Presidio Property Trust, Inc. (identified in the filing as NetREIT, Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is for NetREIT, Inc.; the supplied text does not explain the difference from the company name in the request metadata.
Business context
NetREIT operated as a self-administered REIT with office, industrial, retail, and model-home properties. In April 2015, it sold its seven-property self-storage portfolio and reported the results as discontinued operations. At quarter-end it reported 14 office buildings and one industrial building, five retail centers, and 67 model homes.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $5.592 million | $3.843 million | $10.964 million | $7.762 million |
| Net income (loss) attributable to common stockholders | $2.971 million | $(1.096) million | $1.009 million | $(1.456) million |
| Basic and diluted earnings (loss) per share | $0.18 | $(0.07) | $0.06 | $(0.09) |
| Net cash used in operating activities | Not separately provided for the quarter | $(1.346) million | $(0.337) million |
Q2 included a $4.730 million gain on the self-storage sale in discontinued operations. Excluding discontinued operations, the company recorded a $0.412 million loss from continuing operations in Q2 and a $2.271 million loss for the first six months. Six-month FFO was $0.244 million and MFFO was $1.407 million; both are non-GAAP measures.
- Margins and property operations: Six-month same-property NOI rose 12.5% to $4.101 million, on 7.1% higher same-property rental revenue. Same-property occupancy at June 30 was 79.9%, versus 76.9% a year earlier. Company-wide Q2 occupancy was also reported as 79.9%, versus 72.1% a year earlier.
- Assets and liquidity: Total assets were $205.165 million at June 30, down from $220.625 million at year-end 2014. Cash and cash equivalents were $11.472 million; restricted cash was $8.956 million. Total equity was $72.069 million.
- Debt: Mortgage notes payable were $108.616 million, compared with $123.899 million at year-end, reflecting sale-related debt repayment. The company also carried $16.6 million of mandatorily redeemable Series B preferred stock as a liability. Management reported compliance with mortgage covenants. Scheduled principal payments were $5.417 million for the remainder of 2015 and $7.585 million in 2016.
- Cash flows and distributions: Six-month investing cash flow was positive $24.258 million, chiefly reflecting sale proceeds; financing cash flow was negative $17.077 million. Cash dividends paid to common stockholders were $2.011 million in the first half. Management said distributions were return of capital for tax purposes during the period.
Material changes versus the prior comparable period
- Revenue increased year over year, principally from office and industrial property acquisitions made in 2014. Management also attributed growth to improved occupancy and rental rates at same-store properties. Model-home revenue declined as the number of homes owned and transaction fees fell.
- The self-storage portfolio sale generated approximately $34 million in net sale proceeds, repaid approximately $16.9 million of related mortgages, and produced a $4.730 million gain. Management said approximately $18 million remained after selling costs and debt repayment; some proceeds were held in restricted 1031-exchange accounts.
- Mortgage interest expense and Series B preferred-stock interest expense increased. The Series B stock carries a 14% return: 10% payable monthly and 4% accruing and compounding until redemption.
- Management refinanced approximately $3 million of debt with a $6 million mortgage at approximately 4.31%, compared with 5.6% on the prior debt. It reported a 4.74% weighted-average rate on non-model-home property mortgages at June 30.
Outlook, risks, and other notable items
- Management reported $36.8 million of property acquisitions in escrow, expected to close in Q3 2015. Subsequent to quarter-end, the company acquired two Fargo-area properties for approximately $7.9 million and $3.9 million, respectively, and had three Colorado purchase contracts totaling approximately $22 million.
- The company received $13.4 million net of offering costs from an additional Series B issuance in August 2015; a further $10 million was expected to remain available through November 2015. The preferred financing is intended for investor-approved acquisitions and entails a high-cost, redeemable liability.
- Management expected near-term needs to be funded by cash, operating cash flow, and financing, but reported no revolving credit line and no committed arrangements for future mortgages or refinancing. It stated that distributions could be reduced if cash flow and borrowing were insufficient.
- Key risks include leasing downtime and expirations, occupancy and rent changes, geographic concentration, rising construction and financing costs, access to capital, and uncertain economic and interest-rate conditions. Management cautioned that interim results are not necessarily indicative of full-year results. It reported no impairment reserve for the first half and no off-balance-sheet arrangements.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported. The filing reported no legal proceedings.
Important facts for investors to verify
- Reconcile the filing’s reported revenue growth percentages in MD&A with the financial-statement totals, which imply different year-over-year growth rates.
- Review the self-storage sale accounting, allocation of gains to noncontrolling interests, and the amount and use of restricted 1031-exchange proceeds.
- Confirm the status, financing, closing dates, and expected returns of the $36.8 million escrow pipeline and subsequent acquisitions.
- Assess the terms, remaining availability, redemption timing, and 14% cost of the Series B preferred financing, including the August 2015 issuance.
- Evaluate operating cash generation against distributions, scheduled debt maturities, leasing requirements, and the company’s dependence on uncommitted borrowing sources.