Presidio Property Trust, Inc. / NetREIT, Inc. — 10-Q Summary
Period clarification: The supplied filing is for NetREIT, Inc. and covers the unaudited quarter and nine months ended September 30, 2012—not 2012 Q4. The filing does not identify the registrant as Presidio Property Trust, Inc.
Business context and reporting period
NetREIT operated as a self-administered REIT with office, industrial, retail, self-storage, residential and mortgage investments, primarily in the western United States. At September 30, 2012, its portfolio included commercial properties and model-home investments held through partnerships. The company reported under GAAP; interim results are not necessarily indicative of full-year results.
Financial performance and position
- Revenue: Third-quarter revenue was $4.34 million, up 29.9% year over year. Nine-month revenue was $12.19 million, up 28.4%.
- Profit: Third-quarter net loss attributable to common stockholders was $376,418 ($0.02 per share), versus a $417,597 loss ($0.03 per share) a year earlier. Nine-month net loss was $1.38 million ($0.09 per share), versus $1.69 million ($0.12 per share).
- Operating metrics: Nine-month rental operating costs were 32.4% of rental and fee income, compared with 36.3% in 2011; management attributed the improvement partly to property-tax assessment appeals. Nine-month general and administrative expense was 26.1% of rental and fee income, down from 28.0%.
- Cash flow: Nine-month cash from operations was $3.42 million, versus $1.02 million in 2011. Investing used $15.18 million and financing provided $10.83 million. Cash and cash equivalents ended the period at $3.86 million, down from $4.75 million at year-end 2011. Cash dividends paid were approximately $3.17 million.
- Debt and liquidity: Mortgage notes payable were $72.75 million, up from $59.66 million at December 31, 2011; liabilities associated with assets held for sale included another $5.23 million of mortgage debt. The weighted-average mortgage rate was 5.59%. Management estimated available liquidity of about $19.3 million, including $3.8 million cash and approximately $15.8 million of potential borrowing against unencumbered properties; that borrowing capacity was not committed. Total assets were $172.17 million and total liabilities were $83.84 million.
- Equity and distributions: Total shareholders’ equity was $88.34 million, down from $90.71 million at year-end. Management said distributions in the reported periods were treated as return of capital for tax purposes.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions and higher rental income, including properties acquired in 2011 and 2012. Nine-month rental income rose to $11.76 million from $9.02 million.
- Interest expense increased 43.2% for the nine months, to $3.04 million, mainly due to debt associated with acquired properties and refinancings. The reported weighted-average rate was slightly lower than the prior-year comparison.
- Operating cash flow improved by about $2.40 million, which management attributed to higher property operating income and less cash used for working capital.
- Portfolio growth included the Shoreline Medical Building, the former Rite Aid building, and model-home acquisitions. The company also sold 25 model homes, generating approximately $6.5 million net of selling costs and a $180,770 gain.
- Same-store occupancy improved year over year: office 84.1% versus 82.5%, retail 91.7% versus 90.6%, and self-storage 64.3% versus 63.7%.
Outlook, risks, contingencies and unusual items
- Management expected rental revenue and funds from operations to benefit from acquired properties and further acquisitions, while anticipating higher property operating costs as acquisitions contribute for full periods. No formal earnings guidance was provided.
- Management said the current portfolio’s operating cash flow and potential financing were expected to support near-term obligations and distributions, but cautioned that distributions could be reduced or funded with borrowing if cash generation proved insufficient. The company had no revolving credit facility.
- Management cited slow and uneven economic recovery, tenant credit and leasing risks, regional concentration, competition, refinancing availability, and the possibility of higher interest rates. It also warned that weaker capital markets could constrain acquisitions and financing.
- In the third quarter, the company classified Waterman Plaza, the 7-Eleven property, Casa Grande Apartments and certain model homes as held for sale. It recorded a $358,000 impairment on held-for-sale assets. In October 2012, it sold the 7-Eleven property for approximately $1.9 million, reporting a gain of about $0.5 million.
- DAP III sold its final model home and began liquidation; NetREIT recognized a $285,247 gain on dissolution of partnership interests. The filing also says the company was working with lenders to extend certain model-home loan maturities.
- Management reported compliance with mortgage covenants and effective disclosure controls. The filing reported no legal proceedings, defaults upon senior securities, or off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is NetREIT’s quarter ended September 30, 2012, notwithstanding the request’s company and “2012 Q4” labels.
- Review debt maturities and refinancing exposure, including the Port of San Diego loan due in 2013, the stated efforts to extend certain model-home loans, and the distinction between mortgage notes payable and held-for-sale debt.
- Assess whether distributions are supported by recurring cash generation: the company paid about $3.17 million in cash dividends against $3.42 million of operating cash flow, and management noted distributions could be reduced or borrowed for.
- Evaluate the assumptions and sale prospects behind held-for-sale classifications and the $358,000 impairment, as well as the October 2012 7-Eleven sale and intended reinvestment.
- Reconcile the filing’s FFO figures: the nine-month FFO table reports $1,664,621, while the MFFO table lists nine-month FFO as $1,692,621 before adjustments. The filing text does not provide a clear reconciliation of this discrepancy.