Business context and reporting period
NetREIT, Inc. (the registrant named in this 10-Q; the request metadata names Presidio Property Trust, Inc.) reported for the quarter ended March 31, 2015. The company was a self-administered REIT with office, industrial, retail, model-home and self-storage investments, primarily in the western United States. Seven self-storage properties were sold after quarter-end.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $5.38 million | $3.92 million; up 38.5% |
| Net loss attributable to common stockholders | $1.96 million; $0.12 per share | $360,000; $0.02 per share |
| Net operating income (segment measure) | $3.47 million | $2.72 million |
| Net cash from operating activities | $413,000 | Cash used of $168,000 |
| Cash used in investing activities | $5.47 million | $314,000 |
| Cash from (used in) financing activities | $3.90 million | Cash used of $2.49 million |
| Cash and cash equivalents, March 31 | $4.48 million | $7.23 million at March 31, 2014 |
Rental operating costs were 36.0% of rental and fee income, compared with 32.2% a year earlier. The filing attributes the higher cost ratio primarily to lower model-home rental revenue. Same-property NOI for the specified commercial properties increased 0.7% to $1.04 million.
Total assets were $223.1 million and total equity $69.3 million at March 31, 2015. The balance sheet reported mortgage notes payable of $111.3 million, plus $17.1 million of liabilities related to assets held for sale. The debt note lists total mortgage principal of $128.4 million, including model-home debt. Management reported a 4.9% weighted-average mortgage rate and said the company was current on mortgage covenants. Series B mandatorily redeemable preferred stock of $16.6 million was classified as a liability and carried a 14% return (10% paid monthly, 4% accruing and compounding).
Material changes versus the prior comparable period
- Revenue growth mainly reflected five office-property acquisitions in 2014; rental income from model homes declined as the portfolio shrank year over year.
- Operating costs, depreciation and amortization, and mortgage interest increased, reflecting the expanded property portfolio. Series B preferred-stock costs also contributed materially to the increase in interest expense.
- Net loss attributable to common stockholders widened from $360,000 to $1.96 million. Gain on sales was $78,000, versus $728,000 in the prior-year quarter.
- FFO declined to $119,000 from $736,000; MFFO declined to $307,000 from $814,000. Both are non-GAAP measures and are not substitutes for operating cash flow.
- Cash dividends paid were approximately $997,000, versus $1.28 million; the filing says distributions in both periods represented return of capital for tax purposes.
Outlook, risks and unusual items
- On April 10, 2015, the company completed the sale of all seven self-storage facilities for a net sales price of approximately $34 million. It reported approximately $17 million of net cash proceeds after debt repayment and an expected/estimated gain of approximately $4.9 million. The properties were classified as held for sale and discontinued operations at quarter-end.
- The company acquired 12 model homes for approximately $3.8 million during the quarter, funded partly with promissory notes. It also refinanced approximately $3.0 million of debt with a $6.0 million mortgage, at a lower stated rate and with an interest-only period.
- Management expected to receive a further $23.4 million under the Series B financing, subject to its terms, and discussed potential acquisitions, refinancing, borrowing against unencumbered assets, and a possible credit line. It had no revolving credit line or committed financing arrangement at quarter-end.
- Management said operating cash flow was below debt service and the cash portion of distributions in the quarter; it stated distributions could be funded with borrowing or reduced if operating cash flow proved insufficient. It projected up to $2.0 million for remaining-2015 capital improvements, tenant improvements and leasing costs.
- Risks discussed include slower or uneven economic recovery, geographic and tenant concentration, lease renewal and occupancy risk, competition, rising interest rates and borrowing costs, and reliance on external financing for acquisitions. Management gave no specific earnings or revenue guidance.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No legal proceedings or defaults were reported.
Important facts for investors to verify
- Confirm the issuer identity: this source filing is for NetREIT, Inc., not a registrant named Presidio Property Trust, Inc.
- Reconcile mortgage-debt presentation across the balance sheet, held-for-sale liabilities, debt note and MD&A, including which balances were repaid in the post-quarter self-storage sale.
- Review the final self-storage sale proceeds, gain, use of proceeds and any reinvestment, as these are post-quarter events.
- Verify the remaining Series B funding availability, investor approval rights, 14% return, redemption timing and the company’s ability to service or redeem this liability.
- Assess the sustainability of distributions against operating cash flow, upcoming principal maturities and the company’s uncommitted financing plans.
- Interpret reported FFO, MFFO and NOI alongside GAAP results and cash flows; these supplemental measures have limitations and may not be comparable across REITs.