Business context and reporting period
This is NetREIT, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2014, filed May 15, 2014. NetREIT operated as a self-administered REIT, investing in office, industrial, retail, self-storage and residential model-home properties. The filing identifies the registrant as NetREIT, Inc.; this differs from the requested company name, Presidio Property Trust, Inc., and should be verified.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $4.78 million | $5.17 million; down 7.5% |
| Operating income | $642,000 | $1.12 million |
| Net income, consolidated | $118,000 | $258,000 |
| Net income (loss) attributable to common stockholders | $(360,000), or $(0.02) per share | $(53,000), or approximately $0.00 per share |
| Operating cash flow | $(168,000) | $787,000 |
| Cash and cash equivalents at period end | $7.23 million | $9.85 million at March 31, 2013 |
| Mortgage notes payable | $88.91 million | $89.55 million at December 31, 2013 |
| Total assets / total equity | $177.69 million / $83.82 million | $181.25 million / $85.87 million at December 31, 2013 |
Rental operating costs rose 6.7% to $1.67 million; general and administrative expense declined to $1.12 million. Interest expense was $1.27 million, down 4.8%, and the reported weighted-average interest rate was 5.20%. Segment net operating income was $3.11 million, down from $3.61 million. Management reported FFO of $104,000 versus $1.20 million and modified FFO of $238,000 versus $1.36 million; both are non-GAAP measures and are not cash available for distributions.
Cash dividends paid, net of reinvestment, were approximately $1.25 million, at an annualized rate of $0.543 per share. The company said distributions in both comparison periods were returns of capital because of net losses. Available liquidity was estimated at $14.7 million, comprising $7.2 million cash and approximately $7.5 million of potential borrowing capacity; the borrowing capacity was not committed.
Material changes versus the prior period
- Revenue fell 7.5%, primarily because Q1 2013 included a $345,000 lease-cancellation fee.
- Common-stockholder loss widened to $360,000, primarily reflecting the prior-year lease-cancellation income and a larger allocation of income to noncontrolling interests in Q1 2014.
- Operating cash flow turned negative, which management attributed mainly to approximately $800,000 of prior-year-end liabilities paid during Q1 2014.
- Six model homes were acquired for approximately $1.8 million, partly financed with a $1.1 million promissory note; six model homes were sold for approximately $2.4 million net of selling costs, generating a $425,000 gain.
- Cash declined from $10.21 million at December 31, 2013, while total mortgage debt declined modestly from $89.55 million.
Outlook, risks and unusual items
- In April 2014, the company acquired a Bismarck, North Dakota office building for approximately $5.4 million plus closing costs. The filing describes approximately $3.9 million cash and a $2.5 million mortgage, amounts that together exceed the stated purchase price; verify the transaction details.
- Management expected a refinancing of a property loan to close in the following quarter, but stated that no financing was assured. It was also negotiating with financial institutions regarding a proposed $40 million equity investment and exploring a credit line; neither was committed.
- The Havana/Parker property faced a foreclosure notice received March 4, 2014, with a sale scheduled for June 25, 2014, after reduced mortgage payments. Negotiations with the lender were ongoing. Management expected a modification, extension or discounted payoff and said further losses were not considered likely, but acknowledged foreclosure remained possible. The loan was non-recourse.
- Management cited potential rent pressure as expiring office leases reset to market, competition and vacancy risks in self-storage, dependence on external financing, and possible increases in interest rates. It expected $500,000–$1 million of remaining-2014 capital, tenant-improvement and leasing expenditures in one discussion; another section gives $200,000–$800,000, so the estimate is inconsistent in the filing.
- Management anticipated increased model-home acquisitions and improving FFO as acquisitions contributed rental income. These statements are forward-looking and depend on financing, market conditions and transaction execution.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no legal proceedings.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for NetREIT, Inc., not Presidio Property Trust, Inc.
- Check the outcome of the Havana/Parker foreclosure notice and loan-modification negotiations, including the scheduled June 25, 2014 sale.
- Verify whether the proposed refinancing, $40 million equity investment, borrowing capacity and credit-line discussions were completed; none was assured in this filing.
- Reconcile the Bismarck acquisition’s stated purchase price and sources of financing, and the two differing capital-expenditure estimates.
- Assess dividend coverage against negative Q1 operating cash flow and the company’s statement that distributions represented return of capital.
- Review model-home debt guarantees, upcoming maturities and refinancing needs, as well as the effect of noncontrolling interests on results attributable to common stockholders.