Business context and reporting period
The filing is NetREIT, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, signed March 30, 2015. The request metadata names Presidio Property Trust, Inc.; the filing itself identifies the registrant as NetREIT, Inc., so the corporate name and entity continuity should be verified.
NetREIT was a self-managed REIT with office/industrial, retail, self-storage and residential/model-home investments, primarily in Southern California and Colorado, plus properties in North Dakota. At year-end it reported interests in 27 commercial properties and 54 model homes. Its common stock was not publicly traded.
Financial results and key metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $19.90 million | $19.56 million |
| Operating income (loss) | $(0.12) million | $0.43 million |
| Net loss attributable to common shareholders | $(4.05) million | $(4.09) million |
| Net loss per common share | $(0.24) | $(0.25) |
| Net cash provided by operating activities | $4.39 million | $4.13 million |
| FFO | $1.03 million | $2.79 million |
| MFFO | $2.22 million | $3.76 million |
Revenue rose 1.7%. Rental operating costs increased 17.0% to $7.47 million, and depreciation and amortization rose 13.9% to $6.05 million. Interest expense increased 28.0% to $6.48 million, including $776,000 of Series B preferred return and related financing-cost amortization. The consolidated statements report a net loss of $854,000 before the $3.19 million loss attributable to noncontrolling interests; the common-shareholder loss was $4.05 million.
At December 31, 2014, total assets were $220.62 million, total liabilities were $149.09 million, and total equity was $71.54 million. Cash and cash equivalents were $5.64 million, down from $10.21 million; restricted cash was $4.09 million. Mortgage debt totaled $123.90 million, including $2.1 million described as recourse to the Company. The balance sheet also included $16.6 million of mandatorily redeemable Series B Preferred Stock, classified as a liability.
Net cash used in investing activities was $42.69 million, chiefly reflecting $59.28 million of real-estate acquisitions, partly offset by $22.29 million of property-sale proceeds. Financing activities provided $33.73 million. The company paid $4.80 million in cash dividends, net of reinvestment, while operating cash flow was $4.39 million. The filing reports total 2014 common dividends declared of $8.8 million, of which approximately $3.3 million was reinvested.
Material changes versus 2013
- Five commercial properties were acquired for approximately $53.3 million, and 18 model homes for approximately $5.7 million. NetREIT also sold its Fontana Medical Plaza and model homes; model-home rental revenue fell 30% as the portfolio declined from 77 homes at year-end 2013 to 54 at year-end 2014.
- Commercial same-property rental revenue decreased 2.1%, while same-property model-home rental revenue declined 30.0%. Reported segment NOI increased to $11.49 million from $11.18 million, but FFO and MFFO declined, reflecting lower gains and operating pressures.
- Rental operating costs rose to 37.5% of rental and fee income from 32.6%. A $950,000 impairment was recorded for the Havana/Parker property in 2014, following $2.0 million of impairments in 2013.
- Mortgage debt increased from $89.55 million to $123.90 million. The weighted-average rate on non-model-home property mortgages was reported as 4.9% at year-end, down from 5.4% in 2013. A Havana/Parker loan modification reduced principal by $537,000 and changed payment terms.
- Monthly common distributions were reduced from $0.0451 to $0.0334 beginning July 2014; annual distributions per share were $0.4710 versus $0.5412 in 2013.
Outlook, commentary, risks and unusual items
- In August 2014, NetREIT issued $16.6 million of Series B Preferred Stock to Prime Finance. The preferred stock carries a 14% return: 10% paid monthly and 4% accruing and compounding monthly. It is scheduled for redemption by the third anniversary of closing, with an option to extend up to two years. The company expected another $23.4 million during the funding period. Investor consent and default rights cover significant operating, financing and corporate decisions, including potential board control after default.
- Management anticipated using additional preferred proceeds, potential borrowing and property sales to fund acquisitions. It cited potential borrowing capacity of approximately $12.5 million, but had no committed revolving credit facility or committed mortgage financing. These funding sources were not assured.
- On February 6, 2015, the company agreed, subject to due diligence and closing conditions, to sell its seven-property Sparky’s self-storage portfolio for approximately $36.3 million. Management anticipated a second-quarter 2015 closing and planned to redeploy net proceeds; completion was not assured.
- Management described the economic recovery as slow and uneven, and noted possible increases in interest and borrowing costs. Risks include concentrated regional exposure, tenant vacancies and renewals, refinancing and balloon maturities, limited access to capital, high distributions relative to operating cash flow, illiquid common shares, and the ability to maintain REIT qualification. The filing lists $12.8 million of scheduled 2015 mortgage principal payments, including model-home debt.
- Management expected up to $3.0 million of 2015 capital improvements, tenant improvements and leasing costs. It stated that dividends may be reduced if cash flow or financing is insufficient. All 2014 and 2013 common distributions were characterized as return of capital for tax purposes.
- Ordinary-course legal proceedings were disclosed; management did not expect a material adverse effect. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; no auditor attestation on internal controls was required.
Important facts for investors to verify
- Confirm the relationship between the filing’s registrant, NetREIT, Inc., and the metadata company, Presidio Property Trust, Inc.
- Assess the sustainability of distributions: cash dividends exceeded operating cash flow, distributions were reduced during 2014, and the filing says funding may depend on asset sales, borrowing or new securities.
- Review the Series B Preferred Stock’s 14% return, redemption obligations, investor consent rights and consequences of default.
- Track 2015 debt maturities and refinancing plans, including the stated scheduled principal payments and the separate discussion of balloon payments.
- Verify whether the proposed $36.3 million self-storage sale closed, its net proceeds after debt and costs, and how proceeds were redeployed.
- Reconcile management’s liquidity and cash-flow references: the audited cash-flow statement reports $4.39 million of operating cash flow, while portions of MD&A cite approximately $4.0 million or $4.2 million.
- Review property occupancy, lease expirations, impairment assumptions and the exposure of model-home leases to 2015 expirations.