Business context and reporting period
NetREIT, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The request metadata names Presidio Property Trust, Inc.; the supplied filing text does not explain that difference. NetREIT operated as a self-administered REIT with office, industrial, retail and model-home properties. At quarter-end it reported 18 office buildings, two industrial properties, six retail centers and 74 model homes.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Total revenue | $7.81 million | $16.24 million |
| Net income (loss) attributable to common stockholders | $(0.91) million | $(2.02) million |
| Basic and diluted earnings (loss) per share | $(0.05) | $(0.12) |
| Net cash provided by operating activities | Not reported separately for the quarter | $1.73 million |
- For the six-month period, segment NOI was $11.18 million. Same-property NOI rose 3.4% in the quarter and 17.4% for six months; the latter included a $376,000 lease-termination fee. Same-property occupancy was 84.7%, versus 85.0% a year earlier.
- Six-month operating cash flow improved from cash used of $1.01 million in 2015 to cash provided of $1.73 million. Investing used $3.22 million; financing provided $0.38 million. Cash and cash equivalents ended at $5.52 million, down from $6.63 million at year-end 2015. Restricted cash was $4.63 million.
- At June 30, total assets were $252.26 million and total equity was $61.10 million. Mortgage notes had $148.91 million principal outstanding ($146.85 million net of loan costs); the company also reported $33.60 million of mandatorily redeemable Series B preferred stock as a liability. The company said it was in compliance with mortgage covenants.
- Mortgage debt was predominantly fixed-rate, with a reported 4.7% weighted-average rate. Management cited debt to book and estimated market value of approximately 70% for company properties and approximately 56% for model homes.
- The Series B preferred return was 14% and treated as interest expense. Cash dividends on common stock were at an annualized rate of $0.40 per share; management said distributions were expected to be returns of capital given taxable losses.
Material changes versus prior comparable periods
- Quarterly revenue increased 39.2% year over year, primarily from office and industrial properties acquired after second-quarter 2015. Six-month revenue increased 47.2%, reflecting acquisitions, higher same-property rents and the lease-termination fee, partly offset by the prior-year self-storage business no longer being included.
- The company recorded a six-month common-stockholder loss of $2.02 million, compared with income of $1.01 million in 2015. The 2015 period included $4.60 million of income from discontinued operations, principally the gain on the 2015 sale of the Sparky’s self-storage portfolio.
- Six-month mortgage interest expense rose to $3.76 million from $2.89 million, and Series B preferred interest expense rose to $3.10 million from $1.76 million. Management attributed the increases mainly to acquisitions and the higher number of preferred shares outstanding compared with 2015.
- During the first half, the company acquired 25 model homes for $7.8 million, sold 15 model homes for approximately $4.4 million, and sold a Yucca Valley parcel and building for approximately $1.3 million. The reported gains on these 2016 sales totaled approximately $1.39 million.
Outlook, commentary, risks and unusual items
- Management expressed cautious optimism about leasing and rental-rate trends, but warned that adverse economic conditions, regional market concentration, tenant payment capacity, construction costs, interest rates and capital-market conditions could harm results. It noted that future acquisitions depend on obtaining external financing.
- Management believed existing portfolio cash flow and recent acquisitions would support near-term operating costs, capital expenditures, debt service and current cash distributions. If operating cash flow proves insufficient, it may seek additional borrowing or reduce distributions. The company had no revolving credit line, although it was exploring one.
- Management estimated annual capital improvements, tenant improvements and leasing costs could reach $2.0 million, net of lender-held reserves. It reported approximately $2.0 million of cash intended for capital expenditures.
- Subsequent events: the company reported a July 2016 sale of the Havana/Parker Complex for $3.3 million and repayment of its related $2.5 million mortgage; announced redemptions of Series B shares; agreed to sell Rangewood Medical Office Building for $2.3 million, expected to close in fourth-quarter 2016; and arranged a $4.2 million Bismarck refinancing at 4.02% initially, maturing in 2037 with future rate resets.
- No impairment reserve was recorded in the first half. The filing reported no legal proceedings, no defaults on senior securities and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Confirm the registrant’s identity and relationship to Presidio Property Trust, Inc.; the supplied filing is captioned NetREIT, Inc.
- Review the timing and terms of near-term mortgage maturities, refinancing, property sales and Series B redemptions, including the substantial scheduled preferred-stock obligations.
- Assess whether operating cash generation can sustain debt service, planned capital spending and the current common dividend; distributions were described as returns of capital.
- Separate recurring operating performance from acquisition effects, the $376,000 lease-termination fee and gains on property sales when evaluating revenue and NOI trends.
- Reconcile the filing’s differing references to the Havana/Parker sale timing and the June 2016 Series B redemption date and subsequent redemption balances.