Presidio Property Trust, Inc. (filing identifies registrant as NetREIT, Inc.) — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. NetREIT describes itself as a self-administered REIT investing in office, retail, self-storage, residential and model-home properties, primarily in the western United States. Its portfolio expanded during the period through acquisitions, including office buildings in Fargo, North Dakota, and a retail center in Yucca Valley, California.
Financial highlights
| Metric | Q3 2011 / September 30, 2011 | Comparable period / change |
|---|---|---|
| Revenue | $3.60 million | Up 37.6% from $2.62 million in Q3 2010 |
| Net loss attributable to common shareholders | $0.42 million; $0.03 per share | Compared with $0.75 million; $0.07 per share in Q3 2010 |
| Nine-month revenue | $10.23 million | Up 44.2% from $7.09 million |
| Nine-month net loss attributable to common shareholders | $1.69 million; $0.13 per share | Compared with $2.52 million; $0.23 per share |
| Nine-month operating cash flow | $1.38 million | Compared with cash used of $0.11 million in 2010 |
| Cash and restricted cash | $5.23 million cash; $0.69 million restricted cash | Cash was $7.03 million at December 31, 2010 |
| Total assets / equity | $146.90 million / $83.57 million | Assets were $133.32 million / equity $79.76 million at year-end 2010 |
| Mortgage notes payable | $58.57 million | Up from $49.24 million at year-end 2010 |
Q3 rental operating costs were 36.4% of rental income, down from 43.3%; nine-month costs were 35.8%, down from 45.0%. Management attributed the improvement largely to model-home leases being triple-net. Nine-month FFO, a non-GAAP measure, was $1.60 million versus $0.03 million; Q3 FFO was $0.78 million versus $0.13 million. The company cautions that FFO is not cash available for distributions.
Material changes and capital
- Rental and fee income growth primarily reflected acquisitions and additional model-home activity; same-property revenue was comparatively flat over nine months and declined by about $43,000 in Q3, mainly due to lower renewal rents at a large office building.
- Interest expense rose 50.6% in Q3 and 63.1% for the nine months, principally from acquisition-related borrowing and refinancing. The reported weighted-average interest rate was 5.64% at September 30.
- Real estate acquisitions totaled $23.23 million during the nine months. The company also received $6.57 million from property sales; eighteen model homes were sold, with approximately $4.4 million of associated debt retired.
- Financing provided $14.15 million net cash, including approximately $8.0 million of net common-stock proceeds. Common shares outstanding were 13.67 million at quarter-end, up from 12.43 million at year-end 2010.
Outlook, risks and unusual items
- Management expected revenue and FFO to benefit from owning recently acquired properties for full periods and further acquisitions, and anticipated that net losses would decline and eventually turn to net income. These are forward-looking expectations, not assured results.
- Management said operating cash flow did not cover the approximately $2.6 million of cash distributions paid in the first nine months. It expected to use some combination of equity proceeds, borrowing or reduced distributions until operating cash flow improves; it anticipated about $5 million of additional equity capital during the rest of 2011. The current private placement offering was scheduled to close December 31, 2011.
- Scheduled debt principal payments were $2.36 million in the final quarter of 2011 and $7.43 million in 2012. Certain model-home loans had near-term maturities, and the company said it was working with lenders to extend them. Management reported covenant compliance and said it had arranged to refinance a roughly $3.1 million 2012 balloon payment.
- Management cited slow economic recovery, weak housing and commercial-property conditions, tenant credit and leasing risks, and possible increases in borrowing costs. It noted inconsistent office leasing and pressure on renewal rents. The company had 13 model homes, with approximately $5.0 million of carrying value and $2.6 million of debt, classified as held for sale.
- The company recorded a $56,911 nine-month loss on model-home sales, which management called unusual and attributable to sale timing. No impairment charge was recorded in the period; the filing refers to a $1 million impairment at the Havana/Parker property in 2010.
- Subsequent to quarter-end, the company announced a 5% stock dividend, payable to shareholders of record December 2, 2011. The filing reported no material litigation and no known material environmental liability; management concluded disclosure controls were effective.
Investor verification priorities
- Confirm issuer identity: the request names Presidio Property Trust, but this filing’s registrant and financial statements identify NetREIT, Inc.
- Review debt maturities and refinancing status, particularly near-term model-home loan extensions and the stated 2012 balloon refinancing.
- Assess whether operating cash flow can support distributions: nine-month operating cash flow was below cash dividends paid, and management anticipated using external capital or borrowing in the interim.
- Check acquisition performance, leasing, tenant renewals and occupancy, especially for recently acquired properties and model homes; the filing does not provide a consolidated occupancy rate.
- Evaluate dilution and offering execution, including the planned closing of the private placement and the effect of the announced stock dividend.