SB Partners 10-Q2022 Q3 Quarterly report

ITEM 1. FINANCIAL STATEMENTS

SB PARTNERS

(A New York Limited Partnership)

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

SB PARTNERS

(A New York Limited Partnership)

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See notes to consolidated financial statements

SB PARTNERS

(A New York Limited Partnership)

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT) (Unaudited)

For the Three and Nine Months Ended September 30, 2022 and 2021

See notes to consolidated financial statements.

SB PARTNERS

(A New York Limited Partnership)

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT) (Unaudited)

For the Three and Nine Months Ended September 30, 2022 and 2021

See notes to consolidated financial statements.

SB PARTNERS

(A New York Limited Partnership)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to consolidated financial statements

SB PARTNERS

Notes to Consolidated Financial Statements (Unaudited)

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

SB Partners, a New York limited partnership, and its subsidiaries (collectively, the "Partnership" or the “Registrant”), have been engaged since April 1971 in acquiring, operating, and holding for investment a varying portfolio of real estate interests. SB Partners Real Estate Corporation (the "General Partner") serves as the general partner of the Partnership.

The consolidated financial statements included herein are unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Partnership’s latest annual report on Form 10-K.

On July 14, 2022 the General Partner signed a contract to sell its last real estate property Eagle Lake Business Center IV, an industrial flex property located in Maple Grove, Minnesota (“Eagle IV”), to an unrelated buyer for $13,000,000 in an all cash transaction. The sale was completed on August 22, 2022. The Partnership has reclassified the investment in real estate to investment in real estate held for sale and the operations directly related to Eagle IV has been reclassified from income from continued operations to income from discontinued operation. Other assets and other liabilities related to the discontinued operation has been reclassified to other assets in discontinued operation and other liabilities in discontinued operation. The reclassification has been made for both periods presented. Real estate held for sale is carried at the lower of cost or fair value less selling costs.  Upon determination that a property is held for sale, depreciation of such property is no longer recorded. Rental income at the Partnership’s wholly owned property was recognized on a straight-line basis over the term of the lease.

The results of operations for the three and nine month period ended September 30, 2022 are not necessarily indicative of the results to be expected for a full year.

For a discussion of the significant accounting and financial reporting policies of the Partnership, refer to the Annual Report on Form 10–K for the year ended December 31, 2021.

The continuation of the COVID-19 pandemic may affect market conditions in which the Registrant operates creating a challenging and uncertain economic environment. Financial and real estate companies may be affected by liquidity, disparity of real estate values and financing issues. There is no assurance that such conditions will not result in decreased cash flows which could result in the sale of investments at amounts less than the reported values at September 30, 2022.

In connection with the adoption of ASC Topic 842, the Partnership elected the practical expedient concerning the treatment of CAM costs. CAM is a non-lease component of the lease contract under ASC 842, and therefore would be accounted for under ASC Topic 606, Revenue from Contracts with Customers, and presented separate from rental income based on an allocation of the overall contract price, which is not necessarily the amount that would be billable to the tenant for CAM reimbursements per the term of the lease contract. As the timing and pattern of providing the CAM service to the tenant is the same as the timing and pattern of the tenant’s use of the underlying lease asset, the Partnership elected, under the practical expedient, to combine CAM and other Recoverable Costs with the remaining lease components, and recognize them together as rental income. Rental income is a component of income from discontinued operation in the accompanying Consolidated Statements of Operations. Rental income at the Partnership’s wholly owned property is recognized on a straight-line basis over the term of the lease.

The following table provides a disaggregation of rental income recognized by the Partnership for the three and nine months ended September 30, 2022 and 2021 (see footnote 4 regarding the sale of Eagle IV):

In April 2022 the General Partner engaged a brokerage firm to commence marketing its industrial flex property located in Maple Grove, Minnesota for a sale. On July 14, 2022 the General Partner signed a contract to sell Eagle IV to an unrelated buyer for $13,000,000 in an all cash transaction. The sale was completed on August 22, 2022. As a result, the Partnership had reported its investment in Eagle IV as a property held for sale and has retrospectively reported the property’s results of operations as income from discontinued operations on the attached consolidated statement of operations. The following is the carrying value of the real estate investment owned by the Partnership as of September 30, 2022 and December 31, 2021.

