,322 
The accompanying notes are an integral part of these consolidated financial statements.
2


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three Months Ended March 31,
20222021
Revenues
Rental revenues$23,166 $23,210 
Management and advisory income915 915 
Total revenues24,081 24,125 
Expenses (income)
Property operating expenses5,524 12,720 
Organization and offering costs9 4 
Real estate taxes and insurance3,333 3,563 
Depreciation and amortization6,517 6,661 
Management and advisory expenses3,218 3,036 
General and administrative3,223 3,132 
Interest expense2,083 2,034 
Interest and dividend income(43)(43)
Total expenses, net23,864 31,107 
Net income (loss)217 (6,982)
Net income (loss) attributable to noncontrolling interests202 (364)
Net income (loss) attributable to common stockholders$15 $(6,618)
Net income (loss) attributable to common stockholders per share$ $(0.19)
Weighted average number of common shares outstanding, basic and diluted35,06535,318
The accompanying notes are an integral part of these consolidated financial statements.


3


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands)
Preferred StockCommon Stock
SharesAmountSharesAmountAdditional
Paid-In
Capital
Accumulated
Distributions
and Net Loss
Total
Stockholders'
Equity
Noncontrolling
Interests in Subsidiaries
Total
Equity
Balance at December 31, 20201 $— 35,318 $35 $299,375 $(135,633)$163,777 $24,365 $188,142 
Redemptions of common shares— — (2)— (250)— (250)— (250)
Selling commissions— — — — (2)— (2)— (2)
Dividends and distributions (cash)— — — — — (3,051)(3,051)(230)(3,281)
Net loss— — — — — (6,618)(6,618)(364)(6,982)
Balance at March 31, 20211 $— 35,316 $35 $299,123 $(145,302)$153,856 $23,771 $177,627 
Preferred StockCommon Stock
SharesAmountSharesAmountAdditional
Paid-In
Capital
Accumulated
Distributions
and Net Income (Loss)
Total
Stockholders'
Equity
Noncontrolling
Interests in Subsidiaries
Total
Equity
Balance at December 31, 20211 $— 35,111 $35 $297,335 $(162,355)$135,015 $22,303 $157,318 
Redemptions of common shares— — (135)— (1,179)— (1,179)— (1,179)
Dividends and distributions (cash)— — — — — (3,958)(3,958)(231)(4,189)
Net income— — — — — 15 15 202 217 
Balance at March 31, 20221 $— 34,976 $35 $296,156 $(166,298)$129,893 $22,274 $152,167 

The accompanying notes are an integral part of these consolidated financial statements.
4


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Three Months Ended March 31,
2022
2021
Cash flows from operating activities:
Net income (loss)$217 $(6,982)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock based compensation14922 
Depreciation and amortization6,517 6,661 
Deferred loan and lease commission costs amortization608716 
Bad debt expense (recovery)(302)126 
Changes in operating assets and liabilities:
  Accrued rent and accounts receivable(1,880)(2,094)
  Deferred leasing commissions(332) 
  Prepaid expenses and other assets868 822 
  Accounts payable and accrued expenses(9,764)(738)
  Due to/from related parties(413)(267)
  Tenants' security deposits11 20 
Net cash used in operating activities(4,321)(1,714)
Cash flows from investing activities:
Additions to real estate(3,114)(2,871)
Net cash used in investing activities(3,114)(2,871)
Cash flows from financing activities:
Distributions to common stockholders(3,958)(3,082)
Distributions to non-controlling interests(231)(230)
Borrowing from affiliate1,675  
Repayments under insurance premium finance note (290)
Borrowings under term loan2,645  
Repayments under term loan notes(337)(213)
Redemptions of common stock(1,179)(252)
Payment of deferred loan costs(18) 
Net cash used in financing activities(1,403)(4,067)
Net change in cash and cash equivalents and restricted cash(8,838)(8,652)
Cash and cash equivalents and restricted cash, beginning of period19,257 24,176 
Cash and cash equivalents and restricted cash, end of period$10,419 $15,524 
Supplemental cash flow information:
Cash paid for interest$1,846 $1,578 

The accompanying notes are an integral part of these consolidated financial statements.



5

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Organization and Business

Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009.  The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2011. As used herein, the “Company,” “we,” “us,” or “our” refer to Hartman Short Term Income Properties XX, Inc. and its consolidated subsidiaries, including the Operating Partnership, except where context otherwise requires.

On July 19, 2018, we entered into a limited liability company agreement with our affiliates Hartman Income REIT, Inc. (“HIREIT”), Hartman Short Term Income Properties XIX, Inc. (“Hartman XIX”) and Hartman vREIT XXI, Inc. (“vREIT XXI”) to form Hartman SPE, LLC ("SPE LLC"), a special purpose entity.

On October 1, 2018, SPE LLC, as borrower, and Goldman Sachs Mortgage Company entered into a term loan agreement pursuant to which the lender made a term loan to SPE LLC in the principal amount of $259,000,000.

Contemporaneously therewith and together with our affiliates HIREIT, Hartman XIX and vREIT XXI, we contributed a total of 39 commercial real estate properties ("Properties") to SPE, LLC, subject to the then existing mortgage indebtedness encumbering the Properties, in exchange for membership interests in SPE LLC. Proceeds of the Loan were immediately used to extinguish the existing mortgage indebtedness encumbering the Properties.

Substantially all of our business is conducted through our subsidiaries, the Operating Partnership and SPE LLC. Our wholly-owned subsidiary, Hartman XX REIT GP LLC, a Texas limited liability company, is the sole general partner of the Operating Partnership. Our wholly-owned subsidiary, Hartman SPE Management, LLC ("SPE Management") is the manager of SPE LLC. Our single member interests in our limited liability company subsidiaries are owned by the Operating Partnership or its wholly owned subsidiaries.

On July 21, 2017, the Company and Hartman XIX, entered into an agreement and plan of merger (the “XIX Merger Agreement”). On July 21, 2017, as subsequently modified on May 8, 2018, the Company, the Operating Partnership, HIREIT and Hartman Income REIT Operating Partnership LP, the operating partnership of HIREIT, (“HIROP”), entered into an agreement and plan of merger (the “HIREIT Merger Agreement,” and together with the XIX Merger Agreement, the “Merger Agreements”).

On May 14, 2020, the Merger Agreements were approved by the respective company shareholders. The effective date of the Mergers for financial reporting was July 1, 2020.

Prior to July 1, 2020 and subject to certain restrictions and limitations, Hartman Advisors LLC ("Advisor") was responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf pursuant to an advisory agreement. Management of the Company’s properties and the Properties, is provided pursuant to property management agreements with Hartman Income REIT Management, Inc. (the "Property Manager"), formerly a wholly-owned subsidiary of HIREIT and effective July 1, 2020, our wholly owned subsidiary. Effective with the Mergers and the acquisition of the 70% interest of Advisor not acquired as part of the Mergers, we are a self-advised and self-managed REIT.

As of March 31, 2022 and 2021, respectively, the Company owned 44 commercial properties comprising approximately 6.8 million square feet plus four pad sites and two land developments, all located in Texas. As of March 31, 2022 and 2021, respectively, the Company owned 15 properties located in Richardson, Arlington and Dallas, Texas, 26 properties located in Houston, Texas and three properties located in San Antonio, Texas.

Previously, the Board of Directors (the "Board") of the Company established a share redemption program (the "Redemption Plan"), which permitted stockholders to sell their shares back to the Company, subject to certain significant conditions and limitations. On May 31, 2018, the Board voted to suspend the Redemption Plan. On July 28, 2020, the Board reopened the Redemption Plan for the death and disability or financial hardship of a shareholder. On October 1, 2020, the Board approved by unanimous written consent to further reopen the Redemption Plan, subject to certain significant conditions and limitations for additional shareholders.



6

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2021 are derived from our audited consolidated financial statements as of that date. The unaudited consolidated financial statements as of March 31, 2022 have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X, on a basis consistent with the annual audited consolidated financial statements. The consolidated financial statements presented herein reflect all adjustments (consisting of normal recurring accruals and adjustments and the impact of the Company's restatement of its previously issued financial statements, as described below), which are, in the opinion of management, necessary to fairly present the financial position of the Company as of March 31, 2022, and the results of consolidated operations for the three months ended March 31, 2022 and 2021, consolidated statements of equity for the three months ended March 31, 2022 and 2021, and consolidated statements of cash flows for the three months ended March 31, 2022 and 2021. The results of the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.

