Business context and reporting period
Presidio Property Trust, Inc. is an internally managed REIT with office, industrial, retail and triple-net model-home properties. This Form 10-Q covers the three and nine months ended September 30, 2022. The company reported 12 commercial properties and 82 model homes, and consolidated Murphy Canyon Acquisition Corp. (a SPAC) because it concluded it was the SPAC’s primary beneficiary.
Financial performance and position
- Revenue: Q3 revenue was $4.39 million, up slightly from $4.38 million a year earlier. Nine-month revenue was $13.29 million, down 11% from $14.89 million, primarily reflecting property and model-home sales.
- Profit/loss: Q3 consolidated net income was $351,000, compared with a $425,000 loss in Q3 2021. The loss attributable to common stockholders was $1.30 million, or $0.11 per share, versus $1.39 million, or $0.13 per share. For nine months, consolidated net income was $1.15 million, but the common-stockholder loss was $5.96 million, or $0.51 per share; the latter included a $2.46 million Series A warrant dividend.
- Operating performance: Segment net operating income (NOI), a non-GAAP measure, was $2.96 million in Q3, essentially flat year over year, and $8.92 million for nine months, down from $9.85 million. Nine-month NOI declined across office/industrial, model-home and retail segments. G&A was 34.4% of revenue in Q3 and 32.4% for nine months, versus 33.8% and 29.3%, respectively, in 2021.
- Cash flow: Nine-month operating cash flow was $1.89 million, versus $1.13 million. Investing used $123.83 million, mainly reflecting the SPAC IPO proceeds placed in trust; financing provided $125.81 million, principally from the SPAC IPO. Cash, cash equivalents and restricted cash totaled $18.57 million, including approximately $4.9 million restricted. The balance sheet separately showed $135.71 million of SPAC trust investments.
- Debt and liquidity: Mortgage principal was $94.83 million ($94.14 million net of unamortized costs); total liabilities were $105.29 million. Mortgage debt was predominantly fixed-rate, with a 4.40% weighted-average rate reported for outstanding debt. Management stated it expects available cash, operations, property sales and refinancing capacity to cover operations through at least the next 12 months, while noting financing is not assured.
- Assets and equity: Net real estate assets were $126.79 million, down from $138.06 million at year-end 2021. Total assets were $288.62 million, including the SPAC trust; $129.25 million of SPAC shares subject to redemption was classified outside permanent equity. Total equity was $54.09 million.
Material changes versus the prior comparable period
- Nine-month revenue fell 11%, mainly due to asset dispositions; rental operating costs declined by about $0.37 million, partly reflecting fewer properties and triple-net leases.
- Real estate sale gains increased to $4.06 million for nine months from $2.06 million. The company sold World Plaza and 25 model homes in 2022; it acquired 15 model homes for approximately $8.1 million.
- Mortgage interest expense was about $1.38 million in Q3, up 39% year over year, while nine-month mortgage interest expense was approximately $3.49 million, slightly lower year over year. Management attributed the quarterly increase to higher mortgage debt.
- Common distributions declared for the first nine months declined to $0.231 per share from $0.306 in 2021; the Q3 amount was $0.020 versus $0.103. The Series D preferred stock carries a 9.375% cumulative annual dividend.
- The company repurchased 161,605 common shares and 3,933 Series D preferred shares during the first nine months. A new one-year authorization permits up to $6 million of common-stock and $4 million of preferred-stock repurchases.
Outlook, commentary and risks
- No quantified company-wide earnings or revenue guidance was provided. Management said elevated property prices and compressed capitalization rates make acquisitions challenging and does not expect recent property-sale activity to continue at the same level.
- The lease for Halliburton, the largest tenant at approximately 8.4% of annual base rent, was due to expire December 31, 2022; management did not expect renewal and planned a $1.1 million lender reserve for potential mortgage payments. It expected at least 20% of the space to be leased by January 2023.
- Management expected approximately $2.54 million of mortgage principal payments in 2022, including $2.15 million on model homes. It cited refinancing, asset sales and operating cash flow as funding sources, but cautioned that additional financing may not be available on acceptable terms.
- The company said COVID-19 had not significantly affected results through the first nine months of 2022, but continued to expect possible rent deferrals, abatements or credit losses. Other cited risks include tenant defaults, economic weakness, inflation, higher interest rates, property-market volatility and geographic concentration.
- After quarter-end, a model-home loan was extended through October 2023 with a 1.10-to-1.00 minimum quarterly debt-service coverage requirement; the company guaranteed up to 15% of obligations. The company also acquired six model homes for approximately $3.2 million on October 20.
- On November 8, Murphy Canyon agreed to a proposed merger with Conduit Pharmaceuticals, with stated consideration of $650 million in shares. The transaction remains subject to closing conditions, and the filing cautions it may not close.
Investor facts to verify
- How SPAC consolidation, redemption accounting and the $135.71 million trust balance affect reported assets, liabilities, cash flows and the company’s economic exposure.
- The timing and funding of upcoming mortgage maturities, refinancing availability, and compliance with the amended loan’s coverage covenant and company guaranty.
- Halliburton space re-leasing progress, the reserve requirement and the effect of any vacancy on property cash flow and debt service.
- Whether operating cash flow and dispositions can support capital needs, common dividends and the 9.375% preferred dividend, particularly given the reduced common distribution.
- Progress and conditions for the proposed Murphy Canyon–Conduit transaction, including any financing, shareholder approvals and dilution implications.