fil-20230331

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, 2023

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

Commission File Number 000-53912

__________

SILVER STAR PROPERTIES REIT, INC.

(Exact name of registrant as specified in its charter)


Maryland			26-3455189
(State or Other Jurisdiction of Incorporation or of Organization)			(I.R.S. Employer Identification Number)

2909 Hillcroft
Suite 420
Houston
Texas			77057
(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

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 June 1, 2023, there were 34,894,496 shares of the Registrant’s common stock issued and outstanding.

Table of Contents


PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	38
Item 6.	Exhibits	38
	SIGNATURES

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements


SILVER STAR PROPERTIES REIT, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
	March 31, 2023		December 31, 2022
ASSETS	(Unaudited)
Real estate assets, at cost	$	570,383	$	580,602
Accumulated depreciation and amortization	(190,493)		(189,509)
Real estate assets, net	379,890		391,093

Cash and cash equivalents	380		334
Restricted cash	20,699		24,088
Accrued rent and accounts receivable, net	16,292		16,507
Note receivable - related party	1,726		1,726
Deferred leasing commission costs, net	8,846		9,826
Goodwill	250		250
Prepaid expenses and other assets	4,641		6,019
Real estate held for development	1,596		1,596
Real estate held for sale	14,719		25,963
Due from related parties, net	1,895		1,714
Investment in affiliate	201		201
Total assets	$	451,135	$	479,317

LIABILITIES AND EQUITY
Liabilities:
Notes payable, net	$	273,994	$	314,860
Accounts payable and accrued expenses	34,958		46,670
Tenants' security deposits	5,941		6,143
Total liabilities	314,893		367,673

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, 2023 and December 31, 2022, respectively	—		—
Common stock, $0.001 par value, 750,000,000 authorized, 34,894,496 shares and 34,894,496 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	35		35
Additional paid-in capital	296,152		296,152
Accumulated distributions and net loss	(181,426)		(204,080)
Total stockholders' equity	114,761		92,107
Noncontrolling interests in subsidiaries	21,481		19,537
Total equity	136,242		111,644
Total liabilities and equity	$	451,135	$	479,317

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


SILVER STAR PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

	Three Months Ended March 31,
	2023		2022
Revenues
Rental revenues	$	23,706	$	23,166
Management and advisory income	1,042		915
Total revenues	24,748		24,081

Expenses
Property operating expenses	4,821		5,524
Organization and offering costs	—		9

Real estate taxes and insurance	4,268		3,333
Depreciation and amortization	5,720		6,517
Management and advisory expenses	2,358		3,218
General and administrative	3,090		3,223
Interest expense	6,070		2,083
Total expenses	26,327		23,907
Other income
Interest and dividend income	—		43
Gain on sale of property	26,177		—
Net income	24,598		217
Net income attributable to noncontrolling interests	1,944		202
Net income attributable to common stockholders	$	22,654	$	15
Net income attributable to common stockholders per share	$	0.65	$	0.00
Weighted average number of common shares outstanding, basic and diluted	34,895		35,202

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


SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands)


	Preferred Stock			Common Stock
	Shares	Amount		Shares	Amount		Additional Paid-In Capital		Accumulated Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance at December 31, 2021	1	—		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, 2022	1	—		34,976	35		296,156		(166,298)		129,893		22,274		152,167

	Preferred Stock			Common Stock
	Shares	Amount		Shares	Amount		Additional Paid-In Capital		Accumulated Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance at December 31, 2022	1	$	—	34,895	$	35	$	296,152	$	(204,080)	$	92,107	$	19,537	$	111,644


Net income	—	—		—	—		—		22,654		22,654		1,944		24,598
Balance at March 31, 2023	1	$	—	34,895	$	35	$	296,152	$	(181,426)	$	114,761	$	21,481	$	136,242

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


SILVER STAR PROPERTIES REIT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	24,598	$	217
Adjustments to reconcile net income to net cash used in operating activities:
Stock based compensation	99		149
Depreciation and amortization	5,720		6,517
Deferred loan and lease commission costs amortization	570		608
Deferred loan cost write-off	541		—
Bad debt expense	—		(302)
Straight-line rent	187		217

Gain on disposed property	(26,177)		—


Unrealized loss on derivative instruments	655		—
Changes in operating assets and liabilities:
Accrued rent and accounts receivable	28		(2,097)
Deferred leasing commissions	(183)		(332)
Prepaid expenses and other assets	723		868
Accounts payable and accrued expenses	(11,811)		(9,764)
Due to/from related parties	(181)		(413)
Tenants' security deposits	(202)		11
Net cash used in operating activities	(5,433)		(4,321)
Cash flows from investing activities:

Additions to real estate	(1,100)		(3,114)
Proceeds from sale of property, net	44,827		—
Net cash provided by (used in) investing activities	43,727		(3,114)
Cash flows from financing activities:
Distributions to common stockholders	—		(3,958)
Distributions to non-controlling interests	—		(231)
Repayments to affiliates	(1,832)		—
Borrowing from affiliate	—		1,675


Repayments under term loan notes	(39,805)		(337)
Borrowings under term loan	—		2,645
Redemptions of common stock	—		(1,179)
Payment of deferred loan costs	—		(18)
Net cash used in financing activities	(41,637)		(1,403)
Net change in cash and cash equivalents and restricted cash	(3,343)		(8,838)
Cash and cash equivalents and restricted cash, beginning of period	24,422		19,257
Cash and cash equivalents and restricted cash, end of period	$	21,079	$	10,419
Supplemental cash flow information:
Cash paid for interest	$	5,097	$	1,846
Supplemental disclosure of non-cash activities:



Value of Director's stock compensation shares issued	$	—	$	461

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

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Organization and Business

Silver Star Properties REIT, 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 ended December 31, 2011. As used herein, the "Company," "we," "us," or "our" refer to Silver Star Properties REIT, Inc. and its consolidated subsidiaries and partnerships, including Hartman XX Limited Partnership ("Operating Partnership") and SPE LLC, except where context requires otherwise.

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.

On December 20, 2022, Silver Star Properties REIT, Inc. (previously known as Hartman Short Term Income Properties XX, Inc.) filed an amendment to its Articles of Amendment with the Maryland Secretary of State to change its name from “Hartman Short Term Income Properties XX, Inc.” to “Silver Star Properties REIT, Inc.” The amendment was effective as of December 20, 2022.

As of March 31, 2023 and 2022, respectively, the Company owned 43 and 44 income-producing commercial properties comprising approximately 6.4 million square feet and 6.8 million square feet, respectively, plus one pad site. As of March 31, 2023 and 2022, the Company owned one and two land developments, respectively. All properties are located in Texas. As of March 31, 2023 and 2022, respectively, the Company owned 15 properties located in Richardson, Arlington, Plano, and Dallas, Texas, 25 and 26 properties located in Houston, Texas and three properties located in San Antonio, Texas.