The consolidated financial statements herein are condensed and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2021.

These unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, the Operating Partnership and its subsidiaries, and Hartman SPE, LLC. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents
 
Cash and cash equivalents on the accompanying consolidated balance sheets include all cash and liquid investments with maturities of three months or less. Cash and cash equivalents as of March 31, 2022 and December 31, 2021 consisted of demand deposits at commercial banks. We maintain accounts which may from time to time exceed federally insured limits. We have not experienced any losses in these accounts and believe that the Company is not exposed to any significant credit risk and regularly monitors the financial stability of these financial institutions. As of March 31, 2022 and December 31, 2021 the Company had a bank overdraft of $1,824,000 and $2,710,000, respectively.

Restricted Cash

Restricted cash on the accompanying consolidated balance sheets consists of amounts escrowed for future real estate taxes, insurance, capital expenditures and debt service, as required by certain of our mortgage debt agreements. As of March 31, 2022 and December 31, 2021, the Company had a restricted cash balance of $10,338,000 and $18,972,000, respectively.
Financial Instruments

The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accrued rent and accounts receivable, accounts payable and accrued expenses and balances due to/due from related parties, as well as related party notes receivable. The Company considers the carrying value, other than notes payable, net, to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its notes payable approximates fair value. Disclosure about the fair value of financial instruments is based on relevant information available as of March 31, 2022 and December 31, 2021.
7

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition

The Company's leases are accounted for as operating leases. Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases. Revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation. The Company's accrued rents are included in accrued rent and accounts receivable, net. The Company defers the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.

The Company’s revenue is primarily derived from leasing activities, which is specifically excluded from ASC 606, Revenue from Contracts with Customers ("ASC 606"). The Company’s rental revenue is also comprised of tenant reimbursements for real estate taxes, insurance, common area maintenance, and operating expenses. Reimbursements from real estate taxes and certain other expenses are also excluded from ASC 606 and accounted for under ASC 842 - Leases. The Company elected to utilize the practical expedient provided by Accounting Standards Update (“ASU”) 2018-11 related to the separation of lease and non-lease components and as a result, rental revenues related to leases are reported on one line in the presentation within the consolidated statement of operations.

In addition to our rental income, the Company also earns fee revenues by providing certain management and advisory services to related parties. These fees are accounted for within the scope of ASC 606 and are recorded as management and advisory income on the consolidated statements of operations. These services primarily include asset management and advisory, operating and leasing of properties, and construction management. These services are currently provided under various combinations of advisory agreements, property management agreements, and other service agreements (the "Management Agreements"). The wide variety of duties within the Management Agreements makes determining the performance obligations within the contracts a matter of judgment. We have concluded that each of the separately disclosed fee types in the below table represents a separate performance obligation within the Management Agreements.
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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FeePerformance Obligation Satisfied Timing of PaymentDescription
Property ManagementOver timeDue monthlyThe Company provides property management services on a contractual basis for owners of and investors in office and retail properties. The Company is compensated for our services through a monthly management fee earned based on a fixed fee. We are also often reimbursed for our administrative and payroll costs directly attributable to the properties under management. Revenue is recognized at the end of each month.
Property Leasing and Property Acquisition ServicesPoint in time (upon close of a transaction)Upon completionThe Company provides strategic advice and execution for owners, investors, and occupiers of real estate in connection with the leasing of office and retail space. The Company is compensated for our services in the form of a commission and, in some instances may earn various forms of variable incentive consideration. Commission is paid upon the occurrence of certain contractual event. For leases, the Company typically satisfies its performance obligation at a point in time when control is transferred. Revenue is recognized in an amount equal to the fees charged by unaffiliated persons rendering comparable services. For acquisitions, our commission is typically paid at the closing date of sale, which represents transfer of control of services to the customer.
Asset ManagementOver timeDue monthly The Company earns asset management advisory fees on a recurring, monthly basis for certain properties. The Company is compensated on a monthly basis based on a fixed percentage of respective asset value.
Construction ManagementPoint in time (upon close of project)Upon completionConstruction management services are performed on a contractual basis for owners of an investors in office and retail properties. The Company is compensated for its services upon completion of a project, when its performance obligation has been completed.

Due to the nature of the services being provided under our Management Agreements, each performance obligation has a variable component. Therefore, when we determine the transaction price for the contracts, we are required to constrain our estimate to an amount that is not probable of significant revenue reversal. For most of these fee types, such as acquisition fees and leasing commissions, compensation only occurs if a transaction takes place and the amount of compensation is dependent upon the terms of the transaction. For our property and asset management fees, due to the large number and broad range of possible consideration amounts, we calculate the amount earned at the end of each month.

Real Estate

Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).

The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are
9

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental revenues over the remaining expected terms of the respective leases.

The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in real estate assets in the consolidated balance sheets and are being amortized to expense over the remaining term of the respective leases.

The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income (loss).

Real Estate Joint Ventures and Partnerships

To determine the method of accounting for partially owned real estate joint ventures and partnerships, management determines whether an entity is a variable interest entity ("VIE") and, if so, determines which party is the primary beneficiary by analyzing whether we have both the power to direct the entity’s significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the design of the entity structure, the nature of the entity’s operations, future cash flow projections, the entity’s financing and capital structure, and contractual relationships and terms. We consolidate a VIE when we have determined that we are the primary beneficiary.

Primary risks associated with our involvement with our VIEs include the potential funding of the entities’ debt obligations or making additional contributions to fund the entities’ operations or capital activities.

Partially owned, non-variable interest real estate joint ventures and partnerships over which we have a controlling financial interest are consolidated in our consolidated financial statements. In determining if we have a controlling financial interest, we consider factors such as ownership interest, authority to make decisions, kick-out rights and substantive participating rights. Partially owned real estate joint ventures and partnerships where we do not have a controlling financial interest, but have the ability to exercise significant influence, are accounted for using the equity method.

Management continually analyzes and assesses reconsideration events, including changes in the factors mentioned above, to determine if the consolidation or equity method treatment remains appropriate.

Depreciation and amortization

Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements. Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. In-place leases are amortized using the straight-line method over the weighted average years’ remaining calculated on terms of all of the leases in-place when acquired.

Fair Value Measurement
 
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1: Observable inputs such as quoted prices in active markets.
Level 2: Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to
develop its own assumptions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
 
Market approach: Prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities.
Cost approach:    Amount required to replace the service capacity of an asset (replacement cost).
Income approach:  Techniques used to convert future amounts to a single amount based on market
expectations (including present-value, option-pricing, and excess-earnings models).
 
The Company’s estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

Recurring fair value measurements:

For our disclosure of debt instrument fair value in Note 7, we use a discounted cash flow analysis based on borrowing rates currently available to the Company for loans with similar terms and maturities, discounting the future contractual interest and principal payments (categorized within Level 2 of the fair value hierarchy).

Nonrecurring fair value measurements:

Property Impairments

The Company reviews its real estate assets 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. Our estimated fair values are determined by utilizing cash flow models, market capitalization rates and market discount rates, or by obtaining third-party broker valuation estimates or appraisals (categorized within Level 3 of the fair value hierarchy).

Impairment

The Company determines whether an impairment in value may have 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. During the three months ended March 31, 2022 and 2021, the Company concluded there were no such events or changes in circumstances requiring review of the Company's real estate assets.

Accrued Rent and Accounts Receivable, net

       Accrued rent and accounts receivable includes base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rent and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.
 
Deferred Leasing Commission Costs

       Leasing commissions are amortized using the straight-line method over the term of the related lease agreements.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Goodwill

GAAP requires the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired. The Company applies a one-step quantitative test to determine if the estimated fair value is less than the carrying amount. If the carrying amount exceeds the estimated fair value, the Company will record a goodwill impairment equal to such excess, not to exceed the total amount of goodwill. No goodwill impairment has been recognized in the accompanying consolidated financial statements.

Noncontrolling Interests

Noncontrolling interests is the portion of equity in a subsidiary not attributable to a parent. The ownership interests not held by the parent are considered noncontrolling interests. Accordingly, the Company has reported noncontrolling interests in equity on the consolidated balance sheets but separate from the Company's equity. On the consolidated statements of operations, subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. 

Stock-Based Compensation

The Company follows Accounting Standards Codification ("ASC") 718 - Compensation - Stock Compensation, with regard to issuance of stock in payment of services. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements. The compensation cost is measured based on the estimated grant date fair value, as of the grant date of the Company’s common stock, of the equity or liability instruments issued. Stock-based compensation expense is recorded over the vesting period and is included in general and administrative expense in the accompanying consolidated statements of operations.

