Business context and reporting period
The supplied filing is NetREIT, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011, not a filing identified as Presidio Property Trust, Inc. NetREIT operated as a self-administered REIT, investing in office, retail, self-storage, residential and model-home properties, primarily in the western United States. The company reported 19 properties plus model-home investments at quarter-end.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Rental, fee and other income | $3.30 million, up 34.1% year over year | $6.62 million, up 48.1% |
| Net loss attributable to common shareholders | $730,405; $0.06 per share, versus $901,890; $0.08 per share | $1.27 million; $0.10 per share, versus $1.77 million; $0.17 per share |
| Operating cash flow | $582,173 for the six months, versus cash used of $890,242 in 2010 | |
| Funds from operations (FFO) | $303,663, versus negative $124,408 | $825,627, versus negative $2,836 |
Rental operating costs were 39.0% of rental income in the second quarter and 35.5% of rental and fee income for the first half, compared with 47.5% and 46.0%, respectively, in 2010. Management attributed the lower ratios partly to triple-net model-home leases. These ratios are not a measure of overall profit margin.
At June 30, 2011, total assets were $142.9 million, including $8.4 million cash and cash equivalents; total liabilities were $60.8 million; and shareholders’ equity, including noncontrolling interests, was $82.1 million. Mortgage notes payable totaled $56.3 million, versus $49.2 million at year-end 2010. The filing reports total debt at 29.9% of total capitalization using a $10-per-share offering price assumption. Weighted-average interest rates were approximately 5.7%.
First-half cash use for investing was $9.3 million, principally reflecting property acquisitions. Financing provided $10.1 million, including $5.3 million net common-stock proceeds and $13.1 million of mortgage proceeds, partly offset by repayments and $1.7 million of cash dividends. Cash increased by $1.4 million from year-end.
Material changes versus prior comparable periods
- Revenue growth primarily reflected acquisitions and model-home activity added since 2010; same-property rental and fee income rose only about $85,700 for the first half. The filing also notes that certain 2010 segment comparisons are affected by changes in consolidation and equity-method accounting.
- Net losses narrowed, while FFO turned positive. Higher property operating income was partly offset by increased general and administrative costs, depreciation and interest expense.
- Interest expense rose 53.9% in the quarter and 70.8% for the first half, chiefly due to added mortgage debt on acquired properties and refinancing.
- Real estate assets, net, increased to $123.6 million from $117.1 million at December 31, 2010. Major 2011 additions included the Dakota Bank Buildings for approximately $9.6 million and model-home properties; the company also sold 15 model homes for approximately $5.2 million.
Outlook, risks and unusual items
- Management expected revenue and FFO to improve as recently acquired properties contributed for full periods and further acquisitions were made. It anticipated raising approximately $15 million in additional equity during the remainder of 2011. These are expectations, not guaranteed results; the filing gives no formal earnings guidance.
- Management stated operating cash flow was not expected to cover near-term needs, including distributions at then-current rates. It expected to rely on equity proceeds, borrowing and other financing until property cash flows improved. First-half cash dividends declared were $3.7 million, while operating cash flow was $0.6 million; distributions were characterized as return of capital, not earnings.
- Scheduled principal payments on mortgage notes were approximately $3.9 million for the six months ending December 31, 2011, including $3.4 million related to model-home properties. Some model-home loans with past-due maturity dates were expected to be renewed; management believed refinancing would be available but could not assure it.
- Risks cited include a slow and uneven economic recovery, weak housing and commercial property markets, tenant payment and leasing risks, regional concentration, refinancing availability, and potentially higher interest rates. The Dakota Bank mortgage has a variable rate with a 5.75% floor and 9.75% ceiling.
- The company reported a $57,790 second-quarter gain and a $24,487 first-half loss on model-home sales, both described as unusual timing effects. No additional real-estate impairment was recognized in the first half; the filing references a $1.0 million impairment recorded on the Havana/Parker property in 2010.
- The company reported compliance with mortgage covenants, no legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls at quarter-end.
Important facts for investors to verify
- Confirm the issuer: the filing text identifies NetREIT, Inc.; it does not identify Presidio Property Trust, Inc.
- Review the ability to fund distributions without continued equity issuance or borrowing, given the gap between declared distributions and operating cash flow.
- Verify the status and refinancing or renewal plans for model-home debt maturities, including notes described as past due, and assess the 2012 property-level balloon payment.
- Assess acquisition-related revenue growth against same-property performance, occupancy, leasing and tenant-credit trends.
- Review the terms and success of the planned 2011 equity raise and the assumptions underlying management’s expected improvement in cash flow and FFO.