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 July 8, 2022, the Board voted to suspend the Redemption Plan to support the long-term fiscal health of the Company.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company does not anticipate that there will be any market for its shares of common stock unless they are listed on a national securities exchange. The Executive Committee has adopted resolutions directing management to begin the process of listing the Company’s shares on an established securities exchange, and it is taking steps to accomplish the listing, including without limitation engaging the services of an investment bank to assist with the listing.

On October 14, 2022, the Company’s board of directors formed the Executive Committee, composed of independent directors, to continue the review of strategic alternatives with the objective of maximizing shareholder value and to streamline the communicating, reporting, and decision-making between the board and the Chief Executive Officer. To accomplish this objective and to communicate and manage the day-to-day communications and interactions with the Chief Executive Officer, the Executive Committee has all the authority of decision making of the whole board of directors. The Executive Committee performed a strategic review process to identify, examine, and consider a range of strategic alternatives available to the Company. On April 6, 2023, the Executive Committee of the board of directors approved the previously-announced New Direction Plans to reposition the Company's assets into the self-storage asset class and away from office, retail, and light industrial assets. The Executive Committee is in the process of carrying out the New Direction Plans with the objective of maximizing shareholder value.

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, 2022 are derived from our audited consolidated financial statements as of that date. The unaudited consolidated financial statements as of March 31, 2023 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, 2023, and the results of consolidated operations for the three months ended March 31, 2023 and 2022, consolidated statements of equity for the three months ended March 31, 2023 and 2022, and consolidated statements of cash flows for the three months ended March 31, 2023 and 2022. The results of the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023.

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, for the year ended December 31, 2022.

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, 2023 and December 31, 2022 consisted of demand deposits at commercial banks. We maintain accounts which may from time to time exceed federally insured limits. We

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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 reserves, as required by certain of our mortgage debt agreements. As of March 31, 2023 and December 31, 2022, the Company had a restricted cash balance of $20,699,000 and $24,088,000, respectively.

The following provides a reconciliation of cash, cash equivalents, and restricted cash as of March 31, 2023 and March 31, 2022 to the corresponding consolidated statement of cash flows, in thousands:


	March 31, 2023		March 31, 2022
Cash and cash equivalents	380		81
Restricted cash	20,699		10,338
Total cash, cash equivalents, and restricted cash shown in consolidated statement of cash flows	$	21,079	$	10,419

Financial Instruments

The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accrued rent and accounts receivable, notes payable, accounts payable and accrued expenses and balances due to/due from related parties, related party notes receivable, and derivatives. With the exception of derivative financial instruments and notes payable, the Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. Disclosure about the fair value of financial instruments is based on relevant information available as of March 31, 2023 and December 31, 2022.

The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Under our SASB loan, we are required to enter into an interest rate cap agreement. The interest rate cap is recorded at fair value on the consolidated balance sheets as an other asset. We have elected not to apply hedge accounting and the change in fair value of the the interest rate cap is recognized as a component of interest expense on the accompanying statements of operations.

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 statements of operations.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.


Fee	Performance Obligation Satisfied	Timing of Payment	Description
Property Management	Over time	Due monthly	The 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 Services	Point in time (upon close of a transaction)	Upon completion	The 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 Management	Over time	Due 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 Management	Point in time (upon close of project)	Upon completion	Construction 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,

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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.

Impairment

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The Company determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. During the three months ended March 31, 2023 and 2022, the Company concluded there were no such events or changes in circumstances requiring review of the Company's real estate assets.

Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. The use of inaccurate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of the Company’s real estate and related intangible assets and net income.

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.

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:

The carrying values of cash and cash equivalents, restricted cash, accrued rent and accounts receivable, other assets and accounts payable and accrued expenses are reasonable estimates of fair values because of the short maturities of these instruments. For our disclosure of debt instrument fair value in Note 8, 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). For our disclosure of interest rate cap derivative fair value, refer to Note 6. Fair value determination of the interest rate cap derivative is based on Level 2 inputs.

Nonrecurring fair value measurements:

Property Impairments

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three months ended March 31, 2023 and 2022, the Company incurred net income of $24,598,000 and $217,000, 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.

Income 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, 2023 and 2022, 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 per share for the three months ended March 31, 2023 and 2022 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. The product type concentration in office space, which accounts for approximately 74% of our base rental revenue for the three months ended March 31, 2023, is susceptible to any negative trends in the future demand for office space.

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, 2022, SPE LLC executed the third and final maturity date option to extend the maturity to October 9, 2023.

The October 9, 2023 SASB Loan maturity date is within one year of the issuance of these consolidated financial statements. Uncertainty as to the Company's ability to obtain financing to satisfy the existing SASB Loan obligation requires 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. The Company is working with our third party advisor on refinancing options that align with a range of strategic alternatives under evaluation. Management believes that the SASB Loan Borrower will be able to obtain financing to replace the SASB Loan prior to the October 9, 2023 maturity date, however, no assurances can be given that the Company will be successful in achieving a refinance. The Company's ability to continue as a going concern is dependent upon the Company's ability to refinance the SASB Loan prior to the maturity date.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. The Company adopted ASU 2016-13 effective January 1, 2023. The amendments in this update replaced the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASC 2018-19, Financial Instruments — Credit Losses (Topic 326): Codification Improvements, clarified that receivables arising from operating leases are not within the scope of ASC Topic 326. Instead, impairment of receivables arising from operating leases will be accounted for in accordance with ASC 842. The adoption of this standard did not have a material

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

impact on our consolidated financial statements as the majority of our financial instruments result from operating lease transactions, which are not within the scope of this standard.

Recent Accounting Pronouncements Not Yet 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. In October 2022, the FASB approved a two-year extension of the temporary accounting relief provided under ASU 2020-04 to December 31, 2024.

For the period from January 1, 2020 (the earliest date the Company may elect to apply ASU 2020-04) through December 31, 2022, the Company did not have any contract modifications impacting current reference rates. The Company's SASB Loan and derivative instrument use LIBOR as the current reference rate. The optional expedients for hedging relationships described in ASU 2020-04 are not expected to have an impact to the Company as the Company has elected to not designate its derivative instrument as a hedge.

Note 3 — Real Estate

The Company’s real estate assets consisted of the following, in thousands:


	March 31, 2023		December 31, 2022
Land	$	129,880	$	132,533
Buildings and improvements	346,686		352,060
In-place lease value intangible	93,817		96,009
	570,383		580,602
Less: accumulated depreciation and amortization	(190,493)		(189,509)
Total real estate assets	$	379,890	$	391,093

Depreciation expense for the three months ended March 31, 2023 and 2022 was $4,483,000 and $4,714,000, respectively. Amortization expense of in-place lease value intangible was $1,237,000 and $1,803,000 for the three months ended March 31, 2023 and 2022, 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, 2023		December 31, 2022
In-place lease value intangible	$	93,817	$	96,009
In-place leases – accumulated amortization	(88,972)		(89,926)
Acquired lease intangible assets, net	$	4,845	$	6,083

Real Estate Held for Development

The Company's investment in real estate assets held for development consists of one pad site development in progress acquired from HIREIT.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Real Estate Held for Sale

The Company's real estate held for sale includes one land development, the Quitman Property, and the Cooper Street Property. The Quitman property was sold on April 6, 2023. Refer to Note 16 (Subsequent Events) for additional information.