Income Taxes

The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with its taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions.  Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders; however, the Company believes that it is organized and will continue to operate in such a manner as to qualify for treatment as a REIT. 

For the three months ended March 31, 2022 and 2021, the Company incurred net income (loss) of $217,000 and ($6,982,000), respectively. The Company formed a taxable REIT subsidiary which may generate future taxable income which may offset by the net loss carry forward. The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance. Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the consolidated financial statements.

The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination. Accordingly, the Company has not recognized a liability related to uncertain tax positions.





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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Income (loss) Per Share
 
The computations of basic and diluted income per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock. As of March 31, 2022 and 2021, there were no shares issuable in connection with these potentially dilutive securities. These potentially dilutive securities were excluded from the computations of diluted net income (loss) per share for the three months ended March 31, 2022 and 2021 because no shares were issuable.

Concentration of Risk

The geographic concentration of the Company’s real estate assets makes it susceptible to adverse economic developments in the State of Texas. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocation of businesses, increased competition or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Going Concern Evaluation

Pursuant to ASC 205-40, “Presentation of Financial Statements – Going Concern,” management is required to evaluate the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. The Hartman SPE, LLC loan agreement (the “SASB Loan”) had an initial maturity date of October 9, 2020. The SASB Loan provides for three successive one-year maturity date extensions. On October 9, 2021, SPE LLC executed a maturity date extension agreement to extend the maturity to October 9, 2022.

The SASB Loan requires that SPE LLC have a debt yield, as defined, greater than or equal to 12.50%. The second SASB Loan extension was completed on the basis that the debt yield as of June 30, 2021 was 12.9%. Debt yield is calculated by dividing annual net operating income by debt. The third and final one-year SASB Loan extension is within one year of the issuance of these consolidated financial statements. Uncertainty as to the debt yield calculation as of June 30, 2022 and the Company's ability to exercise the next remaining SASB Loan extension option, require management to conclude, in accordance with guidance provided by ASU 2014-15, that there is a substantial doubt about the Company's ability to continue as a going concern within one year of the issuance date of these consolidated financial statements solely on the basis of the uncertainty regarding the loan maturity extension of the SASB Loan. Management believes that SPE LLC will be able to extend the maturity date for the next one year period which will mitigate the maturity date issue.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. The updated guidance requires measurement and recognition of expected credit losses for financial assets, including trade and other receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Generally, the pronouncement requires a modified retrospective method of adoption. This guidance is effective for fiscal years and interim periods within those years beginning after January 2023, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements when adopted.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective for all entities as of March 12, 2020 through December 31, 2022. An entity can elect to apply the amendments as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to that date that the financial statements are available to be issued. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements when adopted.




13

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3 — Real Estate

The Company’s real estate assets consisted of the following, in thousands:
March 31, 2022December 31, 2021
Land$146,056 $146,056 
Buildings and improvements375,982 372,868 
In-place lease value intangible101,661 101,661 
 623,699 620,585 
Less: accumulated depreciation and amortization(179,557)(173,040)
Total real estate assets$444,142 $447,545 

       Depreciation expense for the three months ended March 31, 2022 and 2021 was $4,714,000 and $4,610,000, respectively. Amortization expense of in-place lease value intangible was $1,803,000 and $2,051,000 for the three months ended March 31, 2022 and 2021, respectively.

The Company identifies and records the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms. With respect to all properties owned by the Company, we consider all of the in-place leases to be market rate leases.

The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows, in thousands:
 March 31, 2022December 31, 2021
In-place lease value intangible$101,661 $101,661 
In-place leases – accumulated amortization(89,411)(87,608)
Acquired lease intangible assets, net$12,250 $14,053 

As of March 31, 2022 and 2021, respectively, the Company owned 44 commercial properties comprising approximately 6.8 million square feet plus four pad sites and two land developments, all located in Texas. As of March 31, 2022 and 2021, respectively, the Company owned 15 properties located in Richardson, Arlington and Dallas, Texas, 26 properties located in Houston, Texas and three properties located in San Antonio, Texas.


Note 4 - Accrued Rent and Accounts Receivable, net

Accrued rent and accounts receivable, net, consisted of the following, in thousands:
 March 31, 2022December 31, 2021
Tenant receivables$8,755 $6,652 
Accrued rent11,137 11,355 
Allowance for uncollectible accounts(4,472)(4,769)
Accrued rents and accounts receivable, net$15,420 $13,238 

As of March 31, 2022 and December 31, 2021, the Company had an allowance for uncollectible accounts of $4,472,000 and $4,769,000, respectively. For the three months ended March 31, 2022 and 2021, the Company recorded bad debt expense (recovery) in the amount of $(302,000) and $126,000, respectively, related to tenant receivables that we have specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness. Bad debt expense and any related recoveries are included in property operating expenses in the accompanying consolidated statements of operations.

14

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 — Deferred Leasing Commission Costs, net

Costs which have been deferred consist of the following, in thousands:

 March 31, 2022December 31, 2021
Deferred leasing commissions costs$20,680 $20,347 
Less: accumulated amortization(10,237)(9,860)
Deferred leasing commission costs, net$10,443 $10,487 

Note 6 — Future Minimum Rents

The Company leases the majority of its properties under noncancellable operating leases which provide for minimum base rentals. A summary of minimum future rentals to be received (exclusive of renewals, tenant reimbursements, and contingent rentals) under noncancellable operating leases in existence at March 31, 2022 is as follows, in thousands:
March 31,Minimum Future Rents
2022$65,421 
202353,567 
202440,014 
202526,575 
202619,121 
Thereafter28,634 
Total$233,332 

Note 7 — Notes Payable

The Operating Partnership is a party to four, cross-collateralized, term loan agreements with an insurance company. The term loans are secured by the Richardson Heights Property, the Cooper Street Property, the Bent Tree Green Property and the Mitchelldale Property. The loans require monthly payments of principal and interest due and payable on the first day of each month. Monthly payments are based on a 27-year loan amortization. Each of the loan agreements are subject to customary covenants, representations and warranties which must be maintained during the term of the loan agreements. Each of the loan agreements provides for a fixed interest rate of 4.61%. Each of the loan agreements are secured by a deed of trust, assignment of licenses, permits and contracts, assignment and subordination of the management agreements and assignment of rents. The terms of the security instruments provide for the cross collateralization/cross default of the each of the loans. The outstanding balance of the four loans was $40,387,000 and $40,724,000 as of March 31, 2022 and December 31, 2021, respectively.

On October 1, 2018, the Company, through SPE LLC and Goldman Sachs Mortgage Company entered into the $259,000,000 SASB Loan agreement. The Company together with its affiliates HIREIT, Hartman XIX and vREIT XXI, contributed a total of 39 commercial real estate properties to Hartman SPE, LLC in exchange for membership interests in SPE LLC.

The term of the SASB loan is five years, comprised of an initial two-year term with three one-year extension options. Each extension option shall be subject to certain conditions precedent including (i) no default then outstanding, (ii) 30 days prior written notice, (iii) the properties must have a specified in-place net operating income debt yield and (iv) purchase of an interest rate cap as described below for the exercised option term or terms.

The outstanding principal of the SASB loan bears interest at the one-month LIBOR rate plus 1.8%. The SASB Loan is subject to an interest rate cap arrangement which caps LIBOR at 3.75% during the initial term and any extensions of the SASB Loan.

On October 9, 2021, the Company executed a one-year maturity date extension agreement to extend the maturity date to October 9, 2022. One option remains to extend for one additional one-year term. Notice to exercise the final one-year maturity extension option is due not less than 30 days nor more than 60 days from the current maturity date. Exercise of each extension option is subject to certain compliance and non-default requirements and a minimum debt yield of 12.5%.

15

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The SASB Loan contains various customary covenants, including but not limited to financial covenants, covenants requiring monthly deposits in respect of certain property costs, such as taxes, insurance, tenant improvements, and leasing commissions, covenants imposing restrictions on indebtedness and liens, and restrictions on investments and participation in other asset disposition, merger or business combination or dissolution transactions. The SASB Loan is secured by, among other things, mortgages on the Properties. The Company is the sole guarantor.