The following table provides a disaggregation of income from discontinued operation for the three and nine months ended September 30, 2022 and 2021:

The Partnership’s wholly owned property located in Maple Grove, Minnesota was 100% leased to a single tenant to October 31, 2031. The tenant pays fixed base rent which increases approximately 3% each year. The tenant pays directly or reimburses the Partnership for all utilities, real estate taxes, insurance and most of the property operating expenses and property management fees.

On February 28, 2022, the tenant and the Partnership executed the Sixth Amendment (“Amendment”) to the lease. The Amendment extends the term of the lease from October 31, 2024 to October 31, 2031. The Amendment reduces the fixed monthly base rent stipulated in the fifth amendment from November 1, 2021 to October 31, 2024 as follows:

From November 1, 2021 to October 31, 2022, $71,222 per month to $62,859 per month.

From November 1, 2022 to October 31, 2023, $73,359 per month to $64,745 per month.

From November 1, 2023 to October 31, 2024, $75,560 per month to $66,688 per month.

Monthly base rent for the extended term increases approximately 3% per annum. The Partnership has agreed to provide a tenant improvement allowance of $175,000 for HVAC replacements. Tenant has a one time right to extend the lease an additional five years. The Partnership has agreed to pay for a leasing commission to the tenant’s broker. In addition, an affiliate of the Partnership will earn a landlord leasing commission in accordance with the property management agreement. All the other relevant terms of the lease remain the same.

The accounting guidance for Fair Value Measurements establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in determining fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level of input that is significant to the fair value measurement.

Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on the assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

The three levels of fair value hierarchy are described below:

The following major categories of assets were measured at fair value as of September 30, 2022 and December 31, 2021:

The following is a reconciliation of the beginning and ending balances for assets measured at fair value using significant unobservable inputs (Level 2) during the periods ended September 30, 2022 and December 31, 2021:

In 2007, the Partnership made an investment in the amount of $37,200,000 in Sentinel Omaha, LLC (“Omaha”). Omaha is a real estate investment company. During the quarter ended March 31, 2022 Omaha sold its last real estate property. Omaha is an affiliate of the Partnership’s general partner. The investment represents a 30% ownership interest in Omaha.

During the quarter ended March 31, 2022, Omaha paid a distribution of $90,000,000 to its investors. The Partnership’s 30% share of the distribution was $27,000,000

The following are the condensed financial statements (000’s omitted) of Omaha as of September 30, 2022 and December 31, 2021 and the nine months ended September 30, 2022 and 2021.

During April 2021, Omaha sold its garden apartment property located in Charleston, South Carolina for a sale price of $47,250,000. Net sales proceeds were used to first pay selling expenses. The remaining net sales proceeds have been reserved to retire Omaha’s secured mortgage loan encumbering a garden apartment property located in Nashville, Tennessee and to retire Omaha’s secured mortgage loan encumbering a garden apartment property located in Aurora, Illinois to payoff Omaha’s long term debt.

During August 2021, Omaha sold one of its garden apartment properties located in Nashville, Tennessee for a sale price of $77,235,000. Net sales proceeds were used to first pay selling expenses. The remaining portion of the sales proceeds were used to pay a distribution of $73,000,000 to its investors. The Partnership’s 30% allocation of the distribution was $21,900,000.

During November 2021, Omaha sold its garden apartment property located in Aurora, Illinois for a sale price of $34,500,000. Net sales proceeds were used to first pay selling expenses. The remaining portion of the sales proceeds were used along with cash reserves to pay a distribution of $52,600,000 to its investors. The Partnership’s 30% allocation of the distribution was $18,410,000.