Dispositions

On January 31, 2023, we sold the 17 acre development site located in Fort Worth, Texas to a third party. Net proceeds from the sale of the development site were approximately $4,317,000 and no gain or loss was recognized on the sale as the property was impaired as an asset held for sale and recognized at fair value less cost to sell as of December 31, 2022.

On March 10, 2023, we sold the Mitchelldale property to a third party. Net proceeds from the sale were approximately $40,510,000 and we recognized a gain on the sale of property of approximately $26,177,000 for the three months ended March 31, 2023.

Note 4 - Accrued Rent and Accounts Receivable, net

Accrued rent and accounts receivable, net, consisted of the following, in thousands:


	March 31, 2023		December 31, 2022
Tenant receivables	$	11,589	$	11,617
Accrued rent	10,931		11,118
Allowance for uncollectible accounts	(6,228)		(6,228)
Accrued rents and accounts receivable, net	$	16,292	$	16,507

As of March 31, 2023 and December 31, 2022, the Company had an allowance for uncollectible accounts of $6,228,000 and $6,228,000, respectively. For the three months ended March 31, 2023 and 2022, the Company recorded bad debt expense (recovery) in the amount of $0 and $(302,000), 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.

Note 5 — Deferred Leasing Commission Costs, net

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


	March 31, 2023		December 31, 2022
Deferred leasing commissions costs	$	19,705	$	21,244
Less: accumulated amortization	(10,859)		(11,418)
Deferred leasing commission costs, net	$	8,846	$	9,826

Note 6 - Derivative Financial Instruments

On October 5, 2022, the Company entered into an interest rate cap agreement with respect to the $259 million SASB Loan through the maturity date of October 9, 2023. The agreement capped the underlying one-month LIBOR rate at 3.75%. The Company has elected not to apply hedge accounting and the change in fair value of the the interest rate cap is recognized as a component of interest expense on the accompanying consolidated statements of operations.

The counterparty under the interest rate cap is a major financial institution. The Company paid a premium of $2,254,000 for the interest rate cap. As of March 31, 2023, the fair value of this cap was $1,696,000 and included in other assets in the Company's consolidated balance sheets. The Company recognized $403,000 of interest income from paid and accrued counterparty payments and $655,000 of loss from the change in fair value of the interest rate cap during the three months ended March 31, 2023. These amounts are recorded as a component of interest expense on the accompanying consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of this interest rate cap is determined using observable inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. These inputs are considered Level 2 inputs in the fair value hierarchy. In addition, any credit valuation adjustments are considered in the fair values to account for potential nonperformance risk to the extent they would be significant inputs to the calculation. It was determined that credit valuation adjustments were not considered to be significant inputs.

Note 7 — 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 leases in existence at March 31, 2023 is as follows, in thousands:


March 31,	Minimum Future Rents
2023	$	62,851
2024	50,056
2025	35,764
2026	26,710
2027	18,049
Thereafter	27,109
Total	$	220,539

Note 8 — Notes Payable

The Operating Partnership was a party to four, cross-collateralized, term loan agreements with an insurance company. The term loans were secured by the Richardson Heights Property, the Cooper Street Property, the Bent Tree Green Property and the Mitchelldale Property. The loans required monthly payments of principal and interest due and payable on the first day of each month. Monthly payments were based on a 27-year loan amortization. Each of the loan agreements were subject to customary covenants, representations and warranties which must be maintained during the term of the loan agreements. Each of the loan agreements provided for a fixed interest rate of 4.61%. Each of the loan agreements were 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 provided for the cross collateralization/cross default of the each of the loans.

On March 10, 2023, the Company completed the sale of its Mitchelldale property for a sale price of $40,510,000. Proceeds from the sale retired the four, cross collateralized term loans referenced above. The outstanding balance of the four loans was $0 and $39,324,000 as of March 31, 2023 and December 31, 2022, 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 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, 2022, the SASB Loan Borrower exercised the third and final one-year maturity date extension agreement to extend the maturity date to October 9, 2023. 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

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 October 19, 2022, the SASB Loan Borrower received a notice from the loan servicer of the SASB Loan in connection with an event of default due to the noncompliance with the loan agreement's insurance requirements relating to a single property. The event of default was previously waived for the sole purpose of exercising the option to extend the SASB Loan term. The event of default triggered cash management provisions under the SASB Loan agreement, which was implemented in November 2022. On April 6, 2023, the SASB Loan Borrower sold the single property responsible for the default, the Quitman property. To secure approval of the SASB Loan lender for the sale of the Quitman property, the SASB Loan Borrower agreed to continue the cash management provisions under the SASB Loan agreement until certain provisions are met. Cash management requires tenant receipts of the SASB Loan Borrower be deposited into a cash management account controlled by the loan servicer. On the 9th day of each month, distributions from the cash management account are made in the following priority: (i) property tax escrow, (ii) scheduled debt service (iii) budgeted operating expenses for the month of the payment date occurs, (iv) capital expenditure reserve, and (v) tenant improvement and lease commission reserve. All remaining amounts are disbursed to an excess cash flow reserve account, also maintained by the loan servicer. The SASB cash management account held $3,021,000 and $3,817,000 as of March 31, 2023 and December 31, 2022, respectively. The excess cash flow reserve held $3,111,000 and $223,000 as of March 31, 2023 and December 31, 2022, respectively. Both the cash management and excess cash flow reserve accounts are recorded in restricted cash on the consolidated balance sheets.

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 was secured by the Company's 17 acre development site located in Fort Worth, Texas and had a maturity date of February 25, 2023. The remaining principal balance was paid out of proceeds from the sale of the development site on January 31, 2023.

The following is a summary of the Company’s notes payable, in thousands:


Property/Facility	Payment	Maturity Date	Rate		March 31, 2023		December 31, 2022
Richardson Heights	P&I	July 1, 2041	4.61	%	$	—	$	15,556
Cooper Street	P&I	July 1, 2041	4.61	%	—		6,764
Bent Tree Green	P&I	July 1, 2041	4.61	%	—		6,764
Mitchelldale	P&I	July 1, 2041	4.61	%	—		10,240
Hartman SPE LLC (1)	IO	October 9, 2023	5.55	%	259,000		259,000
Hartman XXI	IO	October 31, 2022	10.00	%	15,336		17,168
Fort Worth - EWB	P&I	February 25, 2023	8.50	%	—		480
					$	274,336	$	315,972
Less: unamortized deferred loan costs					(342)		(1,112)
					$	273,994	$	314,860

(1) On October 9, 2022, the Company executed the third and final one-year maturity date extension to October 9, 2023.