On February 10, 2022, the Company executed a $2,645,000 promissory note with East West Bank, resulting in net proceeds of $2,528,000. The promissory note is secured by the Company's 17 acre development site located in Fort Worth, Texas and has a maturity date of February 25, 2023. Payable in monthly installments of principal and interest until the maturity date.

The following is a summary of the Company’s notes payable, in thousands:
Property/FacilityPaymentMaturity DateRateMarch 31, 2022December 31, 2021
Richardson Heights (1)P&IJuly 1, 20414.61 %$16,002 $16,144 
Cooper Street (1)P&IJuly 1, 20414.61 %6,939 6,995 
Bent Tree Green (1)P&IJuly 1, 20414.61 %6,939 6,995 
Mitchelldale (1)P&IJuly 1, 20414.61 %10,507 10,590 
Hartman SPE LLC (2)IOOctober 9, 20222.00 %259,000 259,000 
Hartman XXIIOOctober 31, 202210.00 %7,688 6,012 
Fort Worth - EWBP&IFebruary 25, 20234.25 %2,645  
    $309,720 $305,736 
Less: unamortized deferred loan costs  (1,745)(1,959)
    $307,975 $303,777 
(1)    Each promissory note contains a call option wherein the holder of the promissory note may declare the outstanding balance due and payable on either July 1, 2024, July 1, 2029, July 1, 2034, or July 1, 2039.  
(2)    On October 9, 2021, the Company signed a maturity date extension agreement to extend the maturity date for one additional year to October 9, 2022. Options remain to extend for one additional one-year term. Notice to exercise the next one-year maturity extension option is due not less than 30 days nor more than 60 days from the current maturity date. Exercise of each extension option is subject to certain compliance and non-default requirements and a minimum debt yield of 12.5%.


The Company's loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method. Costs which have been deferred consist of the following, in thousands:
 March 31, 2022December 31, 2021
Deferred loan costs$5,418 $5,399 
Less:  deferred loan cost accumulated amortization(3,673)(3,440)
Total cost, net of accumulated amortization$1,745 $1,959 
Interest expense incurred for the three months ended March 31, 2022 and 2021 was $2,082,000 and $2,034,000, respectively, which includes amortization expense of deferred loan costs. Interest expense of $311,000 and $315,000 was payable as of March 31, 2022 and December 31, 2021, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.



Fair Value of Debt

The fair value of the Company’s fixed rate notes payable, variable rate notes payable and secured revolving credit facilities aggregates to $312,130,000 and $310,271,000 as compared to book value of $309,720,000 and $305,736,000 as of March 31, 2022 and December 31, 2021, respectively. The fair value of our debt instruments is estimated on a Level 2 basis, as provided by ASC 820, using a discounted cash flow analysis based on the borrowing rates currently available to the Company for loans with similar terms and maturities, discounting the future contractual interest and principal payments. Disclosure about the fair value of notes payable is based on relevant information available as of March 31, 2022 and December 31, 2021.
16

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 — Income Per Share
        
Basic income (loss) per share is computed using net income (loss) attributable to common stockholders and the weighted average number of common shares outstanding. Diluted weighted average shares outstanding reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share.

 Three Months Ended March 31,
 20222021
Numerator:
Net income (loss) attributable to common stockholders (in thousands)
$15 $(6,618)
Denominator:
Weighted average number of common shares outstanding, basic and diluted (in thousands)35,06535,318
Basic and diluted income (loss) per common share:
Net income (loss) attributable to common stockholders per share$ $(0.19)
 
Note 9 — Income Taxes

Federal income taxes are not provided for because we qualify as a REIT under the provisions of the Internal Revenue Code and because we have distributed and intend to continue to distribute all of our taxable income to our stockholders. Our stockholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our stockholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. The Company’s federal income tax returns for the years ended December 31, 2016, 2017, 2018, 2019 and 2020 have not been examined by the Internal Revenue Service. The Company’s federal income tax return for the year ended December 31, 2016 may be examined on or before September 15, 2022.

The Company has formed a taxable REIT subsidiary which may generate future taxable income, which may be offset by the net loss carry forward. The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance. Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the accompanying consolidated financial statements.

The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination. Accordingly, the Company has not recognized a liability related to uncertain tax positions.

Taxable income (loss) differs from net income (loss) for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and amortization and rental revenue.
 
Note 10 — Real Estate Held for Development

The Company’s investment in real estate assets held for development consists of (i) an approximately 17-acres land parcel located in Fort Worth, Texas, currently being developed, (ii) a 10-acre land development located in Grand Prairie, Texas, to be developed and which was previously held for disposition by Hartman XIX, and (iii) one pad site development in progress acquired from HIREIT.

Note 11 — Related Party Transactions
17

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Hartman Advisors LLC ("Advisor"), is a Texas limited liability company. Advisor is the sole member of Hartman vREIT XXI Advisor, LLC ("XXI Advisor"), which is the advisor for Hartman vREIT XXI, Inc. Hartman vREIT XXI, Inc. ("vREIT XXI") pays acquisition fees and asset management fees to the Advisor in connection with the acquisition of properties and management of the Company. vREIT XXI pays property management and leasing commissions to the Property Manager in connection with the management and leasing of vREIT XXI's properties.

The table below shows the related party balances the Company owes to and is owed by, in thousands:
March 31, 2022December 31, 2021
Due to vREIT XXI(11) 
Due from other related parties539 115 
Total due from related parties$528 $115 

During the fourth quarter of 2019, the Company borrowed under an unsecured promissory note payable to Hartman vREIT XXI, Inc., an affiliate of the Advisor and the Property Manager, in the face amount of $10,000,000. This note payable had an outstanding balance of $7,688,000 and $6,012,000 as of March 31, 2022 and December 31, 2021, respectively, which is included in notes payable, net, in the accompanying consolidated balance sheets. Interest has been accrued on the loan amount at an annual rate of 10%. The Company recognized interest expense on the affiliate note in the amount of $131,000 and $69,000 for the three months ended March 31, 2022 and 2021, respectively, which is included in interest expense in the accompanying consolidated statements of operations.

In May 2016, the Company, through its taxable REIT subsidiary, Hartman TRS, Inc. (“TRS”), loaned $7,231,000 pursuant to a promissory note in the face amount of up to $8,820,000 to Hartman Retail II Holdings Company, Inc. (“Retail II Holdings”), an affiliate of the Advisor and the Property Manager, in connection with the acquisition of a retail shopping center by Hartman Retail II DST, a Delaware statutory trust sponsored by the Property Manager. Pursuant to the terms of the promissory note, TRS received a two percent (2%) origination fee of amounts advanced under the promissory note, and interest at ten percent (10%) per annum on the outstanding principal balance. The outstanding principal balance of the promissory note will be repaid as investor funds are raised by Hartman Retail II DST. The maturity date of the promissory note, as amended, is December 31, 2022. This note receivable had an outstanding balance of $1,726,000 as of March 31, 2022 and December 31, 2021, respectively, which is included in notes receivable – related party in the accompanying consolidated balance sheets. For the three months ended March 31, 2022 and 2021, the Company recognized interest income on this affiliate note in the amounts of $43,000 and $43,000, respectively.

VIEs are defined as entities with a level of invested equity that is not sufficient to fund future operations on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For identified VIEs, an assessment must be made to determine which party to the VIE, if any, has both the power to direct the activities of the VIE that most significantly impacts the performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company is not deemed to be the primary beneficiary of Retail II Holdings, Retail III Holdings, or Ashford Bayou, each of which qualifies as a VIE. Accordingly, the assets and liabilities and revenues and expenses of Retail II Holdings, Retail III Holdings and Ashford Bayou have not been included in the accompanying consolidated financial statements. The Company is a covenant guarantor for the secured mortgage indebtedness of each of the VIEs in the total amount of $24,693,000 as of March 31, 2022.

On March 29, 2021, Hartman Income REIT Property Holdings, LLC, a wholly owned subsidiary of Hartman XX Operating Partnership, LP, was added, by means of a joinder agreement, to a master credit facility agreement where Hartman vREIT XXI, Inc. is the guarantor. The Company’s Atrium II office property was added to the collateral security for the master credit facility agreement where the borrowing base of the facility increased by $1,625,000.

Hartman vREIT XXI owns 1,198,228 shares of the Company's common stock and a 2.47% ownership interest in Hartman SPE, LLC.

Note 12 - Stockholders’ Equity

18

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under the Company’s articles of incorporation, the Company has authority to issue 750,000,000 shares of common stock, $0.001 par value per share, and 200,000,000 shares of preferred stock, $0.001 par value per share.

