Business context and reporting period
NetREIT, Inc. (the registrant named in the filing) is a self-administered REIT owning office, industrial, medical, retail and residential model-home properties. This Form 10-Q covers the quarter ended March 31, 2017, compared with the quarter ended March 31, 2016; balance-sheet comparisons are with December 31, 2016. The filing describes 23 commercial properties and 106 model homes, with commercial assets concentrated in California, Colorado and North Dakota.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $8.25 million | $8.46 million; down 3.5% |
| Net loss attributable to common stockholders | $1.01 million; loss per share $0.06 | $1.10 million; loss per share $0.06 |
| Net operating income, reportable segments | $5.61 million | $5.98 million; down 6.3% |
| FFO / MFFO | $1.02 million / $1.30 million | $1.32 million / $1.54 million |
| Cash from operations | $1.21 million | $1.11 million |
Rental income was $8.01 million, down from $8.25 million. Rental operating costs rose to $2.64 million from $2.47 million; costs were 31.7% of revenue versus 29.4%. General and administrative expense increased 2.2% to $1.26 million. Depreciation and amortization declined to $2.50 million from $2.66 million. Net gains on real estate sales were $541,000, compared with $175,000.
Same-store occupancy increased to 90.9% from 87.8%, but same-store NOI fell 11.3% to $4.64 million. Management attributed the reported decline primarily to a $376,000 early-termination fee and about $210,000 in CAM reconciliation credits recorded in Q1 2016, as well as higher bad debt, utility and maintenance costs in Q1 2017. Excluding the prior-year items, management said same-store rental revenue would have risen 2.8% and NOI would have declined 0.2%.
Balance sheet, debt and liquidity
At March 31, 2017, total assets were $252.0 million, down from $258.0 million at year-end. Cash and cash equivalents were $4.53 million, with another $3.49 million of restricted cash. Mortgage debt was $157.6 million principal ($155.7 million net of unamortized costs), versus $160.8 million principal at year-end. Commercial-property mortgages totaled $136.0 million at a weighted-average rate of about 4.6%; model-home mortgages totaled $21.6 million. Total liabilities were $197.8 million and total equity was $54.2 million.
Series B preferred stock is classified as a liability and carries a 14% preferred return. At March 31, $31.7 million remained outstanding and was scheduled for redemption on August 1, 2017, with two one-year extension options. The company redeemed $1.0 million during Q1 and another $1.0 million on May 8. Management said near-term cash flows were expected to cover operating costs, capital spending, debt service and current cash distributions, but noted it could borrow or reduce distributions if operating cash flow proved insufficient. No revolving credit facility was in place; the company was exploring one.
Operating cash flow was $1.21 million. Investing activities provided $5.02 million, principally from $5.22 million of property-sale proceeds; financing activities used $4.81 million, including $3.23 million of mortgage repayments, the $1.0 million preferred redemption and $1.17 million of cash dividends. Cash increased by $1.42 million during the quarter. The company reported compliance with mortgage covenants and no off-balance-sheet arrangements.
Material changes, outlook and risks
- Q1 2017 property dispositions included the Rangewood Medical Building, Regatta Square Retail Center and two model homes. Net gains on these sales were $541,000. On April 7, the company sold Shoreline Medical Building for about $8.2 million and repaid its approximately $3.6 million mortgage.
- There were no property acquisitions in Q1 2017; Q1 2016 included approximately $7.4 million of model-home acquisitions. Revenue was lower partly because Q1 2016 included an early-termination fee, while Q1 2017 included increased model-home transaction fees.
- Management stated that current portfolio cash flow and partnership distributions were expected to support near-term requirements at the existing distribution rate, but warned that a shortfall could require additional borrowing or a distribution reduction. The filing does not provide formal earnings guidance.
- Management cited potential effects from interest-rate and capital-market conditions, refinancing availability, construction and labor costs, tenant credit and leasing downtime, and economic or market weakness. Geographic concentration in California, Colorado and North Dakota can increase exposure to local conditions. Management reported no impairment reserve was required in Q1.
- Management said it was cautiously optimistic about leasing trends. During the quarter, 18 comparable leases covering 52,308 square feet were signed, with average rental-rate increases of 2.1% on a cash basis and 3.3% on a straight-line basis.
- All Q1 distributions were described as return of capital for tax purposes; the annualized common distribution rate was $0.40 per share. The filing also reports that the preferred-stock redemption date was approaching and relies on potential extensions, asset sales, refinancing or other financing to meet capital needs.
Most important facts for investors to verify
- How the company funded or extended the $31.7 million Series B redemption obligation due August 1, 2017, and the terms and cost of any extension.
- Whether the Shoreline sale proceeds and mortgage payoff were completed as disclosed, and how remaining property sales or refinancing affect liquidity and debt.
- Whether operating cash flow can sustain debt service, planned capital spending and common distributions, particularly given the distribution’s return-of-capital tax treatment.
- Trends in same-store NOI, occupancy, bad debt and property operating costs, and the underlying comparisons excluding prior-year termination and CAM items.
- Concentration and refinancing exposure: scheduled principal payments include $14.9 million in 2019 and $27.6 million in 2020; model-home mortgages generally mature from 2017 through 2020.