Presidio Property Trust, Inc. annual report, FY2016

Business context and reporting period

This is NetREIT, Inc.’s Form 10-K for the fiscal year ended December 31, 2016—not a standalone fourth-quarter report. The filing describes a self-managed REIT owning office, industrial, medical and retail properties, plus model homes leased back to homebuilders. At year-end, it reported interests in 25 commercial properties and 108 model homes. The filing names the issuer as NetREIT, Inc.; the supplied company metadata says Presidio Property Trust, Inc., so the issuer identity should be verified.

Financial and operating results

• Revenue increased 35.4%, reflecting 2015 commercial-property acquisitions, model-home growth, same-property rent and occupancy gains, and about $450,000 in early lease-termination fees.
• Rental operating costs were $10.14 million, or 31.2% of revenue, versus $8.52 million, or 35.5%, in 2015. General and administrative expense rose 8.5% to $5.07 million, but fell to 15.6% of revenue from 19.5%.
• Depreciation and amortization increased 32.1% to $10.26 million. The company recorded $948,000 in real-estate impairment charges on World Plaza and Rangewood Medical; no impairment was recorded in 2015.
• Mortgage interest expense was $7.56 million; Series B preferred-stock expense was $5.97 million. The reported weighted-average mortgage rate was 4.7%, and the mortgage debt was fixed-rate at year-end.
• Non-GAAP FFO was $3.45 million, compared with negative $321,000 in 2015; MFFO was $4.31 million versus $1.62 million. These measures are not substitutes for GAAP earnings or cash flow.
• Year-end total assets were $258.0 million, total liabilities $202.2 million, and total equity $55.7 million. Cash and cash equivalents were $3.12 million, with another $4.27 million restricted. Net mortgage notes payable were $158.9 million; gross mortgage principal was $160.8 million.
• Commercial-property occupancy was 90.7% for office/industrial/medical and 91.8% for retail. Same-property occupancy was 90.9%, up from 87.1% in 2015; same-property NOI rose 14.5% to $13.54 million, including nonrecurring items.

Material changes versus the prior comparable period

• 2016 revenue growth followed six commercial acquisitions in the latter half of 2015 and improved same-property performance; acquisitions accounted for much of the year-over-year increase.
• The company acquired 65 model homes for $23.7 million, funded with $7.5 million cash and $16.2 million in mortgage notes, and sold 21 model homes for $6.4 million.
• It sold the Havana Parker Complex for $3.3 million and a parcel and building at Yucca Valley for $1.3 million. Reported gains were approximately $668,000 and $831,000, respectively, in addition to $687,000 of model-home sale gains.
• Cash declined from $6.63 million to $3.12 million. Gross mortgage principal increased from $144.7 million to $160.8 million, while total equity declined from $65.2 million to $55.7 million.
• 2015 results included $4.73 million of gain from the sale of the self-storage portfolio, reported in discontinued operations; the portfolio was no longer part of 2016 operations.

Liquidity, outlook, risks and unusual items

• The company said existing portfolio cash flow and anticipated property sales were expected to cover near-term costs, debt service, capital expenditures and current-rate common distributions. It warned that insufficient operating cash could require additional borrowing or reduced distributions. No quantified earnings or distribution guidance was provided.
• Operating cash flow of $3.72 million was below the approximately $4.52 million cash paid to common stockholders in 2016. The company declared $7.0 million of distributions; approximately $2.4 million was reinvested. The stated annual common distribution was $0.40 per share, unchanged from 2015.
• The most immediate financing risk is $32.7 million of mandatorily redeemable Series B preferred stock scheduled for redemption August 1, 2017, with two possible one-year extensions. It carries a 14% preferred return, including an accruing component. An event of default could give the investor significant consent and governance rights, including the right to elect a board majority.
• Management cited dependence on external capital, property-market and financing conditions, refinancing and balloon-payment risk, geographic concentration, tenant vacancies or defaults, and the illiquidity of the non-traded common stock. The company had no revolving credit facility and was exploring one.
• The filing reports ordinary-course legal matters that management did not expect to materially affect financial position, results or liquidity, and no known material environmental claim. Management stated that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
• The financial statements received an unqualified audit opinion. The filing’s cover appears to mark “No” for having filed all required reports during the preceding 12 months; verify this apparent reporting-status item against the original filing.

Important facts for investors to verify

1. Confirm that this NetREIT, Inc. 2016 filing corresponds to the Presidio Property Trust, Inc. issuer specified in the request.
2. Confirm the Series B redemption date, extension rights, accrued return, covenant compliance and available refinancing or repayment sources.
3. Reconcile distributions with operating cash generation, including the portion reinvested and the characterization of 2016 distributions as return of capital for tax purposes.
4. Review the original filing for the cover-page reporting-status checkbox and clarify any apparent “No” response.
5. Assess lease expirations, occupancy trends, property-sale proceeds and the sustainability of same-property gains, particularly given model-home lease expirations and concentrated regional exposure.