Common Stock

Shares of common stock entitle the holders to one vote per share on all matters which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.

Preferred Stock

Under the Company’s articles of incorporation, the Company’s board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors has the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights, and privileges of such shares.  As of March 31, 2022 and December 31, 2021, respectively, the Company has 1,000 shares of convertible preferred stock issued and outstanding.


Common Stock Issuable Upon Conversion of Convertible Preferred Stock

The convertible preferred stock issued to the Advisor will convert to shares of the Company’s common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of the Company’s common stock plus the aggregate market value of the Company’s common stock (based on the 30-day average) closing meets the same 6% performance threshold, or  (3)  the Company’s advisory agreement with the Advisor expires without renewal or is terminated (other than because of a material breach by the Advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the stockholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.

Stock-Based Compensation

  The Company awards shares of restricted common stock to non-employee directors as compensation in part for their service as members of the board of directors of the Company.  These shares are fully vested when granted. These shares may not be sold while an independent director is serving on the board of directors. For the three months ended March 31, 2022 and 2021, respectively, the Company granted, but not yet issued, 4,472 and 1,954 shares of restricted common stock to independent directors as compensation for services and recognized $50,000 and $22,000 as stock-based compensation expense for each period. Share based compensation expense is based upon the estimated fair value per share. Stock-based compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations.

19

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Distributions

The following table reflects the total distributions the Company has paid in cash (in thousands, except per share amounts) and the amount paid per common share, in each indicated quarter:
Quarter PaidDistributions per Common ShareTotal Distributions
2022
1st Quarter$0.112 3,958 
Total 2022 year to date$0.112 $3,958 
2021
4th Quarter$0.112 $3,927 
3rd Quarter0.104 3,662 
2nd Quarter0.092 3,246 
1st Quarter0.087 3,082 
Total 2021$0.395 $13,917 


Note 13 - Incentive Award Plan
The Company has adopted an incentive plan (the “Omnibus Stock Incentive Plan” or the “Incentive Plan”) that provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards within the meaning of Internal Revenue Code Section 422, or any combination of the foregoing. The Company has initially reserved 5,000,000 shares of the Company’s common stock for the issuance of awards under the Company’s stock incentive plan, but in no event more than ten (10%) percent of the Company’s issued and outstanding shares. The number of shares reserved under the Company’s stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. Generally, shares that are forfeited or cancelled from awards under the Company’s stock incentive plan also will be available for future awards.  

 Incentive Plan compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations.
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Note 14 - Commitments and Contingencies

Litigation

During February 2021, the state of Texas experienced a severe winter storm, unofficially referred to as Winter Storm Uri, which resulted in power outages and electrical grid failures across the state. Wholesale prices for electricity increased significantly during this period. As a result, the Company experienced a substantial increase in electricity billings for a number of our properties during the month of and after the storm.

On May 26, 2021, Summer Energy LLC (“Summer”) filed a lawsuit against Hartman Income REIT Management, Inc. (the “Property Manager”), a wholly owned subsidiary of the Company that manages our properties, in state court in Harris County, Texas. In this lawsuit, Summer seeks to collect approximately $8.4 million from the Property Manager that Summer claims that the Property Manager owes Summer under one or more electricity sales agreements (“Agreements”) related to Winter Storm Uri. Of the approximately $8.4 million claimed in the lawsuit, approximately $7.6 million relates to wholly owned properties of the Company. Under the Agreements, Summer provided electricity to buildings managed by the Property Manager at indexed prices.

On March 24, 2022, the court entered a judgment in favor of Summer against the Property Manager in the amount of $7,871,000 plus customary pre- and post-judgment interest and attorney's fees. The Property Manager continues to dispute the amount of liability to Summer and intends to appeal the judgment. The outcome of the pending appeal is subject to significant uncertainty and we cannot provide any assurance that the Property Manager will ultimately prevail. Even if the Property Manager is ultimately successful in its appeal, it may take considerable time to resolve the matter. The Company had recognized its applicable share of the judgment amount, approximately $6,731,000, within the Company's consolidated statement of operations for fiscal year 2021. The Company has also recognized $370,000 of pre-judgment interest and attorney fees. Many of the Company’s leases contain provisions that require tenants to pay their allocable share of operating expenses, including utilities. At this time, the Company is unable to reasonably estimate an amount expected to be recovered from our tenants.

Contingencies

Events related to the COVID-19 pandemic and the actions taken to contain it have created substantial uncertainty for all businesses, including the Company. The Company’s consolidated financial statements as of and for the three months ended March 31, 2022 have been prepared in light of these circumstances.

Proposed merger with Hartman XXI

On November 6, 2020, the board of directors of the Company and the board of directors of Hartman XXI each approved a merger of the Company with and into the Hartman XXI, with Hartman XXI as the surviving company. On January 26, 2021, the respective boards determined to delay the pursuit of the proposed merger transaction. On October 26, 2021, the respective boards determined to proceed with the proposed merger transaction.
21


Note 15 - Defined Contribution Plan

The Company sponsors a defined contribution pension plan, the Hartman 401(k) Profit Sharing Plan, covering substantially all of its full-time employees who are at least 21 years of age. Participants may annually contribute up to 100% of pretax annual compensation and any applicable catch-up contributions, as defined in the plan and subject to deferral limitations as set forth in Section 401(k) of the Internal Revenue Code. Participants may also contribute amounts representing distributions from other qualified benefit or defined contribution plans. The Company may make discretionary matching contributions. For the three months ended March 31, 2022 and 2021, the Company matched $99,000 and $98,000, respectively. The Company had a stock match liability to the plan of $1,712,000 and $1,613,000 as of March 31, 2022 and December 31, 2021, respectively.


Note 16 - Subsequent Events

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that no events have occurred, other than as disclosed herein above, that would require adjustments to our disclosures in these consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

       Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us” or “our” are to Hartman Short Term Income Properties XX, Inc.
 
Forward-Looking Statements
 
          Certain statements included in this quarterly report on Form 10-Q (this “Quarterly Report”) that are not historical facts (including statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions, or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events on our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential,” or the negative of such terms and other comparable terminology.
 
          Forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. 

Among the most significant factor that could cause actual outcomes to differ materially from those expressed or implied in our forward-looking statements continues to be the adverse effect of the pandemic of a novel strain of coronavirus which causes the disease known as COVID-19 (“COVID-19”), including variants thereof, on our business, financial performance and condition, operating results and cash flows, the commercial real estate market and the global economy and financial markets generally. The extent and duration of the continued impacts caused by the COVID-19 pandemic on our company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including without limitation the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the speed of the development and distribution of vaccines for COVID-19 and variants thereof and the efficacy and availability of such vaccines, the willingness of the general population to be vaccinated, the duration of associated immunity and efficacy of the currently available vaccines against emerging variants of COVID-19, the potential for business closures that may be mandated or advisable, whether based on increased COVID-19 cases, the continued spread of
more contagious variants or other factors, the reduction or reversal of containment measures in certain communities, and the direct and indirect economic effects of the pandemic.

In addition to COVID-19, other factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
the fact that we have had a net loss for each annual period since our inception;
the imposition of federal taxes if we fail to qualify as a REIT in any taxable year or forego an opportunity to ensure REIT status;
uncertainties related to the national economy, the real estate industry in general and in our specific markets;
legislative or regulatory changes, including changes to laws governing REITS;
construction costs that may exceed estimates or construction delays;
increases in interest rates;
our ability to obtain financing on acceptable terms, satisfy our existing debt service obligations and negotiate maturity date extensions or other modifications to the terms of our existing financing arrangements to the extent necessary (see Note 2 - Summary of Significant Accounting Policies - Going Concern Evaluation, to the consolidated financial statements included in this Quarterly Report;
availability of credit or significant disruption in the credit markets;
litigation risks, including without limitation the outcome of our appeal related to the pricing of electricity provided to certain of our properties during the severe winter weather experienced in Texas (see Part II- Item 1.Legal Proceedings and Note 14 - Commitments and Contingencies, to the consolidated financial statements included in this Quarterly Report);
23


risks inherent to the real estate business, including tenant defaults, potential liability related to environmental matters and the lack of liquidity of real estate investments;
inability to obtain new tenants upon the expiration of existing leases at our properties;
inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws;
the potential need to fund tenant improvements or other capital expenditures out of operating cash flow;
our ability to generate sufficient cash flows to pay distributions to our stockholders;
our ability to retain our executive officers and other key personnel
changes to generally accepted accounting principles in the United States of America (GAAP).

