Presidio Property Trust, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Presidio is a self-managed, non-traded REIT focused on office/industrial properties and sale-leaseback model homes, while transitioning out of retail.
Business and portfolio
- At year-end, the company owned or held interests in 19 commercial properties—15 office/industrial and four retail—and 144 model homes. Commercial properties were primarily in Colorado, Southern California and North Dakota; model homes were in 10 states.
- Commercial properties had 83.4% occupancy, down from 87.2% in 2017. The average remaining commercial lease term was approximately 1.1 years. About 90% of model homes were in Texas, Florida and Pennsylvania, including approximately 61% in Texas.
- In 2018, Presidio acquired 45 model homes for $17.3 million and sold 33 model homes and three commercial properties. Commercial sales included the Port of San Diego Complex and Yucca Valley Retail Center, generating gains, and Pacific Oaks Plaza, sold at a loss.
Financial results and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $32.3 million | $33.4 million |
| Net income (loss), consolidated | $4.45 million | ($2.84 million) |
| Net income (loss) attributable to common stockholders | $3.38 million | ($3.48 million) |
| Basic and diluted EPS | $0.19 | ($0.20) |
| Net cash from operating activities | $0.43 million | $5.59 million |
| FFO | $1.89 million | $4.24 million |
| MFFO | $2.18 million | $5.14 million |
- Revenue declined 3.1%. Management attributed the decrease primarily to lower same-property revenue and occupancy, property sales, and a favorable $525,000 insurance claim in 2017; model-home acquisitions partly offset the decline.
- Same-property commercial NOI fell 6.2% to $14.5 million. Same-property rental revenue declined 3.2%, while same-property operating costs rose 1.4%. Overall rental operating costs were $10.9 million, or 33.7% of revenue, versus 32.1% in 2017.
- Common-stockholder earnings benefited from $12.2 million of net property-sale gains, compared with $2.6 million in 2017. The company also recorded a $533,000 impairment on Waterman Plaza and $1.51 million of deferred offering costs. Thus, the return to reported profitability did not correspond to stronger recurring operating cash flow.
- Mortgage interest expense was $8.27 million; Series B preferred-stock interest expense was $4.77 million. The weighted-average mortgage rate was approximately 4.6% at year-end.
- Cash, cash equivalents and restricted cash totaled $9.78 million, including approximately $2.3 million restricted for property costs. Management reported available liquidity of $5.8 million. Total assets were $233.1 million, total liabilities $176.9 million and total equity $56.1 million.
Material changes versus 2017
- Reported common-stockholder results shifted from a $3.48 million loss to $3.38 million of income, chiefly alongside the increase in property-sale gains. Revenue fell, and operating cash flow dropped by $5.15 million to $432,000.
- Same-property occupancy declined 3.8 percentage points, and same-property NOI decreased 6.2%. Retail remained a weak spot: World Plaza occupancy was 22.6% at year-end.
- Mortgage debt was $151.1 million at December 31, 2018, compared with $162.0 million at year-end 2017. The company redeemed $13.8 million of Series B preferred stock during 2018, leaving $16.9 million outstanding.
- Cash dividends paid during 2018 were zero. A fourth-quarter distribution of approximately $1.1 million, or $0.06 per share, was declared in December and paid January 18, 2019.
Liquidity, outlook and risks
- Near-term redemption obligation: The remaining $16.9 million of Series B preferred stock was mandatorily redeemable for cash on August 1, 2019. Management said year-end cash was insufficient and expected operating cash flow would not be enough to fund redemption. Its stated options were additional borrowing, property sales or reduced distributions. The auditor highlighted this uncertainty in an emphasis-of-matter paragraph; its audit opinion was not modified.
- Debt maturities: Approximately $13.4 million of mortgage principal was scheduled for 2019, including $9.9 million tied to model homes. Management planned to refinance a significant portion or sell homes to repay those loans. The company guaranteed the model-home mortgages; it reported $38.7 million of total debt as recourse to the company.
- Default and control risk: A default under the Series B financing could give the investor substantial rights, including the ability to replace a majority of the board and, after specified conditions and timing, sell company property. The investor also had consent rights over various material company actions.
- Management expected portfolio cash flow, model-home partnership distributions and 2019 property sales to fund near-term operating needs, capital spending and cash distributions. It gave no quantified earnings or distribution guidance and cautioned that future results could differ materially.
- Other risks include short lease duration and upcoming expirations, geographic concentration, vacancies and tenant defaults, refinancing and interest-rate risk, property-market competition, weather and uninsured losses, environmental and regulatory exposure, and dependence on access to external financing. The common stock had no public trading market.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2018. The auditor issued an unmodified opinion on the financial statements and did not audit internal-control effectiveness.
Important facts for investors to verify
- How Presidio funded the August 2019 $16.9 million Series B redemption and refinanced or repaid the $9.9 million of model-home mortgage maturities.
- Actual 2019 property-sale proceeds, debt repayments and unrestricted cash available after closing costs and lender restrictions.
- Whether occupancy and same-property NOI stabilized or improved, particularly at lower-occupancy properties and following lease expirations.
- How much earnings and cash generation came from recurring rents versus property-sale gains, and how FFO/MFFO reconcile to cash available for debt service and distributions.
- Whether distributions were sustained from operating cash flow and whether the company maintained REIT qualification while meeting its liquidity needs.