During January 2022 sold its last real estate property which was located in Nashville, Tennessee for a price of $57,350,000. Net sales proceeds were used to first pay selling expenses. The remaining portion of the sales proceeds were used along with cash reserves to pay a distribution of $90,000,000 to its investors. The Partnership’s 30% allocation of the distribution was $27,000,000.

On March 22, 2022 the General Partner declared a distribution of $3,300 for a full unit for all partners holding units or participations on March 22, 2022. The distribution was paid during June 2022.

On October 25, 2022, the General Partner authorized and a Limited Partner with the requisite majority voting power has approved the dissolution of the Partnership. On October 28, 2022, the General Partner filed Form 14C with the Securities and Exchange Commission (“SEC”) notifying the SEC of its plans to dissolve the Partnership and its intent to notify the limited partners of its plan to dissolve the partnership. On November 7, 2022, the Partnership received a notification from Omaha that it was making a final distribution and dissolving the real estate venture by December 30, 2022.  As of November 10, 2022, the SEC did not have any comment on the filing. On November 10, 2022 a notification was sent to the limited partners informing them of the Plan of Dissolution of the Partnership. The General Partner anticipates winding up the business of the Partnership and making a final distribution near the end of the fourth quarter of 2022.

The General Partner has implemented the Plan of Dissolution now that the Partnership has completed the sale of its last real estate property, Eagle Lake Business Center IV. Following the sale, the Partnership’s assets consist principally of cash and cash equivalents and an equity interest in a liquidating real estate investment company. The General Partner will file a certificate of cancellation with the relevant authorities of the State of New York, (the “Certificate of Cancellation”), thereby dissolving the Partnership under state law and commencing the process of winding up the Partnership which will include several steps, including: liquidating any remaining assets; paying creditors, including Partners who are creditors, and expenses of the Partnership; establishing a reserve, to the extent deemed reasonably necessary by the General Partner, for the payment of contingent or unforeseen future liabilities or obligations of the Partnership; and distributing available cash to the Partners in accordance with the Partnership’s governing documents and applicable law.

Once the wind-up has been completed, the General Partner will file a Form 15 Certification and Notice of Termination of Registration with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which will suspend the Partnership’s obligation to file periodic or current reports under the Exchange Act.

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

General

The consolidated financial statements for the three and nine months ended September 30, 2022 and 2021 reflect the operation of one wholly owned industrial flex property located in Maple Grove, Minnesota (“Eagle IV”) and a 30% interest in Omaha. In April 2022 Registrant engaged a brokerage firm to commence marketing its industrial flex property located in Maple Grove, Minnesota for a sale. On July 14, 2022 Registrant signed a contract to sell Eagle IV to an unrelated buyer for $13,000,000 in an all cash transaction. The sale was completed on August 22, 2022.  As a result, Registrant is reporting its investment in Eagle IV as a property held for sale and has retrospectively reported the property’s results of operations as income from discontinued operations on the attached consolidated statement of operations.

During January 2022 Omaha sold its last real estate property which was located in Nashville, Tennessee for a price of $57,350,000. Net sales proceeds were used to first pay selling expenses and the remaining portion of the net sales proceeds were used along with cash reserves to pay a distribution of $90,000,000 to its investors. The Registrant’s 30% share of the distribution was $27,000,000. As of September 30, 2022 Omaha’s net assets consists of operating cash and other assets and operating liabilities.

On October 25, 2022, the General Partner authorized and a Limited Partner with the requisite majority voting power has approved the dissolution of the Partnership. On October 28, 2022, the General Partner filed Form 14C with the SEC notifying the SEC of its plans to dissolve the Partnership and its intent to notify the limited partners of its plan to dissolve the partnership. On November 7, 2022, the Partnership received a notification from Omaha that it was making a final distribution and dissolving the real estate venture by December 30, 2022.  As of November 10, 2022, the SEC did not have any comment on the filing. On November 10, 2022 a notification was sent to the limited partners informing them of the Plan of Dissolution of the Partnership. The General Partner anticipates winding up the business of the Partnership and making a final distribution near the end of the fourth quarter of 2022.