          The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K (referred to herein as our Annual Report) for the year ended December 31, 2021.

The following discussion and analysis should be read in conjunction with the accompanying interim consolidated financial information.

Overview

We were formed as a Maryland corporation on February 5, 2009 to invest in and operate real estate and real estate-related assets on an opportunistic basis. We may acquire a wide variety of commercial properties, including office, industrial, retail, and other real properties. These properties may be existing, income-producing properties, newly constructed properties or properties under development or construction. In particular, we focus on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning or those located in markets with high growth potential. We also may invest in real estate-related securities and, to the extent that we determine that it is advantageous, we may invest in mortgage loans.
On February 9, 2010, we commenced our initial public offering of up to $250,000,000 in shares of our common stock to the public at a price of $10 per share and up to $23,750,000 in shares of common stock to our stockholders pursuant to our distribution reinvestment plan at a price of $9.50 per share. On April 25, 2013, we terminated our initial public offering. As of the termination of our initial public offering on April 25, 2013, we had accepted subscriptions for and issued shares of our common stock, including shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $43,943,731.

On July 16, 2013, we commenced our follow-on public offering, or our “follow-on offering,” of up to $200,000,000 in shares of our common stock to the public at a price of $10.00 per share and up to $19,000,000 in shares of our common stock to our stockholders pursuant to our distribution reinvestment plan at a price of $9.50 per share. Effective March 31, 2016, we terminated the offer and sale of our common shares to the public in our follow-on offering. Effective July 16, 2016, we terminated the sale of additional shares of our common stock to our stockholders pursuant to our distribution reinvestment plan. We accepted subscriptions for, and issued shares of our common stock in our follow-on offering, including shares of our common stock issued pursuant to our distribution reinvestment plan, resulting in aggregate gross proceeds of $181,800,895.

As of March 31, 2022 we owned 44 commercial real properties comprising approximately 6.8 million square feet plus four pad sites and two land developments, all located in Texas.

The SASB Loan outstanding as of March 31, 2022 has a maturity date of October 9, 2022, which is within one year of the date that this Quarterly Report was available to be issued. Management has considered whether there is substantial doubt about the Company's ability to continue as a going concern within one year of the issuance date of these consolidated financial statement due to the uncertainty regarding the SASB Loan maturity, as set forth in Accounting Standards Codification (ASC) 205-40, “Presentation of Financial Statements – Going Concern.”

Without limiting the foregoing, we believe that we will have sufficient capital to meet our existing debt service and other operating obligations for the next year and that we have adequate resources to fund our cash needs. However, our operations are subject to a variety of risks, including, but not limited to, changes in national economic conditions, the restricted availability of financing, changes in demographic trends and interest rates and declining real estate valuations. As a result of these uncertainties, there can be no assurance that we will meet our investment objectives or that the risks described above will not have an adverse effect on our properties or results of operations.

24


We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders. We are internally managed by our subsidiary, Hartman Income REIT Management, Inc. Our property manager is responsible for operating, leasing and maintaining our properties.


Impact of the COVID-19 Pandemic

Since the first quarter of 2020, the COVID-19 pandemic has significantly impacted the global and U.S. economies. The Company’s properties are all located in Texas in the metropolitan areas of Houston, Dallas and San Antonio. The operation of tenant businesses is subject to the business judgement of tenant business owners and the direction of government authorities and public health officials. In accordance with the advice of the CDC due to the threat presented by the ongoing COVID-19 pandemic, some of the Company's office property tenants adopted remote working for their office employees. The Company's retail property tenants have been affected to the extent that they have been required to close or limit hours of operations in the case of experiential businesses such as movie theaters, restaurants and specialty event operations. While all of our markets have embarked upon reopening of businesses, many of our retail tenants have moved activities towards carry-out and delivery sales and service. The rental obligations under our leases have not been materially affected by the pandemic to date, and any requests for rent adjustments are addressed on a case-by-case basis.

With the increased availability of vaccines, we have begun to see increases in physical occupancy at our properties, which we expect to continue. However, we cannot predict how the COVID-19 pandemic (including the spread of variant strains) may impact our operations in the future. Although the impact of the COVID-19 pandemic on our business has not been severe to date, the long-term impact of the pandemic on our tenants or prospective tenants and the world-wide economy is uncertain and will depend on the scope, severity, and duration of the pandemic. A prolonged economic downturn resulting from the pandemic could adversely affect many of our tenants or prospective tenants, which could, in turn, adversely impact our business, financial condition, and results of operations. See “Item 1A. Risk Factors” for a discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.

Impact of Winter Storm Uri

During February 2021, the state of Texas experienced a severe winter storm, Winter Storm Uri, which resulted in power outages and electrical grid failures across the state. Wholesale prices for electricity increased significantly during this period. As a result, we experienced a substantial increase in electricity billings for a number of our properties during the month of and after the storm. For the three months ended March 31, 2022, we have incurred $1,701,000 of electricity expense compared to $8,905,000 for the three months ended March 31, 2021. See Part II - Item 1. Legal Proceedings for additional information.


Investment Objectives and Strategy: Hartman Advantage

Our primary investment objectives are to:
realize growth in the value of our investments;
preserve, protect and return stockholders’ capital contributions; and
grow net cash from operations and pay regular cash distributions to our stockholders.

We cannot assure our stockholders that we will achieve these objectives.

The cornerstone of our investment strategy is our discipline in acquiring a portfolio of real estate properties, specifically properties that are located in Texas, which offer a blend of current and potential income based on in place occupancy plus relatively significant potential for growth in income and value from re-tenanting; repositioning or redevelopment. We refer to this strategy as “value add” or the “Hartman Advantage.”

We rely upon the value add or Hartman Advantage strategy to evaluate numerous potential commercial real estate acquisitions and investment opportunities per completed acquisition or investment.

Our board of directors continually evaluates potential liquidity events to maximize the total potential return to our stockholders, including, but not limited to, a listing of our shares of common stock on a national securities exchange. However, our board of directors has not made a decision to pursue any specific liquidity event, and there can be no assurance that we will complete a liquidity event on the terms described above, or at all.

25


We do not anticipate that there will be any market for our shares of common stock unless they are listed on a national securities exchange. In the event that our shares of common stock are not listed or traded on an established securities exchange prior to the tenth anniversary of the termination of our initial public offering, which terminated on April 25, 2013, our charter requires that the board of directors must seek the approval of our stockholders of a plan to liquidate our assets, unless the BOD agenda has obtained the approval of our stockholders (1) to defer the liquidation of our assets or (2) of an alternate strategy.

We believe that we have sufficient capital to meet our existing debt service and other operating obligations for the next year and that we have adequate resources to fund our cash needs. However, our operations are subject to a variety of risks, including, but not limited to, changes in national economic conditions, the restricted availability of financing, changes in demographic trends and interest rates and declining real estate valuations. As a result of these uncertainties, there can be no assurance that we will meet our investment objectives or that the risks described above will not have an adverse effect on our properties or results of operations.
 
We elected to be taxed as a REIT under the Internal Revenue Code beginning with the taxable year ending December 31, 2011. As a REIT we generally are not subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year after the year in which we initially elected to be treated as a REIT, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income. However, we believe that we are organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.

