Business context and reporting period
NetREIT, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The filing describes a self-administered REIT investing primarily in office, retail, self-storage, industrial and model-home properties, principally in the western United States. Note: the request names Presidio Property Trust, Inc., but the filing identifies the registrant as NetREIT, Inc.; verify the entity and filing match.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $4.86 million, up 13.7% year over year | $10.03 million, up 19.9% |
| Net loss attributable to common stockholders | $396,202; $0.02 per share | $449,351; $0.03 per share |
| Operating income | $669,980 | $1.79 million |
| Interest expense | $1.22 million | $2.55 million |
| Gain on real estate sales | $410,258 | $856,911 |
| FFO / MFFO | $794,402 / $796,203 | $1.63 million / $1.60 million |
| Cash flow from operations | Not presented for the quarter | $1.32 million, versus $2.17 million in 2012 |
For the six months, revenue growth reflected acquired properties and model-home activity. Compared with 2012, the net loss narrowed from $1.00 million; FFO rose 57.2% and MFFO rose 38.3%. Quarterly MFFO declined 3.3% year over year. Sales gains contributed materially to reported results and should be distinguished from recurring property operations. Six-month rental operating costs were 30.0% of rental and fee income, compared with 31.9% in 2012; management attributed the improvement partly to property-tax appeal outcomes.
At June 30, total assets were $182.54 million, mortgage notes payable $89.32 million, total liabilities $94.34 million, and stockholders’ equity including noncontrolling interests $88.20 million. Cash and cash equivalents were $7.81 million, down from $10.75 million at year-end 2012; restricted cash was $1.05 million. Six-month investing cash flow was positive $0.46 million, while financing used $4.71 million. Management estimated available liquidity of $15.2 million, including cash and about $7.4 million of potential borrowing capacity on unencumbered properties; that capacity was not committed.
Reported mortgage debt decreased from $92.48 million at year-end. The filing reports a 5.23% weighted-average rate for mortgage notes at June 30 and says all loan covenants were met. Scheduled principal repayments on the company’s non-model-home property debt include $18.27 million in 2015, with $46.84 million thereafter; model-home debt totals $13.35 million. Management reported no balloon principal payments on non-model-home property debt due in 2013 or 2014.
Material changes and transactions
- Revenue increased as acquisitions made in 2012 and 2013 contributed for more of the period; older model-home partnerships winding down partly offset that growth. Rental income from properties held throughout the six-month comparison was nearly flat.
- The company acquired a Lancaster, California self-storage facility for about $3.7 million; it was approximately 65% occupied at acquisition. It also acquired four Texas model homes for about $1.1 million.
- The company sold Casa Grande Apartments in May for $1.8 million, recording a $322,356 gain, and sold model homes, recording gains. Six-month net proceeds from real estate sales were about $3.1 million after related debt repayments, according to management.
- In January, the company completed its acquisition of CHG Properties through wholly owned NTR Property Management, issuing 200,000 NetREIT shares valued at $1.9 million. Management expected approximately $300,000 in annual savings from bringing property management in-house. The purchase-price allocation was still being determined; the purchase price was included in other assets at quarter-end.
- About $18.1 million of loans were refinanced or modified. Management said the new loans had a weighted-average rate of 4.85%, compared with 6.04% on the refinanced loans, and estimated first-year interest savings of about $200,000 and annual debt-service reduction of about $600,000.
Outlook, risks and contingencies
Management expected rental and fee revenues to benefit from recent acquisitions being owned for full periods and from future acquisitions. It also expected operating costs to rise as recently acquired assets contributed for full periods. Management said cash flow from the existing portfolio and financing activities should cover near-term debt service, operating costs and the cash portion of distributions at the current rate, but stated that distributions could be reduced or eliminated if cash generation is insufficient. Six-month distributions were described as a return of capital because of net losses; the filing says the company could reduce distributions while still meeting its 2013 REIT distribution requirement.
Key risks include tenant credit and leasing conditions, competition and occupancy at self-storage properties, geographically concentrated assets, refinancing and borrowing availability, possible increases in interest rates, and the ability to access equity or debt capital. Management cited uneven economic recovery and uncertain commercial property markets. Liquidity estimates depend on the ability to obtain uncommitted loans against unencumbered properties; the company had no revolving credit line. The filing reports no off-balance-sheet arrangements, no legal proceedings, and no recognized property impairment at June 30. It estimates up to $750,000 of additional 2013 capital improvements, tenant improvements and leasing costs. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm that this NetREIT, Inc. filing is the intended filing for the requested company, Presidio Property Trust, Inc.
- Reconcile share counts: the balance sheet reports 16,210,739 common shares at June 30, while the stockholders’ equity statement reports 16,210,754; the filing also reports 16,210,739 outstanding at August 12.
- Review the debt maturity schedule, refinancing terms, covenants and guarantees, particularly model-home loan maturities and the reliance on future refinancing.
- Assess whether operating cash flow can sustainably support cash distributions and capital needs, given the six-month operating cash flow decline and management’s stated option to reduce distributions.
- Evaluate recurring performance apart from real estate sale gains and non-GAAP FFO/MFFO adjustments, and confirm the expected CHG/NTR cost savings and final purchase-price allocation.