Presidio Property Trust, Inc. annual report, FY2017

Presidio Property Trust, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed March 20, 2018. This is an annual report, not a standalone fourth-quarter report. The company is a self-managed, non-traded REIT; its common stock had no public trading market.

Business context

Presidio owned or held interests in office, industrial and retail properties, plus 132 model homes leased back to homebuilders. Its commercial portfolio was concentrated in Southern California, Colorado and North Dakota; model homes were in ten states. The company said it was shifting its commercial focus toward office and industrial assets and away from retail. In October 2017, it changed its name from NetREIT, Inc. to Presidio Property Trust, Inc.

Financial results and liquidity

Metric	2017	2016
Total revenue	$33.4 million	$32.5 million
Rental operating costs	$10.7 million	$10.1 million
General and administrative expense	$5.2 million	$5.1 million
Depreciation and amortization	$9.7 million	$10.3 million
Consolidated net loss	$2.8 million	$5.6 million
Net loss attributable to common stockholders	$3.5 million; $0.20 per share	$5.8 million; $0.34 per share
Net cash provided by operating activities	$5.6 million	$3.7 million
Net cash used in investing activities	$1.1 million	$19.0 million
Net cash from/(used in) financing activities	$(3.6) million	$9.3 million

• Revenue increased 3.4%. The filing attributes the change to higher model-home rents and transaction fees and a favorable $525,000 insurance claim, partly offset by commercial property sales.
• Rental operating costs rose 5.9%, principally because of higher Colorado property taxes. Costs were 32.1% of revenue, compared with 31.2% in 2016; G&A was 15.6% of revenue in both years.
• Net loss improved partly because 2016 included $948,000 of property impairment charges; no impairment charge was recorded in 2017. The company reported $2.6 million of gains on real estate sales in 2017.
• Same-property commercial NOI increased 6.5% to $19.4 million, while same-property year-end occupancy declined to 87.1% from 91.0%. Separately, reported segment NOI across all three segments was $22.9 million versus $22.3 million.
• Management’s non-GAAP FFO was $4.2 million and MFFO was $5.1 million, versus $3.4 million and $4.3 million, respectively, in 2016. These measures exclude items including depreciation; the filing cautions that they are not substitutes for GAAP results or cash available for distributions.
• Cash and restricted cash totaled $8.3 million, including $4.5 million restricted; management cited approximately $3.8 million of cash and cash equivalents as available liquidity. About $2.0 million was intended for capital expenditures. Operating cash flow exceeded the $3.6 million net cash paid for common-stock distributions.
• Gross mortgage debt was $162.0 million, all fixed-rate, with a weighted-average rate of approximately 4.7%. The balance-sheet carrying amount, net of financing costs, was $160.3 million. The company reported $133.6 million of commercial-property mortgages and $28.5 million of model-home mortgages, which it guaranteed. Total debt to estimated property value was reported at about 53.8% for commercial properties and 58.8% for model homes.
• Mandatorily redeemable Series B preferred stock was treated as a liability; its net balance was $30.6 million. It carried a 14% preferred return. The company extended its redemption date from August 1, 2017 to August 1, 2019 and paid a $153,500 extension fee.

Material changes and portfolio activity

• Acquired 47 model homes for $17.6 million in 2017, funded with approximately $5.9 million cash and $11.7 million in mortgage notes; acquired 65 homes for $23.7 million in 2016.
• Sold three commercial properties and 23 model homes in 2017 for total proceeds of approximately $20.6 million, recognizing reported gains and losses that netted to $2.6 million. Disposals included the Shoreline Medical Building, Regatta Square Retail Center and Rangewood Medical Building.
• Common dividends fell to $0.20 per share in 2017 from $0.40 in 2016; the third- and fourth-quarter 2017 dividends were suspended. The company declared $4.7 million of 2017 dividends, with approximately 23.2% reinvested; net cash paid was about $3.6 million. The filing says distributions in both years were treated as return of capital for tax purposes.
• Commercial-property occupancy was 88.1% at year-end in the property summary, while the same-property comparison reported 87.1%; confirm the differing scopes and definitions when comparing occupancy. World Plaza occupancy fell to 34.6% from 81.8% in 2016.

Outlook, risks and unusual items

• Management expected existing portfolio cash flows, model-home partnership distributions and property sales during 2018 to cover near-term operating costs, capital expenditures, debt service and cash distributions. If cash flow proved insufficient, it said it might borrow more or reduce distributions. This is not a quantified earnings or dividend forecast.
• Management projected up to $2.0 million annually for capital improvements, tenant improvements and leasing costs, net of lender-held reserves. It also stated that future revenues, expenses and depreciation could rise as assets acquired in recent years contribute and further acquisitions occur.
• Significant financing exposure includes model-home loan maturities: scheduled principal payments were $17.96 million in 2019 and $32.68 million in 2020, including commercial and model-home debt. The company noted that model-home loans are generally repaid from home-sale proceeds.
• Series B investor agreements impose consent rights over major actions, including acquisitions, budgets, financing and property management. Upon default, the investor may have broad remedies, including the right to elect six directors; the filing warns a default-driven change of control could materially harm the company.
• Key risks include tenant defaults and vacancies, regional and property-type concentration, real estate market and refinancing conditions, limited access to new capital, uninsured casualty losses, environmental and regulatory liabilities, REIT qualification and distribution requirements, and the ability to refinance or repay debt. Model homes were concentrated geographically, with about 57% in Texas and 88% in Texas, Florida and Pennsylvania combined.
• The company reported no material litigation, no off-balance-sheet arrangements, and no environmental matter known to have a material effect. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

• Confirm the Series B redemption terms, remaining balance, extension provisions, payment status and any covenant compliance or default developments.
• Review debt maturity schedules, refinancing plans and the company’s guarantees of model-home mortgages, particularly the 2019–2020 maturities.
• Assess unrestricted cash, restricted-cash requirements, capital needs and whether operating cash flow can support debt service and any future distributions.
• Verify the basis and sustainability of occupancy and NOI trends, including the sharp occupancy decline at World Plaza and the difference between reported occupancy figures.
• Confirm the dividend policy and tax characterization of distributions; 2017 included two quarters without common dividends.
• Review the full financial statements and notes for segment performance, noncontrolling interests, related-party arrangements and assumptions behind non-GAAP FFO/MFFO.