The General Partner has implemented the Plan of Dissolution now that the Partnership has completed the sale of its last real estate property, Eagle Lake Business Center IV. Following the sale, the Partnership’s assets consist principally of cash and cash equivalents and an equity interest in a liquidating real estate investment company. The General Partner will file a certificate of cancellation with the relevant authorities of the State of New York, (the “Certificate of Cancellation”), thereby dissolving the Partnership under state law and commencing the process of winding up the Partnership which will include several steps, including: liquidating any remaining assets; paying creditors, including affiliates of the General Partner who are creditors, and expenses of the Partnership; establishing a reserve, to the extent deemed reasonably necessary by the General Partner, for the payment of contingent or unforeseen future liabilities or obligations of the Partnership; and distributing available cash to the Partners in accordance with the Partnership’s governing documents and applicable law.

Once the wind-up has been completed, the General Partner will file a Form 15 Certification and Notice of Termination of Registration with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which will suspend the Partnership’s obligation to file periodic or current reports under the Exchange Act.

Registrant’s wholly owned property located in Maple Grove, Minnesota is 100% leased to a single tenant to October 31, 2031. The tenant pays fixed base rent which increases approximately 3% each year. The tenant pays directly or reimburses Registrant for all utilities, real estate taxes, insurance and most of the property operating expenses and property management fees.

On February 28, 2022, the tenant and the Registrant executed the Sixth Amendment (“Amendment”) to the lease. The Amendment extends the term of the lease from October 31, 2024 to October 31, 2031. The Amendment reduces the fixed monthly base rent stipulated in the fifth amendment from November 1, 2021 to October 31, 2024 as follows:

From November 1, 2021 to October 31, 2022, $71,222 per month to $62,859 per month.

From November 1, 2022 to October 31, 2023, $73,359 per month to $64,745 per month.

From November 1, 2023 to October 31, 2024, $75,560 per month to $66,688 per month.

Monthly base rent for the extended term increases approximately 3% per annum. The Registrant has agreed to provide a tenant improvement allowance of $175,000 for HVAC replacements. Tenant has a onetime right to extend the lease an additional five years. The Registrant has agreed to pay for a leasing commission to the tenant’s broker. In addition, an affiliate of the Registrant will earn a landlord leasing commission in accordance with the property management agreement. All the other relevant terms of the lease remain the same.

Results of Operations

Income from discontinued operation consists of the operation of Registrant’s property Eagle IV.

Income from discontinued operation decreased $89,000 for the three months ended September 30, 2022 as compared to the same period in 2021. Income from discontinued operation decreased due to lower total revenue offset by lower operating expenses. Total revenues from discontinued operation for the three months ended September 30, 2022 decreased $157,000 to approximately $146,000 as compared to approximately $303,000 for the three months ended September 30, 2021. Total revenues decreased due to the sale of Eagle IV on August 22, 2022. Operating expenses were lower due to the sale of Eagle IV on August 22, 2022.

Income from discontinued operation decreased $141,000 for the nine months ended September 30, 2022 as compared to the same period in 2021. Income from discontinued operation decreased due to lower total revenue offset by lower operating expenses. Total revenues from discontinued operation for the nine months ended September 30, 2022 decreased $191,000 to approximately $717,000 as compared to approximately $908,000 for the nine months ended September 30, 2021. Total revenues decreased due to the sale of Eagle IV on August 22, 2022. Operating expenses were lower due to the sale of Eagle IV on August 22, 2022.

Net income (loss) from continuing operations consists of Registrant income and expenses and the 30% investment in Omaha.

Interest income increased approximately $23,000 for the three months ended September 30, 2022 as compared to the same period in 2021 due to higher cash balances invested in 2022. Registrant expenses decreased approximately $135,000 due primarily to a decrease in investment management fees.

