Presidio Property Trust, Inc. — 2014 Q2 Form 10-Q Summary
Registrant identification: The supplied filing is for NetREIT, Inc., not Presidio Property Trust, Inc. The summary below reflects the filing text provided and should not be attributed to Presidio without verification.
Business context and reporting period
The unaudited report covers the quarter and six months ended June 30, 2014, with comparisons to the same 2013 periods. NetREIT operated a diversified real estate portfolio spanning office and industrial, retail, self-storage, and residential model-home properties. At quarter-end it reported 11 office buildings and one industrial building, four retail centers, seven self-storage facilities, and 67 model homes, including properties held for sale.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $4.69 million | $4.86 million | $9.47 million | $10.03 million |
| Net loss attributable to common stockholders | $1.10 million | $396,202 | $1.46 million | $449,351 |
| Loss per common share, basic and diluted | $0.07 | $0.02 | $0.09 | $0.07 |
| Net cash from (used in) operating activities, per cash flow statement | — | $(336,668) | $1.85 million |
- For the six months, reported FFO was $896,023 versus $1.20 million; MFFO was $1.14 million versus $1.48 million. These are non-GAAP measures and should not be treated as cash available for distributions.
- At June 30, assets were $182.0 million, mortgage debt was $95.4 million, total liabilities were $100.4 million, and equity was $81.7 million. Cash and cash equivalents were $10.0 million, with a further $1.7 million of restricted cash.
- Mortgage debt increased from $89.6 million at December 31, 2013. The company reported a 5.19% weighted-average interest rate for its total mortgage notes; MD&A separately reported 5.14% for non-model-home property debt and 5.6% for model-home debt.
- Six-month cash flows included $1.83 million used in investing activities and $1.94 million provided by financing activities. The company paid approximately $2.5 million of cash dividends, net of reinvestments, during the period.
Material changes versus prior periods
- Revenue declined 3.4% for Q2 and 5.5% for the six-month period. Management attributed the six-month decline mainly to a $345,000 lease-cancellation fee received in 2013 and lower model-home rental revenue; increased self-storage revenue partly offset the decline.
- Six-month rental operating costs rose 7.0% to $3.41 million. Management cited higher property taxes, maintenance, bad debts and collection-related legal costs, as well as the Bismarck acquisition.
- Six-month interest expense increased 3.4% to $2.64 million, reflecting additional property financing and higher amortization of financing costs, partly offset by lower model-home debt as homes were sold.
- The company acquired a Bismarck, North Dakota office building for approximately $5.4 million and six model homes for approximately $1.8 million. It sold 18 model homes during the six months, reporting a $1.20 million gain on real estate sales.
- Q2 net loss worsened partly because 2013 included a one-time $345,000 lease-cancellation fee. For the six-month comparison, the filing also identifies lower revenue, higher expenses, and increased income allocated to noncontrolling interests.
Outlook, risks and unusual items
- Management expected acquisitions to increase and anticipated FFO improvement as recently acquired properties contributed for full periods. It projected $500,000–$750,000 of capital improvements, tenant improvements, and leasing costs for the remainder of 2014. These are expectations, not guarantees.
- Management estimated approximately $23 million of available liquidity, including $10 million of cash and an estimated $13 million of potential borrowing capacity. The potential borrowing was not committed; the company said it had no arrangement with a financial institution for that amount.
- The company stated that current portfolio cash flow and anticipated acquisitions should support near-term debt service, operating costs, and distributions, but warned it could borrow or reduce distributions if cash flow proved insufficient. It also noted that model-home distributions and property-sale proceeds contribute to liquidity.
- A material property-level contingency concerns the Havana/Parker property: the company had made reduced payments on a non-recourse mortgage, received a foreclosure notice, and faced a scheduled sale date of September 3, 2014. Loan-modification negotiations were ongoing. Management did not consider further loss likely at the reporting date, but foreclosure remained possible if negotiations failed.
- After quarter-end, the company acquired an office building in Lakewood, Colorado, for approximately $9.4 million, financed partly with a $6.6 million mortgage. It also closed an investment of up to $40 million through Series B preferred stock: $15 million funded initially and a further $25 million due by the one-year anniversary. The preferred return is 14%, with 10% payable monthly and 4% accruing and compounding monthly; redemption is due by the third anniversary, subject to extension options. The investor has approval rights over specified decisions and certain rights upon default, including the ability to elect a board majority.
- Management cited risks from a slow and uneven economic recovery, tenant and rental-rate pressures, regional concentration, competition, higher interest rates, and reliance on external financing. It reported no material impairment at June 30, 2014, and stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the registrant: the filing identifies NetREIT, Inc., while the request identifies Presidio Property Trust, Inc.
- Reconcile operating cash flow: the cash flow statement reports $(336,668) for the six months, while MD&A describes the amount as approximately $(639,000).
- Review the Havana/Parker loan status, the foreclosure process and outcome after the scheduled September 2014 sale date.
- Assess the terms, governance rights, funding schedule, redemption obligations, and actual use of proceeds of the Series B preferred investment.
- Evaluate the sustainability of distributions: the filing says distributions were a return of capital during loss periods and warns distributions could be reduced if cash flow is inadequate.
- Check the FFO and MFFO reconciliations against the financial statements; the filing’s supplemental tables contain figures that do not consistently match other reported net-loss amounts.