26


Our Real Estate Portfolio

As of March 31, 2022, we owned 44 commercial properties listed below.
Property NameLocationGross Leasable Area SFPercent OccupiedAnnualized Base Rental Revenue (in thousand)Average Base Rental Revenue per Occupied SFAverage Net Effective Annual Base Rent per Occupied SF
Retail:
PromenadeDallas176,58579 %$1,711 $12.28 $12.15 
Prestonwood ParkDallas105,78373 %$1,640 $21.12 $20.58 
Richardson HeightsDallas201,43375 %$2,725 $18.13 $18.66 
Cooper StreetDallas127,696100 %$1,650 $12.92 $12.95 
One Mason SCHouston75,18390 %$925 $13.74 $13.34 
Chelsea Square SCHouston70,27575 %$553 $10.48 $10.46 
Mission Center SCHouston112,97193 %$943 $9.02 $9.00 
Garden Oaks SCHouston106,85899 %$1,817 $17.13 $16.89 
HarwinHouston38,81399 %$308 $7.98 $7.30 
FondrenHouston93,19698 %$1,001 $10.91 $10.98 
Northeast Square SCHouston40,52585 %$467 $13.62 $13.66 
Walzem Plaza SCSan Antonio182,71372 %$1,556 $11.87 $11.92 
Total - Retail1,332,031 84 %$15,296 $13.64 $13.60 
Office:
North Central PlazaDallas198,37473 %$2,121 $14.72 $14.69 
Gateway TowerDallas266,41264 %$2,313 $13.66 $13.74 
Bent Tree GreenDallas139,60977 %$2,218 $20.74 $20.95 
Parkway Plaza I&IIDallas136,50683 %$1,738 $15.34 $15.17 
HillcrestDallas203,68879 %$2,252 $13.92 $13.90 
Skymark Dallas115,70081 %$1,774 $18.84 $18.81 
Corporate Park PlaceDallas113,42975 %$1,116 $13.18 $12.85 
Westway OneDallas165,98265 %$2,180 $20.12 $21.41 
Three Forest PlazaDallas366,54976 %$5,254 $18.85 $19.07 
Spring ValleyDallas94,30468 %$888 $13.93 $14.15 
Tower PavilionHouston87,58984 %$833 $11.30 $11.18 
The PreserveHouston218,68992 %$2,862 $14.16 $14.08 
Westheimer CentralHouston182,50680 %$1,646 $11.20 $11.04 
11811 N FreewayHouston156,36274 %$1,673 $14.50 $14.74 
Atrium IHouston118,46185 %$1,432 $14.29 $14.37 
Atrium IIHouston111,85385 %$1,030 $11.16 $11.48 
3100 TimmonsHouston111,26589 %$1,590 $16.08 $16.01 
CornerstoneHouston71,00872 %$613 $12.02 $14.47 
NorthchaseHouston128,98163 %$1,013 $12.54 $12.57 
616 FM 1960Houston142,19449 %$926 $13.39 $13.35 
601 SawyerHouston88,25894 %$1,356 $16.33 $15.87 
Gulf PlazaHouston120,65177 %$1,846 $19.83 $20.04 
Timbercreek AtriumHouston51,03592 %$625 $13.26 $13.25 
Copperfield Houston42,62197 %$655 $15.87 $15.79 
400 N. BeltHouston230,87247 %$1,186 $10.83 $11.23 
Ashford CrossingHouston158,45184 %$1,867 $14.03 $13.93 
Regency SquareHouston64,06385 %$551 $10.15 $10.15 
Energy PlazaSan Antonio180,11988 %$3,119 $19.72 $19.53 
One Technology CtrSan Antonio196,34889 %$4,458 $25.37 $25.37 
Total -office4,261,87976 %51,135 15.7115.79
Industrial/Flex
Central ParkDallas73,09997 %$600 $8.47 $8.45 
QuitmanHouston736,95788 %$1,283 $1.97 $1.98 
Mitchelldale Houston377,752 100 %$2,451 $6.52 $6.51 
Total -Industrial/Flex1,187,808 92 %$4,334 $3.95 $3.95 
Grand Total6,781,71881 %$70,765 $12.93 $12.91 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related notes, require us to make estimates and assumptions that are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions, and other factors related to the ongoing viability of our customers. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 31, 2022 in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no significant changes to these policies during the three months ended March 31, 2022. See also Note 2 (Summary of Significant Accounting Policies) to our consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of our significant accounting policies.

RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2022 versus March 31, 2021.

As of March 31, 2022 and 2021, respectively, the Company owned 44 commercial properties comprising approximately 6.8 million square feet plus four pad sites and two land developments, all located in Texas. As of March 31, 2022 and 2021, respectively, the Company owned 15 properties located in Richardson, Arlington and Dallas, Texas, 26 properties located in Houston, Texas and three properties located in San Antonio, Texas.

Revenues - The primary source of our revenue is rental revenues. For the three months ended March 31, 2022 and 2021, we had total revenues of $24,081,000 and $24,125,000, respectively. The decrease is attributable to a decrease in average net effective base rent per occupied square foot from $13.47 to $12.91, offset by an increase in overall occupancy from 78% to 81%.

Property operating expenses - Property operating expenses consist of contract services, repairs and maintenance, utilities and management fees and property level administrative expenses including bad debt expense. For the three months ended March 31, 2022 and 2021, we had property operating expenses of $5,524,000 and $12,720,000, respectively. The decrease in property operating expenses is primarily due to the increase in electricity expenses as a direct result of the severe winter storm during February 2021, also known as Winter Storm Uri. See Part II - Item 1. Legal Proceedings and Note 14 - (Commitments and Contingencies) for additional information regarding Winter Storm Uri. For the three months ended March 31, 2022, we have incurred $1,701,000 of electricity expense compared to $8,905,000 for the three months ended March 31, 2021.

Real estate taxes and insurance - Real estate taxes and insurance for the three months ended March 31, 2022 and 2021 were $3,333,000 and $3,563,000, respectively. The decrease in real estate taxes and insurance is attributable to lower property tax assessments as a result of successful property tax protests and litigation.
Depreciation and amortization - Depreciation and amortization for the three months ended March 31, 2022 and 2021 were $6,517,000 and $6,661,000, respectively. The decrease is primarily related to a decrease in amortization expense of our in-place lease value intangibles, which typically have a shorter useful life compared to other real estate asset components.

General and administrative expenses - General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, and independent director compensation. General and administrative expenses for the three months ended March 31, 2022 and 2021 were $3,223,000 and $3,132,000, respectively.

Interest expense - Interest expense for the three months ended March 31, 2022 and 2021, was $2,083,000 and $2,034,000, respectively. The increase is due to overall increase in Notes Payable, net from $303,611,000 to $307,974,000 during the comparative periods.

Net income (loss) - We generated a net income (loss) of $217,000 and $(6,982,000) for the three months ended March 31, 2022 and 2021, respectively. The main driver was an increase in property operating expenses in March of 2021 as a result of Winter Storm Uri, as explained in the property operating expenses section above.

Funds From Operations and Modified Funds From Operations

Funds From Operations, or FFO, is a non-GAAP financial measure defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, which we believe is an appropriate supplemental measure to reflect the
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operating performance of a real estate investment trust, or REIT in conjunction with net income. FFO is used by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

We define Modified Funds From Operations, or MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses. We do not currently exclude amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Accordingly, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics to us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the
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allowable adjustments across the non-listed REIT industry and as a result we may have to adjust our calculation and characterization of FFO or MFFO.

The table below summarizes our calculation of FFO and MFFO for the three months ended March 31, 2022 and 2021, including a reconciliation of such non-GAAP financial performance measures to our net income (loss), in thousands.

 Three Months Ended March 31,
 20222021
Net income (loss)
$217 $(6,982)
Depreciation and amortization of real estate assets6,5176,661
Funds from operations (FFO)6,734 (321)
Organization and offering costs94
Modified funds from operations (MFFO)$6,743 $(317)


Distributions

The following table summarizes the distributions we paid in cash and pursuant to our distribution reinvestment plan for the period from January 2011 (the month we first paid distributions) through March 31, 2022, in thousands:
PeriodCash (1)DRIP (2)(3)Total
Year ended December 31, 2011$255 $242 $497 
Year ended December 31, 2012891 869 1,760 
Year ended December 31, 20131,681 1,594 3,275 
Year ended December 31, 20142,479 2,358 4,837 
Year ended December 31, 20153,475 3,718 7,193 
Year ended December 31, 20168,918 2,988 11,906 
Year ended December 31, 201712,650 — 12,650 
Year ended December 31, 201812,555 — 12,555 
Year ended December 31, 201912,811 — 12,811 
Year ended December 31, 202015,797 — 15,797 
Year ended December 31, 202113,668 — 13,668 
Quarter ended March 31, 20223,958 — 3,958 
Total$89,138 $11,769 $100,907 
(1)Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 40 days following the end of such month.
(2)Distributions accrued for the period from December 27, 2010 through December 31, 2010 were paid on January 20, 2011, the date we first paid a distribution.
(3)Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan. Effective July 16, 2016, we terminated the sale of additional shares of our common stock to our stockholders pursuant to our distribution reinvestment plan.

Distributions to non-controlling interests were $231,000 and $230,000 for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022, we paid aggregate distributions of $3,958,000 in cash to common stockholders. During the same period, cash used in operating activities was $4,321,000 and our FFO was $6,734,000.