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, 2023		December 31, 2022
Deferred loan costs	$	4,930	$	5,471
Less: deferred loan cost accumulated amortization	(4,588)		(4,359)
Total cost, net of accumulated amortization	$	342	$	1,112

Interest expense incurred for the three months ended March 31, 2023 and 2022 was $6,071,000 and $2,082,000, respectively, which includes amortization expense of deferred loan costs. Interest expense also includes $541,000 of write off of deferred loan costs for the three months ended March 31, 2023 due to the pay off of the insurance company loan mentioned

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

above. Interest expense of $1,418,000 and $1,117,000 was payable as of March 31, 2023 and December 31, 2022, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

On March 29, 2021, Hartman Income REIT Property Holdings, LLC ("HIRPH"), a wholly owned subsidiary of Hartman XX Limited Partnership, 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. The master credit facility has a maturity date of March 9, 2023. Refer to Note 14 (Commitments and Contingencies) for additional information regarding the review of the ownership of HIRPH's membership interest resulting from the joinder agreement.

As noted in Note 16 (Subsequent Events), on May 30, 2023, Hartman vREIT XXI, Inc. completed the refinance of the master credit facility where HIRPH was a borrower via the joinder agreement. The Atrium II property is no longer included in the master credit facility and is unencumbered as of the closing of the refinance. HIRPH is no longer a borrower nor is it jointly and severally liable with the other loan parties for repayment of the loan.

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 $269,908,000 and $308,286,000 as compared to book value of $274,336,000 and $315,972,000 as of March 31, 2023 and December 31, 2022, 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, 2023 and December 31, 2022.

Note 9 — Income Per Share

Basic income per share is computed using net income 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,
	2023		2022
Numerator:
Net income attributable to common stockholders (in thousands)	$	22,654	$	15
Denominator:
Weighted average number of common shares outstanding, basic and diluted (in thousands)	34,895		35,202
Basic and diluted income per common share:
Net income attributable to common stockholders per share	$	0.65	$	0.00

Note 10 — 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, 2023.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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 11 — Related Party Transactions

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, 2023		December 31, 2022
Due from (to) vREIT XXI	543		429
Due from (to) other related parties	1,352		1,285
Total due from related parties	$	1,895	$	1,714

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 with an interest rate of 10%. In addition to the balance due under this note, the Company received advances from vREIT XXI totaling $7,168,000 which were outstanding as of December 31, 2022 and which were not covered by the unsecured promissory note. The Company made principal payments of $1,832,000 during three months ended March 31, 2023 This note payable had an outstanding balance of $15,336,000 and $17,168,000 as of March 31, 2023 and December 31, 2022, 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 $408,000 and $131,000 for the three months ended March 31, 2023 and 2022, 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 or upon property sale.

The maturity date of the promissory note, as amended, is June 30, 2024. This note receivable had an outstanding balance of $1,726,000 as of both March 31, 2023 and December 31, 2022, respectively, which is included in notes receivable – related party in the accompanying consolidated balance sheets. For the period ended December 31, 2022, the Company wrote off $1,022,000 of interest receivable and will cease to recognize interest income in future periods. For the three months ended March 31, 2023 and 2022, the Company recognized interest income on this affiliate note in the amounts of $0 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $24,165,000 and $24,276,000 as of March 31, 2023 and December 31, 2022, respectively.

On March 29, 2021, Hartman Income REIT Property Holdings, LLC, a wholly owned subsidiary of Hartman XX Limited Partnership, 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. The master credit facility has a maturity date of March 9, 2023. Refer to Note 14 (Commitments and Contingencies) for additional information regarding the review of the ownership of HIRPH's membership interest resulting from the joinder agreement.

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

Refer to Note 16 (Subsequent Events) for information regarding the Company's purchase of Southern Star Self-Storage Investment Company, where the Company's former Chief Executive Officer and Chief Financial Officer are equity holders.

Effective April 17, 2023, the Company is no longer providing management and advisory services to Hartman vREIT XXI, Inc. and its affiliates.

Note 12 - Stockholders’ Equity

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, 2023 and December 31, 2022, respectively, the Company has 1,000 shares of convertible preferred stock issued and outstanding, 300 shares of which are owned by a wholly-owned subsidiary.

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

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

On July 26, 2022, the Board approved cash payments totaling $400,000 in lieu of unissued shares due to non-employee directors under the non-employee director's compensation plan. The Incentive Plan that provides for the issuance of the restricted common stock awards to non-employee director has expired and requires stockholder approval for modification or reinstatement. All non-employee director compensation will be cash based until incentive stock is available.

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. The Company matches 401(k) cash contributions with Company stock. The Company may make discretionary matching contributions. For the three months ended March 31, 2023 and 2022, the Company matched $99,000 and $99,000, respectively. The Company had a stock match liability to the plan of $1,907,000 and $1,808,000 as of March 31, 2023 and December 31, 2022, respectively.

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 Paid	Distributions per Common Share		Total Distributions
2023
1st Quarter	$	—	—
Total 2023 Quarter to date	$	—	$	—

2022
4th Quarter	$	—	$	—
3rd Quarter	—		—
2nd Quarter	0.128		4,500
1st Quarter	0.112		3,958
Total 2022	$	0.240	$	8,458

Note 13 - Incentive Award Plan

The Company previously adopted an incentive plan called the Omnibus Stock Incentive Plan, (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 Incentive Plan has expired pursuant to its terms and requires stockholder approval for modification or reinstatement. The Board approved the payment of accrued director's fees in cash, as stock compensation was not available.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Company had recognized the share of the judgment amount applicable to wholly owned properties of the Company, approximately $6,731,000, within the Company's consolidated statements of operations for fiscal year 2021. The Company has also recognized $370,000 of pre-judgment interest and attorney fees in 2021 and $304,000 of post-judgment interest in 2022. Many of the Company’s leases contain provisions that require tenants to pay their allocable share of operating expenses, including utilities. The Company has completed its assessment of tenants' applicable share and has collected and recognized $1,530,000 of tenant's share to date, $866,000 was recognized in the first quarter of 2023.

On April 25, 2022, the Property Manager filed its supersedeas surety bond totaling $2,197,000 in order to suspend enforcement the judgment for the duration of the Property Manager's appeal. The share of the supersedeas surety bond applicable to wholly owned properties of the Company totaled $2,001,000 and is recorded in prepaid expenses and other assets on the Company's consolidated balance sheets.

The Property Manager continues to dispute the amount of litigation to Summer and had appeal the judgment, filing its Notice of Appeal on June 21, 2022. The outcome of the 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.

Atrium II Joinder Agreement

Through the execution of the joinder agreement referenced in Note 8 (Notes Payable) and Note 11 (Related Party Transactions), certain organizational and loan documents reference Hartman vREIT XXI Operating Partnership LP (“Hartman XXI OP”), a wholly owned subsidiary of Hartman vREIT XXI, Inc., as the sole member.

