Business context and reporting period
This is NetREIT, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014—not a filing identified in its text as Presidio Property Trust, Inc. NetREIT operated as a self-administered REIT, investing in office, industrial, retail, self-storage and residential model-home properties. Its portfolio included 55 model homes and commercial properties primarily in California and Colorado, with office properties also in North Dakota.
Financial highlights
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $5.09 million | $4.79 million | $14.56 million | $14.82 million |
| Income from operations | $0.29 million | $0.58 million | $0.89 million | $2.37 million |
| Net loss | $1.85 million | $2.31 million | $3.31 million | $2.67 million |
| Loss per common share | $0.11 | $0.14 | $0.20 | $0.16 |
| Net cash from operating activities | Not separately provided for the quarter | $4.01 million | $3.14 million |
At September 30, 2014, total assets were $198.3 million, cash and cash equivalents $11.9 million, restricted cash $10.1 million, mortgage notes payable $99.4 million, and equity $76.2 million. The company also had $15.0 million of Series B preferred stock classified as long-term debt because it must be redeemed. Reported mortgage debt carried a weighted-average interest rate of about 5.1%; management cited approximately $8.0 million of additional mortgage debt secured by model homes.
For the nine months, investing activities used $15.5 million and financing activities provided $13.2 million. Management-defined segment net operating income was $9.16 million, down from $9.97 million. Nine-month FFO was $1.60 million versus $2.81 million, and MFFO was $1.56 million versus $2.85 million; these are non-GAAP measures, not substitutes for cash flow or net income.
Material changes versus prior periods
- Q3 revenue rose 6.2%, primarily from the Bismarck and Union Terrace office acquisitions, while nine-month revenue declined 1.7%, reflecting lower model-home rent and the absence of a prior-year lease-termination charge.
- Nine-month rental operating expenses increased 11.4%; operating costs were 37.1% of rental and fee income versus 32.7% a year earlier. Interest expense also increased, to $3.99 million from $3.80 million.
- Nine-month net loss increased by about $0.64 million despite higher gains on property sales and lower impairment charges. The company sold 34 model homes for net proceeds of about $13.5 million, recognized a $2.43 million gain and acquired two office buildings plus nine model homes.
- In August, NetREIT issued $15 million of Series B preferred stock under a placement for up to $40 million. The preferred return is 14%: 10% paid monthly and 4% accruing and compounding monthly. Redemption is due within three years, with an extension option of up to two years. About $2.7 million of issuance costs were incurred.
Outlook, risks and unusual items
- Management expected to close two Colorado Springs acquisitions before year-end 2014, at stated purchase prices of $11.3 million and $15.5 million, and anticipated substantially increasing the portfolio in 2015. It also expected remaining Series B proceeds and potential borrowing capacity to support acquisitions; the borrowing estimate was not a committed facility.
- Management estimated approximately $47 million of available liquidity, including cash, the remaining $25 million preferred-stock investment and estimated borrowing capacity. It said current portfolio cash flow was expected to support near-term operating needs and distributions, but cautioned that it might need additional borrowing or reduce distributions if cash flow proved insufficient.
- Havana/Parker was impaired by $950,000 in Q3, following a $1.5 million impairment in 2013. The property’s $3.1 million non-recourse loan exceeded its $2.3 million carrying value. Net property cash flow was substantially below scheduled payments; the company reported reduced payments for 11 months, a foreclosure notice, and ongoing loan-modification negotiations. Management said foreclosure remained possible if negotiations failed.
- Common dividends were described as a return of capital for the periods reported, when the company had net losses. Management noted risks from tenant renewals and rental rates, local-market competition, interest-rate changes, and access to financing. It also stated disclosure controls were effective and reported no legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer and filing match the intended company: this filing names NetREIT, Inc., not Presidio Property Trust, Inc.
- Check the status and terms of the Havana/Parker loan modification, foreclosure process, accrued interest and any potential additional impairment.
- Verify whether the remaining $25 million Series B investment was funded, its restrictions and approval rights, redemption obligations, and the actual cost of capital.
- Review debt maturities and refinancing progress, particularly near-term maturities, and distinguish committed liquidity from management’s estimated borrowing capacity.
- Assess whether operating cash flow can support distributions and capital needs; compare cash distributions with earnings, FFO/MFFO and property-level performance.
- Confirm the closing and financing of the two announced acquisitions and their occupancy, costs and expected contribution to cash flow.