Business context and reporting period
This is NetREIT, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013, comparing results with Q1 2012. The filing identifies the issuer as NetREIT, Inc., not Presidio Property Trust, Inc.; investors should verify the entity and filing match the requested company. NetREIT operated a diversified real estate portfolio spanning office, industrial, retail, self-storage, apartments and model homes, primarily in the western United States.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $5.17 million | $4.09 million; up 26.4% |
| Operating income | $1.12 million | $0.45 million |
| Net loss attributable to NetREIT | $53,149; loss per share rounded to $0.00 | $571,611; loss per share $0.04 |
| Net operating income, reportable segments | $3.69 million | $2.77 million; up about 33% |
| FFO / MFFO | $833,780 / $835,581 | $470,215 / $569,199 |
| Cash from operations | $342,064 | $567,154 |
Rental operating costs were $1.50 million, or 29.0% of rental income, versus $1.33 million, or 32.6%, a year earlier. General and administrative expense rose 9.6% to $1.23 million, but declined as a share of rental and fee income to 23.9% from 27.5%. Interest expense increased 35.9% to $1.33 million. The reported Q1 net loss improved largely with higher rental contribution and a $446,653 property-sale gain.
At March 31, 2013, total assets were $183.7 million, including $162.5 million of net real estate assets and $9.85 million of cash. Mortgage notes payable were $89.7 million; total liabilities were $95.0 million and stockholders’ equity, including noncontrolling interests, was $88.7 million. Cash declined from $10.75 million at year-end. Operating cash flow was below cash distributions of approximately $1.1 million; investing activities provided $2.27 million and financing activities used $3.51 million. The company reported approximately $17.4 million of available liquidity, including $7.5 million estimated potential borrowing capacity on unencumbered properties, which was not committed financing.
Material changes versus the prior period
- Revenue increased $1.08 million, primarily from properties acquired in 2012, model-home activity and a $345,000 Rite Aid lease-cancellation fee. Management also cited lower revenue from model-home partnerships winding down.
- Q1 2013 included four model-home acquisitions for approximately $1.1 million and sales of 11 model homes, producing $3.8 million net proceeds and a $446,653 gain. Approximately $1.3 million of mortgage debt was retired in those sales.
- NetREIT acquired CHG Properties through a related-party merger effective January 31, issuing 200,000 common shares valued at $1.9 million. Purchase-price allocation was still being determined. Management projected approximately $300,000 in annual savings from bringing property management in-house.
- Mortgage debt declined from $92.5 million at December 31, 2012 to $89.7 million at March 31, 2013. Management reported refinancing two loans totaling approximately $18.4 million into loans maturing in 2020 at a weighted average rate of 4.85%, versus 6.04% previously, with expected first-year interest savings of about $200,000.
- Common shares outstanding increased to 16.07 million from 15.77 million, including shares issued for the CHG acquisition and dividend reinvestment.
Outlook, risks and unusual items
Management expected revenue and FFO to benefit from owning recent acquisitions for full periods and from future acquisitions; it also anticipated declining G&A as a percentage of revenue. It projected up to $750,000 in 2013 capital improvements, tenant improvements and leasing costs. These statements are forward-looking, not guarantees. The company had no revolving credit line and cautioned that borrowing capacity and access to equity or debt were uncertain.
Management said current cash flow and possible property-sale or financing proceeds were expected to support near-term operations and distributions, but acknowledged it might need additional borrowing or to reduce or eliminate distributions if cash sources were insufficient. Distributions were described as return of capital in both comparison periods; the filing states the company could reduce them while still meeting 2013 REIT requirements. Risks cited include tenant credit and lease renewals, vacancies and rents, local market concentration, competition in self-storage, economic weakness, higher interest rates and refinancing access. Management reported compliance with mortgage covenants and no off-balance-sheet arrangements. A model-home loan maturity extension was being pursued; the company anticipated an extension until the secured home is sold. In April 2013, after quarter-end, the company purchased a self-storage facility and was under contract to sell its Casa Grande apartments.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for NetREIT, Inc., despite the request naming Presidio Property Trust, Inc.
- Reconcile the filing’s net-loss figures: the financial statements report $53,149, while the FFO reconciliation prints $51,149 for Q1 2013.
- Assess whether distributions are sustainable from recurring operating cash flow: Q1 operating cash flow was $342,064 versus approximately $1.1 million of cash distributions.
- Review debt maturities, refinancing assumptions and the uncommitted nature of the estimated $7.5 million borrowing capacity; scheduled principal payments rise materially in 2015.
- Verify the CHG related-party transaction, final purchase-price allocation and whether projected management-cost savings are realized.
- Separate recurring rental performance from the one-time $345,000 lease-cancellation fee and gains on model-home sales when evaluating earnings and FFO.