Liquidity and Capital Resources

Our principal demands for funds are and will continue to be for real estate and real estate-related acquisitions, for the payment of operating expenses, for the payment of interest on our outstanding indebtedness, and for the payment of distributions. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations;
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provided, that some or all of our distributions have been and may continue to be paid from sources other than cash from operations (as discussed below).
 
Some or all of our distributions have been and may continue to be paid from sources other than cash flow from operations, including proceeds of our public offerings, cash advances to us by affiliates and borrowings secured by our assets in anticipation of future operating cash flow. To the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.
 
We use, and intend to use in the future, secured and unsecured debt to acquire properties and make other investments. As of March 31, 2022, our outstanding secured debt is $302,032,000. There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment. Under our charter, we are prohibited from borrowing in excess of 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors and if such excess is disclosed to the stockholders in the next quarterly report along with the explanation for such excess borrowings. Our board of directors has adopted a policy to limit our aggregate borrowings to approximately 50% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Such limitation, however, does not apply to individual real estate assets. We may borrow more than 50% of the contract purchase price of a real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent.

Pursuant to ASC 205-40, “Presentation of Financial Statements – Going Concern,” management is required to evaluate the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. The SASB Loan has a currently extended maturity date of October 9, 2022. The SASB Loan provides for one remaining one-year maturity date extension. In order to exercise each successive one-year extension options, SPE LLC must meet five conditions in order to extend the maturity date without any further qualification. One of the five conditions is that Hartman SPE must have a debt yield, as defined, of 12.5% or greater as of June 30, 2022.

Management has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year of the issuance date of these consolidated financial statements due to the fact of the uncertainty regarding the loan maturity of the SASB Loan. Management believes that Hartman SPE will be able to extend the maturity date for one year which will mitigate the maturity date issue within one year of the issuance date of these consolidated financial statement.
 
Potential future sources of capital include proceeds from additional private or public offerings of our securities, secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

The consolidated financial statements as of March 31, 2022 include the accounts of the Company, our operating partnership and its subsidiaries, Hartman SPE, LLC, HIREIT, Advisor and Hartman XIX. Prior to October 1, 2018, our consolidated financial statements did not include Hartman SPE, LLC. Prior to July 1, 2020, our consolidated financial statements did not include HIREIT, Advisor or Hartman XIX.

Cash Flows from Operating Activities

For the three months ended March 31, 2022 and 2021, net cash used in operating activities was $4,321,000 versus $1,714,000, respectively. The increase in cash used in operating activities is primarily due to increase in cash used for accounts payable and accrued expenses.

Cash Flows from Investing Activities

For the three months ended March 31, 2022 and 2021, net cash used in investing activities was $3,114,000 versus $2,871,000, respectively.

Cash Flows from Financing Activities

For the three months ended March 31, 2022 and 2021, net cash used in financing activities was $1,403,000 and $4,067,000, respectively. The decrease in cash used in financing activities is primarily due to proceeds from a new loan and increase in proceeds from borrowing from affiliate.

Contractual Commitments and Contingencies
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We use, and intend to use in the future, secured and unsecured debt, as a means of providing additional funds for the acquisition of our properties and our real estate-related assets. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. Under our charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets. We may borrow in excess of this amount if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with a justification for such excess. In such event, we will monitor our debt levels and take action to reduce any such excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of March 31, 2022, our borrowings were not in excess of 300% of the value of our net assets.

As of March 31, 2022, we had notes payable totaling an aggregate principal amount of $309,720,000. For more information on our outstanding indebtedness, see Note 7 (Notes Payable) to the consolidated financial statements included in this report.

Off-Balance Sheet Arrangements

As of March 31, 2022 and December 31, 2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

The Company is a covenant guarantor for the secured mortgage indebtedness of VIEs in the total amount of $24,693,000 and $24,748,000 as of March 31, 2022 and December 31, 2021, respectively. The Company is not deemed to be the primary beneficiary of the VIEs. See Note 11 (Related Party Transactions).

Recent Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements. See Note 2 (Summary of Significant Accounting Policies) to the notes to the accompanying consolidated financial statements included in this quarterly report.

Related-Party Transactions and Agreements
We have entered into management and advisory agreements with our affiliates. See Item 13, “Certain Relationships and Related Transactions and Director Independence” in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022 and Note 11 (Related Party Transactions) to the consolidated financial statements included in this Quarterly Report for a discussion of the various related-party transactions, agreements and fees.

Subsequent Events

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
We will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
In connection with the preparation of this Form 10-Q, as of March 31, 2022, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). In performing this evaluation, management reviewed the
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selection, application and monitoring of our historical accounting policies. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2022, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported as and when required.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION

Item 1.  Legal Proceedings

During February 2021, the state of Texas experienced a severe winter storm, unofficially referred to as Winter Storm Uri, which resulted in power outages and electrical grid failures across the state. Wholesale prices for electricity increased significantly during this period. As a result, we experienced a substantial increase in electricity billings for a number of our properties during the month of and after the storm.

On May 26, 2021, Summer Energy LLC (“Summer”) filed a lawsuit against Hartman Income REIT Management, Inc. (the “Property Manager”), a wholly owned subsidiary of the Company that manages our properties, in state court in Harris County, Texas. In this lawsuit, Summer seeks to collect approximately $8.4 million from the Property Manager that Summer claims that the Property Manager owes Summer under one or more electricity sales agreements (“Agreements”) related to Winter Storm Uri. Of the approximately $8.4 million claimed in the lawsuit, approximately $7.6 million relates to wholly owned properties of the Company. Under the Agreements, Summer provided electricity to buildings managed by the Property Manager at indexed prices.

On March 24, 2022, the court entered a judgment in favor of Summer against the Property Manager in the amount of $7,871,000 plus customary pre- and post-judgment interest and attorney's fees. The Property Manager continues to dispute the amount of liability to Summer and intends to appeal the judgment. The outcome of the pending appeal is subject to significant uncertainty and we cannot provide any assurance that the Property Manager will ultimately prevail. Even if the Property Manager is ultimately successful in its appeal, it may take considerable time to resolve the matter. The Company had recognized its applicable share of the judgment amount, approximately $6,731,000, within the Company's consolidated statement of operations for fiscal year 2021. The Company has also recognized $370,000 of pre-judgment interest and attorney fees. Many of the Company’s leases contain provisions that require tenants to pay their allocable share of operating expenses, including utilities. At this time, the Company is unable to reasonably estimate an amount expected to be recovered from our tenants.


Item 1A. Risk Factors

The outbreak of the novel coronavirus, COVID-19, has caused and could continue to cause severe disruptions in the United States as well as Texas state and local economies and could have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic has caused significant disruptions to the United States economy as well as the economies of the State of Texas and major Texas communities and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the United States, have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. Certain cities where we own properties and/or have development sites, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. Although in many cases these measures have been modified or lifted entirely, they may be reinstated in whole or in part and additional, more restrictive measures may be implemented in the future. The COVID-19 pandemic has adversely impacted numerous industries, including transportation and hospitality, and triggered a global economic slowdown.

Although a number of vaccines for COVID-19 are currently available to the general public in the United States and in many countries around the world, the ultimate effectiveness of the vaccination effort is subject to significant uncertainty. The length and severity of the pandemic will be worsened to the extent that a significant portion of the population, in the United States and globally, is reluctant to be vaccinated, fails to complete required multi-step vaccination protocol or is unable to become vaccinated due to shortages in vaccine supply or suspensions in the distribution of vaccines due to safety concerns or other issues. The length of the pandemic is also dependent upon the degree to which more contagious variants of the virus continue to spread, particularly among areas of the country in which overall full vaccination rates are relatively low, and overall rates of new COVID-19 cases continue to rise. Further, new and worsening outbreaks of COVID-19 in other countries may impact global vaccine supplies and lead to the emergence of new variants of the virus which are more contagious, more deadly or against which currently available vaccines are less effective. As a result of the foregoing factors, the COVID-19 pandemic is expected to have a continued adverse impact on economic and market conditions despite the ongoing distribution of vaccines.

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The COVID-19 pandemic may adversely affect our business, financial condition and results of operations, and may have the effect of heightening many of the risks described in the “Risk Factors” section of our Annual Report on Form 10-K (Amendment No.1) for the year ended December 31, 2021, including:

failure of our tenants to perform tenant obligations under our leases including but not limited to timely payment of rent and other charges;
the disruptive impact on tenant personnel resources, which could hinder our ability to renew expiring leases, initiate