Presidio Property Trust, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. The company, formerly NetREIT, Inc., changed its name in October 2017. It operates as a REIT with office, industrial, retail, and residential model-home properties. At quarter-end it reported 22 commercial properties and 139 model homes; commercial properties are concentrated in Colorado, California, and North Dakota.
Financial performance and position
- Revenue: Q3 revenue was $8.0 million, up 1.3% year over year; nine-month revenue was $24.7 million, up 2.5%. The nine-month increase included a favorable insurance claim of approximately $525,000; management attributed the remaining increase primarily to higher rental rates.
- Profit and per-share results: Net loss attributable to common stockholders was $1.8 million in Q3 and $2.8 million for nine months, compared with $2.0 million and $4.0 million, respectively, in 2016. Loss per share was $0.10 for Q3 and $0.16 for nine months, versus $0.12 and $0.23.
- Operating performance: Rental operating costs were 35.0% of revenue in Q3 versus 32.9% a year earlier, and 32.8% for nine months versus 31.5%. Same-store occupancy was 89.1%, down from 91.2%. Same-store NOI fell 7.4% in Q3 but rose 0.5% for nine months.
- Cash flow: Nine-month operating cash flow was $4.3 million, compared with $2.5 million in 2016. Investing used $3.5 million and financing used $0.5 million. Cash and cash equivalents were $3.4 million at quarter-end, plus $3.9 million of restricted cash.
- Debt and liquidity: Mortgage principal was $164.7 million ($162.9 million net of unamortized loan costs), largely fixed-rate; the reported weighted-average mortgage rate was 4.7%. The company also carried $30.6 million of mandatorily redeemable Series B preferred stock as a liability, with a 14% preferred return. Total liabilities were $204.0 million and total equity was $52.5 million. Management reported compliance with mortgage covenants and no revolving credit line.
Material changes versus the prior comparable period
- Nine-month revenue increased, while rental operating costs and G&A also rose. Same-store rental revenues increased 4.6% for nine months, offset by a 13.6% increase in rental operating costs. Management cited higher Colorado property taxes, bad debt, utilities, and maintenance costs.
- Residential model-home activity expanded: the company acquired 45 homes for approximately $16.8 million, financed with about $5.7 million cash and $11.1 million of mortgage notes, and sold 14 homes. It also sold the Rangewood Medical Building, Regatta Square Retail Center, and Shoreline Medical Building.
- Net gains on real estate sales were $2.2 million for nine months. No impairment was recorded in 2017; the comparable 2016 period included a $700,000 impairment charge.
- Operating cash flow improved year over year. Financing cash flow shifted from $4.3 million provided in 2016 to $0.5 million used in 2017, in part because the prior period included property refinancing proceeds.
Outlook, commentary, and risks
- Dividends and proposed offering: The company filed a registration statement for a proposed IPO in September 2017 and suspended dividends corresponding to Q3. It paid approximately $3.6 million in cash dividends during the first nine months; management expected 2017 distributions to be treated as return of capital. Management said near-term cash flows should cover operating costs, capital expenditures, debt service, and cash distributions at the then-current rate, but stated it could borrow or reduce distributions if cash flow proves insufficient.
- Series B preferred stock: The company extended its redemption date from August 1, 2017 to August 1, 2019 and paid a $153,500 extension fee. Management planned to use part of proposed IPO proceeds to redeem the remaining shares.
- Debt maturities and capital needs: Scheduled mortgage principal payments total approximately $19.0 million in 2019 and $33.2 million in 2020. The company estimated up to $2.0 million of annual capital improvements, tenant improvements, and leasing costs, net of lender reserves. It said long-term growth depends on access to refinancing, secured borrowing, or public securities financing.
- Property and market risks: Management noted geographic concentration, tenant defaults or non-renewals, vacancy and rent pressures, operating-cost increases, interest-rate changes, and the possibility of difficulty raising capital or completing acquisitions. Q3 same-store NOI was pressured by higher Colorado real estate taxes; management remained cautiously optimistic about leasing trends but gave no quantified financial guidance.
- The filing reported no legal proceedings, no defaults on senior securities, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Progress and terms of the proposed IPO, including whether proceeds are sufficient to redeem Series B preferred stock and support liquidity needs.
- Effect of the Q3 dividend suspension on future distributions, and whether distributions remain supportable from operating cash flow.
- Refinancing plans and available liquidity for the 2019–2020 mortgage maturities, particularly the model-home debt due in 2019.
- Occupancy, tenant renewals, and whether rental growth can offset higher property taxes and other operating costs.
- How much of reported revenue and earnings improvement reflects recurring property operations versus the insurance claim and property-sale gains.