Filing summary
Entity and period: The supplied filing is NetREIT, Inc.’s Form 10-K for the fiscal year ended December 31, 2013—not a filing under the name Presidio Property Trust, Inc. The filing does not explain the company-name difference; verify the issuer and filing attribution before relying on this summary.
Business context
NetREIT was a self-managed REIT investing in office, industrial, retail, self-storage and residential model-home properties. At year-end it reported interests in 12 office/industrial properties, four retail centers, seven self-storage facilities and 77 model homes. Its portfolio was concentrated geographically: California accounted for 63% of reported annual base rent and Colorado 26%.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $19.56 million | $17.67 million |
| Operating income | $0.43 million | $0.82 million |
| Net loss | $4.09 million; $0.25 per share | $2.13 million; $0.14 per share |
| Cash from operations | $4.13 million | $4.54 million |
| FFO | $2.79 million | $3.94 million |
| Modified FFO | $3.76 million | $4.36 million |
Revenue grew 10.7%, largely from properties acquired in 2012 and the Lancaster self-storage facility acquired in May 2013. Rental operating costs rose 14.9% to $6.38 million; those costs were 33.3% of rental income, versus 32.7% in 2012. General and administrative costs increased 14.5% to $5.44 million. Interest expense rose to $5.06 million from $4.49 million. The net loss widened amid higher interest expense, impairments and income allocated to noncontrolling interests. FFO and MFFO declined year over year.
At December 31, 2013, total assets were $181.25 million, mortgage notes payable were $89.55 million, total liabilities were $95.38 million and stockholders’ equity including noncontrolling interests was $85.87 million. Cash and cash equivalents were $10.21 million, with a further $1.36 million of restricted cash. Management estimated total available liquidity of $17.7 million by including approximately $7.5 million of potential borrowing capacity against properties; that capacity was not committed financing. The filing reports no revolving credit line.
Operating cash flow did not cover distributions and principal debt service: the company reported approximately $4.1 million of operating cash flow versus approximately $7.3 million for the cash portions of those uses. It declared $8.8 million of common dividends in 2013; approximately $3.9 million was reinvested in shares, and cash dividends paid were about $4.8 million. Distributions in both 2013 and 2012 were characterized as return of capital for tax purposes. The common distribution rate was $0.5412 per share for 2013, unchanged from 2012.
Material changes and unusual items
- In January 2013, NetREIT acquired its related-party property manager, CHG Properties, for approximately $1.9 million in stock and began internal property management through NTR Property Management. Management projected annual savings, but the filing cites differing estimates of about $225,000 and $300,000.
- The company acquired Lancaster self-storage for approximately $3.65 million, sold Casa Grande Apartments for $1.8 million and recognized a $322,356 gain, and model-home entities sold 32 homes, recording a $1.30 million gain.
- Impairment charges totaled $2.0 million in 2013: $1.5 million for Havana/Parker and $0.5 million for Morena Office Center. The 2012 filing-year comparison included $1.68 million of impairments.
- NetREIT refinanced two large loans in early 2013, extending maturities to 2020 and reducing their stated weighted rate from about 6% to 4.9%; management estimated annual payment savings of about $600,000.
Outlook, risks and contingencies
Management expected acquisitions and operating cash flow to increase, and anticipated active model-home acquisitions in 2014. It also projected $1–$2 million of 2014 capital improvements, tenant improvements and leasing costs. These are expectations, not commitments; future acquisitions and distributions depend on cash flow, asset sales and access to financing. Management cautioned that economic conditions, leasing, property values, interest rates and financing availability could affect results.
Major credit contingency: Havana/Parker had a $3.1 million non-recourse loan, a $3.5 million year-end book value and a July 2016 stated maturity. The company had made reduced payments for five months while seeking a loan modification. On March 4, 2014, it received a foreclosure notice and notice of a sale scheduled for June 25, 2014. Management expected a modification, extension or discounted payoff but warned that foreclosure remained possible if negotiations failed.
Other notable risks include $19.0 million of scheduled principal payments in 2015 across company and model-home debt, the company’s guarantees of model-home loans, the absence of a public market or share-redemption program, reliance on external capital, and REIT qualification and distribution requirements. The company reported that its disclosure controls and internal control over financial reporting were effective at year-end; the auditor issued an unqualified opinion on the financial statements but did not attest to internal control.
Investor verification priorities
- Confirm the issuer identity and whether this NetREIT filing is relevant to Presidio Property Trust.
- Check the Havana/Parker loan negotiations, foreclosure outcome and any later accounting or cash impact.
- Reconcile dividend declarations, cash distributions, reinvestments and operating cash generation; assess the sustainability of distributions.
- Review debt maturities, refinancing terms, model-home loan guarantees and whether the estimated borrowing capacity became available.
- Verify portfolio occupancy and leasing trends, especially at underoccupied office and self-storage properties, and clarify the stated property-management savings estimate.