Under the joinder agreement, HIRPH became a borrower under the loan and is jointly and severally liable with the other loan parties for the repayment of the loan. The Atrium II property is the sole asset of HIRPH with which to repay any debt under the loan. The loan is currently in an extension period to accommodate ongoing renewal terms. The outstanding balance of the loan which HIRPH is party totals $15,625,000 as of March 31, 2023. There are four other properties as named borrowers in the loan. If a renewal agreement is not reached, the Company may be required to relinquish ownership of the property to the lender in a foreclosure transaction or other alternative to foreclosure in satisfaction of the loan. The Company’s max potential loss in regards to its liability under the loan would be the value of the property. The Company’s maximum potential loss in regards to its liability under the loan would be the value of the property.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Charter provision regarding liquidity or liquidation

The Company does not anticipate that there will be any market for its shares of common stock unless they are listed on a national securities exchange. In the event that Company shares of common stock are not listed or traded on an established securities exchange prior to the tenth anniversary of the completion or termination of the Company's initial public offering, which terminated on April 25, 2013, the Company's charter requires that the board of directors must seek the approval of the stockholders of a plan to liquidate assets, unless the board of directors has obtained the approval of the stockholders (1) to defer the liquidation of our assets or (2) of an alternate strategy. If the stockholders do not approve the proposal presented by the board of directors prior to the end of ten years after the termination of the Company’s initial public offering, the board of directors shall begin the process of liquidating the Company’s assets or listing the Company’s shares. The Executive Committee has adopted resolutions directing management to begin the process of listing the Company’s shares on an established securities exchange, and it is taking steps to accomplish the listing, including without limitation engaging the services of an investment bank to assist with the listing.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2023 and 2022, the Company matched $99,000 and $99,000, respectively. The Company had a stock match liability to the plan of $1,907,000 and $1,808,000 as of March 31, 2023 and December 31, 2022, respectively.

Note 16 - Subsequent Events

On April 6, 2023, the Company completed the sale of its Quitman property for a sale price for a sale price of $9,065,000. Proceeds from the sale were applied to the outstanding balance of the SASB Loan. The property is presented in real estate held for sale on the consolidated balance sheets as of March 31, 2023 and December 31, 2022. The disposal of the Quitman property granted us a one time waiver of event of default on the SASB Loan, subject to certain conditions. Most notably, the Company does have access to certain reserve accounts, however is still subject to cash management provisions until a 14% debt yield is reached.

On April 6, 2023, the Company agreed to purchase all of the equity interests in Southern Star Self-Storage Investment Company ("Southern Star") for approximately $3,000,000 in cash and 301,659 restricted stock units of the Company's Common Stock. Mark T. Torok and Louis T. Fox III, CFO, are equity holders of Southern Star. On May 5, 2023, the Company completed the acquisition of Southern Star, which will operate as a subsidiary of the Company’s operating partnership alongside the Company’s current operations, utilizing its expertise in developing assets within Delaware Statutory Trusts.

On April 6, 2023, the Executive Committee and Managing General Partner of the Operating Partnership approved and adopted the Silver Star Properties REIT, Inc. and Hartman XX Limited Partnership 2023 Incentive Award Plan (the “2023 Incentive Award Plan”) to promote the success and enhance the value of the Company by retaining personnel that have the knowledge vision and ability not only with the Company but also in the capital markets as further described in the Employment Agreement included as Exhibit 10.3 to the Company’s Form 8-K filed April 10, 2023. The 2023 Incentive Award Plan recognizes that the entire Acquisition and the New Direction Plans were set up by the work and effort of the Chief Executive Officer and the Executive Committee, and it further serves to incentivize and retain the Chief Executive Officer and the Executive Committee, together, to execute the New Direction Plans and enable the Company and its shareholders to realize the value created by the New Direction Plans. The 2023 Incentive Award Plan allows for grants of performance units (“Performance Units”) which are intended to constitute profits interests units in the Operating Partnership convertible into Partnership Common Units of the Operating Partnership at the election of the participant which may be later exchanged for Common Stock of the Company based on a 1:1 ratio. The participant is also able to cause the redemption of the Performance Units, or the applicable Partnership Common Units received as a result of conversion, after three years from the Grant Date. The 2023 Incentive Award Plan includes a three-year vesting that is intended to ensure that the Executive Committee and the Chief Executive Officer will stay in place and provide continued services to the Company.

On April 6, 2023, pursuant to the 2023 Incentive Award Plan, the Executive Committee approved grants of founders’ Performance Units to retain and incentivize the following members of the Executive Committee in carrying out the New Direction Plans, as defined below: Gerald Haddock, member of the Executive Committee, (1,053,035 Performance Units), Jack Tompkins, member of the Executive Committee, (1,053,035 Performance Units), and James Still, member of the Executive Committee, (1,053,035 Performance Units). Performance Units vest 1/3 of the grant per year, and the term of each Performance Unit is ten (10) years from the date of grant as further described in the 2023 Incentive Award Plan included as Exhibit 10.4 to the Company’s Form 8-K filed April 10, 2023. The Executive Committee engaged a third-party compensation consultant to assist in determining the compensation structure for the Executive Committee and to evaluate their compensation relative to the marketplace.

Mark Torok tendered his resignation as Chief Executive Officer of Silver Star Properties REIT, Inc. (the “Company”) citing personal reasons, effective April 28, 2023, Mr. Torok’s resignation as Chief Executive Officer was not the result of any disagreement with the Company on any matter relating to the Company's operations, policies or practices. Also effective April 28, 2023, the Executive Committee of Board of Directors of the Company appointed David Wheeler to serve as the Company’s Interim President and has elevated the role and duties of Michael Racusin, General Counsel and Secretary. A search is underway to identify a permanent CEO with self-storage experience. The Executive Committee of the Board of Directors has retained a nationally recognized executive search firm to assist in the process.

SILVER STAR PROPERTIES REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Effective April 17, 2023, the Company is no longer providing management and advisory services to Hartman vREIT XXI, Inc. and its affiliates.

On May 30, 2023, Hartman vREIT XXI, Inc. completed the refinance of the master credit facility referenced in Note 14 (Commitments and Contingencies). The Atrium II property is no longer included in the master credit facility and is unencumbered as of the closing of the refinance. HIRPH is no longer a borrower nor is it jointly and severally liable with the other loan parties for repayment of the loan.

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 Silver Star Properties REIT, 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.

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;
●			our ability to obtain financing on acceptable terms, satisfy our existing debt service obligations and negotiate maturity date extensions, particularly with our SASB Loan, or other modifications to the terms of our existing financing arrangements to the extent necessary
●			construction costs that may exceed estimates or construction delays;
●			increases in interest rates;
●			availability of credit or significant disruption in the credit markets;
●			litigation risks, including without limitation the outcome of pending litigation related to the pricing of electricity provided to certain of our properties during the severe winter weather experienced in Texas
●			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 renew tenant leases or 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 resume the payment of distributions to our stockholders;
●			the outcome of our pending legal appeal of a significant judgment against our Property Manager related to Winter Storm Uri (see Item 1. Legal Proceedings)
●			our ability to retain our executive officers and other key personnel; and
●			changes to generally accepted accounting principles, or 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, 2022.