Interest income increased approximately $33,000 for the nine months ended September 30, 2022 as compared to the same period in 2021 due to higher cash balances invested in 2022. Registrant expenses decreased approximately $449,000 due primarily to a decrease in investment management fees.

The Registrant has a 30% non-controlling interest in Omaha that is accounted for on a fair value basis.

During January 2022 Omaha sold its last real estate property which was located in Nashville, Tennessee for a price of $57,350,000. Net sales proceeds were used to first pay selling expenses and the remaining portion of the net sales proceeds were used along with cash reserves to pay a distribution of $90,000,000 to its investors. The Registrant’s 30% share of the distribution was $27,000,000. As of September 30, 2022 Omaha’s net assets consists of operating cash and other assets and operating liabilities.

For additional analysis, please refer to the discussions of the individual properties below.

This report on Form 10-Q includes statements that constitute "forward looking statements" within the meaning of Section 27(A) of the Securities Act of 1933 and Section 21(E) of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. By their nature, all forward looking statements involve risks and uncertainties as further described in the Registrant’s latest annual report on Form 10-K. Actual results may differ materially from those contemplated by the forward looking statements.

CRITICAL ACCOUNTING POLICIES

The Registrant’s critical accounting policies are described in its Annual Report on Form 10-K for the year ended December 31, 2021. There were no significant changes to such policies in 2022. There are no accounting pronouncements or interpretations that have been issued, but not yet adopted, that Registrant believes will have a material impact on its consolidated financial statements.

Liquidity and Capital Resources

As of September 30, 2022, the Registrant had cash and cash equivalents of approximately $15,302,000. These balances are approximately $13,192,000 higher than cash and cash equivalents held on December 31, 2021. Cash and cash equivalents increased during the nine months ended September 30, 2022 due to the sale of Eagle IV and a distribution from Omaha added to cash reserves partially offset by a return of investment paid to the partners.

Currently, Registrant’s has cash reserves sufficient to pay all of its partnership expenses, liquidating expenses and pay a final distribution to the partners.

In March 2022 the General Partner declared a distribution of $3,300 for a full unit for all partners holding units or participations on March 22, 2022. The distribution was paid during June 2022.

During the quarter, inflation and changing prices did not significantly affect the markets in which the Registrant conducts its business, or the Registrant's business overall.

Eagle Lake Business Center IV (Maple Grove, Minnesota)

Total revenues for the three months ended September 30, 2022 decreased $156,000 due to the sale of Eagle IV on August 22, 2022. Net operating income decreased $89,000 for the three months ended September 30, 2022 as compared to the same period in 2021. Net operating income decreased due to lower total revenue offset by lower operating expenses. Operating expenses were lower due to the sale of Eagle IV on August 22, 2022.

Total revenues for the nine months ended September 30, 2022 decreased $191,000 due to the sale of Eagle IV on August 22, 2022. Net operating income, which includes deductions for depreciation, decreased $141,000 for the three months ended September 30, 2022 as compared to the same period in 2021. Net operating income decreased due to lower total revenue offset by lower operating expenses. Operating expenses were lower due to the sale of Eagle IV on August 22, 2022.

Investment in Sentinel Omaha, LLC

During January 2022 77sold its last real estate property which was located in Nashville, Tennessee for a price of $57,350,000. The net income was approximately $21,000. For the three months ended September 30, 2022, the Registrant’s 30% equity interest in the net income of Omaha was approximately $6,000.

Omaha’s total revenues for the nine months ended September 30, 2022 were approximately $158,000. The loss before net unrealized losses and realized gains was approximately $89,000. Major expenses included approximately $88,000 for payroll, and $31,000 for utilities. Omaha reported net change in unrealized losses of approximately $34,409,000 and a realized gain of approximately $34,412,000 resulting in a net decrease in net assets of approximately $86,000. For the nine months ended September 30, 2022, the Registrant’s 30% equity interest in the loss of Omaha was approximately $26,000.

ITEM 3.

None

ITEM 4.

CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

ITEM 6.

EXHIBITS

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.