Presidio Property Trust, Inc. quarterly report, Q2 FY2017

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Business context and reporting period

NetREIT, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The filing describes a self-managed REIT with office, industrial, retail, mixed-use and model-home properties. The filing registrant is NetREIT, Inc.; the request metadata names Presidio Property Trust, Inc., so the entity/name should be verified.

Financial performance and position

  • Revenue: Second-quarter revenue was $8.52 million, up 9.0% year over year; six-month revenue was $16.76 million, up 3.2%. The filing attributes about $525,000 of the increase to an insurance claim exceeding roof-repair costs.
  • Profit: Second-quarter consolidated net income was $164,625, versus a loss of $828,386 a year earlier; income attributable to common stockholders was $19,312, or $0.00 per share. For six months, consolidated net loss was $779,559 and the loss attributable to common stockholders was $994,387, or $0.06 per share.
  • Cash flow: Six-month operating cash flow was $2.03 million, compared with $716,000 in 2016. Investing activities provided $3.42 million, primarily reflecting property-sale proceeds; financing used $2.72 million. Cash rose to $5.85 million from $3.12 million at year-end; restricted cash was a separate $3.05 million.
  • Operating measures: Same-store commercial-property NOI rose 2.9% in Q2 but fell 4.3% for the first half. Same-store occupancy was 90.0%, versus 88.7% in 2016. Rental operating costs were 30.5% of total revenue in Q2 and 31.4% for the first half.
  • Debt and liquidity: Mortgage principal was $161.78 million ($159.95 million net of loan costs); weighted-average mortgage interest was 4.7%. The filing reports $134.41 million of mortgages on 21 commercial properties and $27.37 million on model homes. The $30.46 million Series B preferred balance is classified as a liability and carries a 14% preferred return. Total equity was $53.52 million.

Material changes versus prior periods

  • Q2 revenue benefited from the insurance claim and higher rental rates; same-store occupancy improved modestly. The six-month same-store NOI decline reflected higher operating costs, including property taxes, utilities, maintenance and bad debt.
  • G&A increased 16.7% in Q2 and 4.0% for the first half, which management attributed to salary increases and higher group-insurance rates. Mortgage interest expense was broadly stable; Series B preferred interest expense declined as shares were redeemed.
  • The company acquired 30 model homes and sold commercial properties and nine model homes during the first half. It reported $2.03 million of net gains on real-estate sales for the period.
  • During the first half, the company redeemed $2.0 million of Series B preferred stock. On June 30, it extended the remaining preferred-stock redemption date from August 2017 to August 1, 2019, paying a $153,500 extension fee.

Outlook, risks and notable items

  • Management said current portfolio cash flows and model-home partnership distributions were expected to cover near-term operating costs, capital expenditures, debt service and cash distributions at the then-current rate. If cash flow is insufficient, it may borrow or reduce distributions. The filing gives no formal earnings or revenue guidance.
  • Management estimated up to $2.0 million annually for capital improvements, tenant improvements and leasing costs, net of lender-held reserves. It also said it had no revolving credit line and was exploring obtaining one; long-term growth depends on financing, property sales and access to capital.
  • Risks include tenant payment and re-leasing challenges, lease downtime and rent roll-downs, concentration in Southern California and Colorado, economic and interest-rate changes, and construction-cost pressures. Management cautioned that forward-looking expectations may not be realized.
  • The company reported no impairment reserve for the first half, no off-balance-sheet arrangements, no legal proceedings and compliance with mortgage covenants. It expected 2017 distributions to be return of capital because of taxable losses. The filing states disclosure controls were effective.

Important facts for investors to verify

  1. Confirm the relationship between the filing registrant, NetREIT, Inc., and the metadata company name, Presidio Property Trust, Inc.
  2. Reconcile model-home acquisition funding disclosures: the MD&A describes the 30-home purchase as $9.7 million funded with $2.9 million cash and $6.8 million of mortgage notes, while another passage gives $7.5 million cash and $16.2 million of mortgage notes.
  3. Review the timing and refinancing risk of scheduled mortgage principal payments, particularly the $18.78 million scheduled for 2019 and $29.36 million for 2020, and the preferred-stock redemption obligation in 2019.
  4. Assess recurring cash generation separately from the insurance claim, property-sale gains and non-GAAP FFO/MFFO adjustments; verify the sustainability of distributions against cash flow and capital needs.
  5. Review same-store expense trends, property occupancy and lease expirations, and the company’s exposure to its concentrated commercial-property markets.