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

Overview

Silver Star Properties REIT, Inc. (previously known as Hartman Short Term Income Properties XX, Inc.) is a Maryland corporation formed on February 5, 2009, to acquire and invest in income-producing commercial real estate properties, including office buildings, retail shopping centers and flex and industrial properties. We have previously made investments in real estate assets located in the United States, with a strategic focus on real estate properties located in Texas. We recently began an initiative to pivot away from office, retail, and light industrial assets, and reposition our portfolio into the self-storage asset class. We currently own substantially all of our assets and conduct our operations through Hartman XX Limited Partnership, a Texas limited partnership, which we refer to as our “operating partnership.” Our wholly-owned subsidiary, Hartman XX REIT GP LLC, is the sole general partner of our operating partnership. We elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2011. References in this Quarterly Report to “shares” and “our common stock” refer to the shares of our common stock.

As of March 31, 2023 we owned 43 income-producing commercial real estate properties comprising approximately 6.4 million square feet plus one pad site and one land development, all located in Texas.

On May 14, 2020, we completed: (i) the merger between us and Hartman Short Term Income Properties XIX, Inc.("Hartman XIX"), and (ii) the merger by us, our operating partnership, Hartman Income REIT, Inc. (“HIREIT”), and Hartman Income REIT Operating Partnership LP, (“HIREIT Operating Partnership”). The effective date of the mergers ("Mergers") 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 our 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. The Property Manager owned 30% of the Advisor prior to the Mergers. Effective with the Mergers and the acquisition of the 70% interest of Advisor owned by affiliates of Allen R. Hartman, we are a self-advised and self-managed REIT.

On December 20, 2022, we filed an amendment to our Articles of Amendment with the Maryland Secretary of State to change our name from “Hartman Short Term Income Properties XX, Inc.” to “Silver Star Properties REIT, Inc.”

On April 6, 2023, the Executive Committee of the board of directors approved our previously-announced New Direction Plans to reposition the Company's assets into the self-storage asset class and away from office, retail, and light industrial assets.

Going Concern Considerations

We have a $259,000,000 SPE Loan (the "SASB Loan") outstanding as of March 31, 2023 which has a maturity date of October 9, 2023, which is within one year of the date that this Quarterly Report was available to be issued. We are on the third and final one year maturity date option under the SASB Loan. Management has determined that the our ability to continue as a going concern is dependent upon the our ability to refinance the SASB Loan prior to the maturity date.

On October 19, 2022, we received a notice from the loan servicer of the SASB Loan in connection with an event of default due to the noncompliance with the loan agreement's insurance requirements relating to a single property. The event of default was previously waived for the sole purpose of exercising the final one-year extension option to the SASB Loan term. The default triggers cash management provisions under the SASB Loan agreement, which was implemented in November 2022. Cash management implementation has restricted access to tenant receipts and limited the amount of cash available to meet our operating obligations. Refer to Note 8 (Notes Payable) to the consolidated financial statements in the Quarterly Report for additional information regarding the timing and priority of disbursements we receive from the cash management accounts and required excess cash flow reserves.

Notwithstanding cash management implementation, we believe that we will have sufficient capital to meet our existing, monthly debt service and other operating obligations for the next year and that we have adequate resources to fund our cash needs. We are working with our third party advisor on refinancing options that are in alignment with a range of strategic alternatives being evaluated. However, the lack of lending activity in the debt markets, particularly in commercial office real estate markets, may have a direct impact on the value of our real estate and ability to refinance the properties in the SASB Loan due October 9, 2023. No assurances can be given we will meet our objective of refinancing the SASB Loan prior to the maturity date.

Investment Objectives and Strategy

We have invested in a diverse portfolio of real estate investments. As of March 31, 2023, we owned a total of 43 income-producing commercial properties, consisting of 29 office properties, 12 retail properties, and 2 industrial/flex properties. Historically, we have relied on a value add acquisition and development strategy, focused specifically properties located in Texas, to realize growth in the value of our investments, grow net cash from operations, and pay regular cash distributions to our stockholders.

The current economic slowdown, rising interest rate environment, inflation, and the COVID-19 pandemic have had a negative impact on us. Effective July 8, 2022, we suspended the payment of distributions and seek to preserve capital to secure our financial health on an ongoing basis.

We have changed our investment objectives and strategy to preserve the long-term health of our company and we do not anticipate acquiring any office properties in the near future. Management and the Executive Committee of our Board of Directors have identified, examined, and evaluated a range of strategic alternatives and are in the process of carrying out our New Direction Plans with the objective of maximizing shareholder value.

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. We recently engaged advisors to examine the possibility of listing our shares on a public exchange in conjunction with our previously-announced New Direction Plans. 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 board of directors has obtained the approval of our stockholders (1) to defer the liquidation of our assets or (2) of an alternate strategy. If the stockholders do not approve the proposal presented by the board of directors prior to the end of ten years after the termination of the Company’s initial public offering, the board of directors shall begin the process of liquidating the Company’s assets or listing the Company’s shares. The Executive Committee of the Board of Directors has adopted resolutions directing management to begin the process of listing the Company’s shares on an established securities exchange, and it is taking steps to accomplish the listing, including without limitation engaging the services of an investment bank to assist with the listing.

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.

Our Real Estate Portfolio

As of March 31, 2023, we owned 43 income-producing commercial properties listed below.


Property Name	Location	Gross Leasable Area SF	Percent Occupied		Annualized Base Rental Revenue (in thousand)		Average Base Rental Revenue per Occupied SF		Average Net Effective Annual Base Rent per Occupied SF
Retail:
Promenade	Dallas	176,585	79	%	$	1,584	$	11.41	$	11.47
Prestonwood Park	Dallas	105,783	84	%	$	1,840	$	20.80	$	20.47
Richardson Heights	Dallas	201,433	76	%	$	3,157	$	20.56	$	18.87
Cooper Street	Dallas	127,696	95	%	$	1,578	$	13.06	$	13.12
One Mason SC	Houston	75,183	90	%	$	1,044	$	15.40	$	15.45
Chelsea Square SC	Houston	70,275	66	%	$	542	$	11.66	$	11.71
Mission Center SC	Houston	112,971	90	%	$	949	$	9.34	$	9.39
Garden Oaks SC	Houston	106,858	96	%	$	1,756	$	17.15	$	17.18
Harwin	Houston	38,813	59	%	$	261	$	11.46	$	12.26
Fondren	Houston	93,196	93	%	$	962	$	11.08	$	11.22
Northeast Square SC	Houston	40,525	76	%	$	432	$	14.06	$	14.12
Walzem Plaza SC	San Antonio	182,713	71	%	$	1,564	$	12.06	$	12.09
Total - Retail		1,332,031	82	%	$	15,669	$	14.38	$	14.17
Office:
North Central Plaza	Dallas	198,374	62	%	$	1,824	$	14.92	$	14.96
Gateway Tower	Dallas	266,412	63	%	$	1,994	$	11.89	$	11.87
Bent Tree Green	Dallas	139,609	70	%	$	1,940	$	19.83	$	20.41
Parkway Plaza I&II	Dallas	136,506	69	%	$	1,321	$	13.97	$	14.29
Hillcrest	Dallas	203,688	80	%	$	2,156	$	13.25	$	13.28
Skymark	Dallas	115,700	85	%	$	1,589	$	16.21	$	16.26
Corporate Park Place	Dallas	113,429	76	%	$	1,161	$	13.44	$	13.32
Westway One	Dallas	165,982	82	%	$	2,588	$	18.92	$	19.02
Three Forest Plaza	Dallas	366,549	75	%	$	5,085	$	18.96	$	18.88
Spring Valley	Dallas	94,304	66	%	$	961	$	15.37	$	15.57
Tower Pavilion	Houston	87,589	93	%	$	787	$	9.66	$	9.59
The Preserve	Houston	218,689	91	%	$	2,729	$	13.75	$	13.40
Westheimer Central	Houston	182,506	71	%	$	1,504	$	11.60	$	11.53
11811 N Freeway	Houston	156,362	63	%	$	1,375	$	13.90	$	13.93
Atrium I	Houston	118,461	82	%	$	1,392	$	14.38	$	14.55
Atrium II	Houston	111,853	94	%	$	1,202	$	11.16	$	11.48
3100 Timmons	Houston	111,265	84	%	$	1,561	$	16.68	$	16.79
Cornerstone	Houston	71,008	65	%	$	536	$	11.55	$	11.33
Northchase	Houston	128,981	63	%	$	978	$	12.02	$	12.29
616 FM 1960	Houston	142,194	60	%	$	1,139	$	13.28	$	13.28
601 Sawyer	Houston	88,258	90	%	$	1,359	$	17.12	$	16.96
Gulf Plaza	Houston	120,651	85	%	$	2,054	$	20.00	$	20.43
Timbercreek Atrium	Houston	51,035	73	%	$	439	$	11.75	$	11.72
Copperfield	Houston	42,621	97	%	$	651	$	15.79	$	15.41
400 N. Belt	Houston	230,872	43	%	$	1,155	$	11.67	$	12.03
Ashford Crossing	Houston	158,451	92	%	$	2,048	$	14.12	$	14.21
Regency Square	Houston	64,245	95	%	$	558	$	9.15	$	9.12
Energy Plaza	San Antonio	180,119	89	%	$	3,287	$	20.53	$	20.51
One Technology Ctr	San Antonio	196,348	90	%	$	4,493	$	25.33	$	25.36
Total -office		4,262,061	76	%	49,866		15.5		15.53

Industrial/Flex
Central Park	Dallas	73,099	91	%	$	585	$	8.79	$	9.81
Quitman	Houston	736,957	88	%	$	1,353	$	2.08	$	2.07
Total -Industrial/Flex		810,056	88	%	$	1,938	$	2.71	$	2.80

Grand Total		6,404,148	78	%	$	67,473	$	13.43	$	13.42

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, 2022, as filed with the SEC on May 26, 2023 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, 2023. 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, 2023 versus March 31, 2022.

As of March 31, 2023 and 2022, respectively, the Company owned 43 and 44 income-producing commercial properties comprising approximately 6.4 million square feet and 6.8 million square feet, respectively, plus one pad sites. As of March 31, 2023 and 2022, the Company owned one and two land developments, respectively. All properties are located in Texas. As of March 31, 2023 and 2022, respectively, the Company owned 15 properties located in Richardson, Arlington, Plano, and Dallas, Texas, 25 and 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, 2023 and 2022, we had total revenues of $24,748,000 and $24,081,000, respectively.

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, 2023 and 2022, we had property operating expenses of $4,821,000 and $5,524,000, respectively. The decrease in property operating expenses is primarily due to an overall decrease in normal course property repairs and improvements as well as decrease in utility costs.

Real estate taxes and insurance - Real estate taxes and insurance for the three months ended March 31, 2023 and 2022 were $4,268,000 and $3,333,000, respectively. The increase in real estate taxes and insurance is attributable to increased premiums for commercial property insurance, driven by inflationary trends as well as volatile conditions in the commercial insurance market.

Depreciation and amortization - Depreciation and amortization for the three months ended March 31, 2023 and 2022 were $5,720,000 and $6,517,000, respectively. The decrease is primarily related to assets classified as held for sale, where depreciation is not recognized, and impairment charges taken in the fourth quarter of 2022 which reduced the depreciable base of a number of our assets.

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, 2023 and 2022 were $3,090,000 and $3,223,000, respectively.

Interest expense - Interest expense for the three months ended March 31, 2023 and 2022, was $6,070,000 and $2,083,000, respectively. The increase is attributable to the impact of rising interest rates on our variable rate debt and increase in Notes Payable. The interest rate on our SASB Loan rose from 2.00% from March 2022 to 5.55% in March 2023, which includes the impact of our interest rate cap required under the loan.

Gain on sale of property - During the three months ended March 31, 2023, we sold the Mitchelldale property to a third party and recognized a gain on the sale of property of approximately $26,177,000.

Net income - We generated a net income of $24,598,000 and $217,000 for the three months ended March 31, 2023 and 2022, respectively. The increase in net income is primarily attributable to the gain on sale of property mentioned 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 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 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, 2023 and 2022, including a reconciliation of such non-GAAP financial performance measures to our net income, in thousands.


	Three Months Ended March 31,
	2023		2022
Net income	$	24,598	$	217
Gain on sale of property	(26,177)		—
Depreciation and amortization of real estate assets	5,720		6,517
Funds from operations (FFO)	4,141		6,734
Organization and offering costs	—		9

Modified funds from operations (MFFO)	$	4,141	$	6,743

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, 2023, in thousands:


Period	Cash (1)		DRIP (2)(3)		Total
Year ended December 31, 2011	$	255	$	242	$	497
Year ended December 31, 2012	891		869		1,760
Year ended December 31, 2013	1,681		1,594		3,275
Year ended December 31, 2014	2,479		2,358		4,837
Year ended December 31, 2015	3,475		3,718		7,193
Year ended December 31, 2016	8,918		2,988		11,906
Year ended December 31, 2017	12,650		—		12,650
Year ended December 31, 2018	12,555		—		12,555
Year ended December 31, 2019	12,811		—		12,811
Year ended December 31, 2020	15,797		—		15,797
Year ended December 31, 2021	13,917		—		13,917
Year ended December 31, 2022	8,458		—		8,458
Quarter ended March 31, 2023	—		—		—
Total	$	93,887	$	11,769	$	105,656

(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 $0 and $231,000 for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2022, we paid aggregate distributions of $0 in cash to common stockholders. During the same period, cash used in operating activities was $5,433,000 and our FFO was $4,141,000.

Liquidity and Capital Resources

As described above under "Overview - Going Concern Considerations," we are under our final one year maturity date option of our SASB Loan due October 9, 2023 and have an ongoing event of default under the SASB Loan relating to the loan agreement's insurance requirements relating to a single property. The Company's ability to continue as a going concern is dependent upon the Company's ability to refinance the SASB Loan prior to the maturity date.

The event of default triggered cash management provisions under the loan agreement which have been in effect since November 2022. The action has restricted access to tenant receipts from the 39 properties in the loan and disrupted both the timing and amount of free cash flow on hand. Tenant receipts on these 39 properties are deposited into a cash management account controlled by the loan servicer. On the 9th day of each month, distributions from the cash management account are made in the following priority: (i) property tax escrow, (ii) scheduled debt service (iii) budgeted operating expenses for the month of the payment date occurs, (iv) capital expenditure reserve, and (v) tenant improvement and lease commission reserve. All remaining amounts are disbursed to an excess cash flow reserve account, also maintained by the loan servicer. As a result, our unrestricted cash and cash equivalents on hand is limited. The SASB cash management account held $3,021,000 and $3,817,000 as of March 31, 2023 and December 31, 2022, respectively. The excess cash flow reserve held $3,111,000 and $223,000 as of March 31, 2023 and December 31, 2022, respectively. The remaining four of our 43 income-producing properties are outside the SASB Loan and are not subject to the provisions above.

Our principal demands for funds are 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. Effective July 8, 2022, we have suspended the payment of distributions. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations; provided, that some or all of our distributions have been and may continue to be paid from sources other than cash from operations.

We have in the past and may in the future pay distributions 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 future 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, 2023, our outstanding secured debt is $259,000,000. 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 and only will apply once we have ceased raising capital in our public offering and invested substantially all of our capital. As a result, we expect to borrow more than 50% of the contract purchase price of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent.

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.

Cash Flows from Operating Activities

We have used $5,433,000 and $4,321,000 of cash from operating activities for the three months ended March 31, 2023 and 2022. The increase in cash used in operating activities is primarily due to the rise in interest costs of our variable rate debt.

Cash Flows from Investing Activities

For the three months ended March 31, 2023 and 2022, net cash provided by (used in) investing activities was $43,727,000 versus $(3,114,000), respectively. The increase in cash is mainly due proceeds from the to the sale of property of $44,827,000. On January 31, 2023, we sold the 17 acre development site located in Fort Worth, Texas to a third party. Net proceeds from the sale of the development site were approximately $4,317,000. On March 10, 2023, we sold the Mitchelldale property to a third party. Net proceeds from the sale were approximately $40,510,000.

Cash Flows from Financing Activities

We used $41,637,000 and $1,403,000 of cash from financing activities for the three months ended March 31, 2023 and 2022. The increase in cash used in financing activities is primarily due to repayments of term loans notes of $39,805,000 from property sales referenced above.

Contractual Commitments and Contingencies

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, 2023, our borrowings were not in excess of 300% of the value of our net assets.

As of March 31, 2023, we had notes payable totaling an aggregate principal amount of $274,336,000. For more information on our outstanding indebtedness, see Note 8 (Notes Payable) to the consolidated financial statements included in this report.

Off-Balance Sheet Arrangements

As of March 31, 2023 and December 31, 2022, 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 $24,165,000 and $24,276,000 as of March 31, 2023 and December 31, 2022, respectively. The Company is not deemed to be the primary beneficiary of the VIEs. See Note 11 (Related Party Transactions). Refer to Note 14 (Commitments and Contingencies) regarding borrowing joinder agreement between one of the Company's wholly owned subsidiaries and Hartman vREIT XXI, Inc.

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, 2022 filed with the SEC on May 26, 2023 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

Refer to Note 16 (Subsequent Events) to the consolidated financial statements included in this Quarterly Report for a discussion of subsequent events.

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 and interest rate cap 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, 2023, 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 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, 2023, have concluded because of material weaknesses in our internal control over financial reporting discussed below, our disclosure controls and procedures were not effective as of March 31, 2023 at the reasonable assurance level.

Material Weaknesses

Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of these inherent limitations, management does not expect that our internal control over financial reporting will prevent all error and all fraud. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, we identified material weaknesses related to (i) the insufficient design and operation of controls over the review, approval, and disclosure of related party transactions and (ii) the insufficient design of controls related to the timing for revenue recognition of estimated recoveries of operating expense items under leasing arrangements.

Remediation Plans

Management has begun implementing remediation plans to address the material weaknesses in our internal control over financial reporting discussed above. The remediation plan for the first material weakness includes enhancing our policies and procedures around identifying related party transactions, approval thresholds, disclosure requirements, and strengthening documentation standards to ensure transactions with related parties are appropriately evaluated, reviewed, approved, and disclosed.

The formation of the Executive Committee in October 2022, and the actions taken thereafter, including changes in senior management, has resulted in a strengthened review process over the form, substance, and evaluation of related party transactions. Further, effective in the second quarter of 2023, the Company no longer serves in an advisory or management capacity to Hartman vREIT XXI, Inc. and its affiliates. The termination of this relationship will eliminate future related party transactions which gave rise to the first material weakness referenced above.

The remediation plan for the second material weakness includes implementation of a fiscal year-end evaluation procedure to determine if recognition of an estimated recovery is warranted. We believe these actions will be sufficient to remediate the

identified material weaknesses and strengthen our internal control over financial reporting; however, some of these actions will take time to be fully integrated and confirmed to be effective and sustainable. We will continue to monitor the effectiveness of our internal control over financial reporting and will make any further changes management determines appropriate.

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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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 Company had recognized the share of the judgment amount applicable to wholly owned properties of the Company, approximately $6,731,000, within the Company's consolidated statements of operations for fiscal year 2021. The Company has also recognized $370,000 of pre-judgment interest and attorney fees in 2021 and $304,000 of post-judgment interest in 2022. Many of the Company’s leases contain provisions that require tenants to pay their allocable share of operating expenses, including utilities. The Company has completed its assessment of tenants' applicable share and has collected and recognized $1,530,000 of tenant's share to date, $866,000 was recognized in the first quarter of 2023.

Item 1A. Risk Factors

Except to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Refer to Note 8 (Notes Payable) or a description of an occurrence of an event of default related to the SASB Loan.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit						Description
3.1						First Articles of Amendment to Third Amended and Restated Articles of Incorporation of Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K filed on April 12, 2012)
3.2						Third Amended and Restated Articles of Incorporation of Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 1 to the Company’s registration statement on Form 8-A (SEC File No. 000-53912) filed on March 22, 2010)
3.3						Certificate of Correction - Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 3.3 to the Company's form 10-Q filed on May 11, 2018
3.4						Bylaws of Hartman Short Term Income Properties XX, Inc. (incorporated by reference to Exhibit 2 to the Company’s registration statement on Form 8-A (SEC File No. 000-53912) filed on March 22, 2010)
31.1*						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*						Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*						Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*						XBRL Instance Document
101.SCH*						XBRL Taxonomy Extension Schema Document
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

SIGNATURES

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

SILVER STAR PROPERTIES REIT, INC.

Date: June 7, 2023

By: /s/ David Wheeler

David Wheeler,

Interim President

(Principal Executive Officer)

Date: June 7, 2023

By: /s/ Louis T. Fox, III

Louis T. Fox, III,

Chief Financial Officer,

(Principal Financial and Principal Accounting Officer)