Form 10-Q Presidio Property Trust, For: Mar 31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM
___________________________________________________________
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period from _____ to _____
(Commission file No.)
___________________________________________________________
PRESIDIO PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________
| | | |
| (State or other jurisdiction | (I.R.S. employer |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
| Title of each class of registered securities | Trading Symbol(s) | Name of each exchange on which registered | ||
| | ||||
| $0.01 par value per share | ||||
| $0.01 par value per share | ||||
| Purchase Shares of Common Stock | ||||
________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| | ☒ | Smaller reporting company | | |||||||||||
| Emerging Growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At May 13, 2022, registrant had issued and outstanding
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this report and in our other filings with the Securities and Exchange Commission (the “SEC”). Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, financial condition, liquidity, capital resources, cash flows, results of operations and other financial and operating information. Forward-looking statements included in this report include, but are not limited to, statements regarding purchases and sales of properties, plans for financing and refinancing our properties, the adequacy of our capital resources, changes to the markets in which we operate, our business plans and strategies, and our payment of dividends. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Important factors that may cause actual results to differ from projections include, but are not limited to:
| • |
the potential adverse effects of the novel coronavirus ("COVID-19") pandemic and ensuing economic turmoil on our financial condition, results of operations, cash flows and performance, particularly our ability to collect rent, on the financial condition, results of operations, cash flows and performance of our tenants, and on the global economy and financial markets; adverse economic conditions in the real estate market and overall financial market fluctuations (including, without limitation, as a result of the current COVID-19 pandemic); |
| • |
inherent risks associated with real estate investments and with the real estate industry; |
| • |
significant competition may decrease or prevent increases in our properties' occupancy and rental rates and may reduce the value of our properties; |
| • |
a decrease in demand for commercial space and/or an increase in operating costs; |
| • |
failure by any major tenant (or a substantial number of tenants) to make rental payments to us because of a deterioration of their financial condition, an early termination of their lease, a non-renewal of their lease, or a renewal of their lease on terms less favorable to us; |
| • |
challenging economic conditions facing us and our tenants may have a material adverse effect on our financial condition and results of operations; |
| • |
our failure to generate sufficient cash to service and/or retire our debt obligations in a timely manner; |
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our inability to borrow or raise sufficient capital to maintain and/or expand our real estate investment portfolio; |
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adverse changes in the real estate financing markets, including potential increases in interest rates and/or borrowing costs; |
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potential losses, including from adverse weather conditions, natural disasters, and title claims, may not be covered by insurance; |
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inability to complete acquisitions or dispositions and, even if these transactions are completed, failure to successfully operate acquired properties and/or sell properties without incurring significant defeasance costs; |
| • |
our reliance on third-party property managers to manage a substantial number of our properties, brokers and/or agents to lease our properties; |
| • |
decrease in supply and/or demand for single family homes, inability to acquire additional model homes, and increased competition to buy such properties; |
| • |
terrorist attacks or actions and/or risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions; |
| • |
failure to continue to qualify as a REIT; |
| • |
adverse results of any legal proceedings; |
| • |
changes in laws, rules and regulations affecting our business; and |
| • |
the other risks and uncertainties discussed in Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 30, 2022. |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Real estate assets and lease intangibles: | ||||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Tenant improvements | ||||||||
| Lease intangibles | ||||||||
| Real estate assets and lease intangibles held for investment, cost | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Real estate assets and lease intangibles held for investment, net | ||||||||
| Real estate assets held for sale, net | ||||||||
| Real estate assets, net | ||||||||
| Cash, cash equivalents and restricted cash | ||||||||
| Deferred leasing costs, net | ||||||||
| Goodwill | ||||||||
| Other assets, net | ||||||||
| Investments held in Trust (see Notes 2 & 11) | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Mortgage notes payable, net | $ | $ | ||||||
| Mortgage notes payable related to properties held for sale, net | ||||||||
| Mortgage notes payable, total net | ||||||||
| Note payable, net | — | |||||||
| Accounts payable and accrued liabilities | ||||||||
| Accounts payable and accrued liabilities of SPAC (see Notes 2 & 11) | ||||||||
| Accrued real estate taxes | ||||||||
| Dividends payable preferred stock | ||||||||
| Lease liability, net | ||||||||
| Below-market leases, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9 & 11) | ||||||||
| SPAC Class A common stock subject to possible redemption; shares (at $ per share), net of issuance cost of $ million | ||||||||
| Equity: | ||||||||
| Series D Preferred Stock, par value per share; shares authorized; shares issued and outstanding (liquidation preference $ per share) as of March 31, 2022 and December 31, 2021, respectively | ||||||||
| Series A Common Stock, par value per share, shares authorized: ; shares and shares were issued and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Dividends and accumulated losses | ( | ) | ( | ) | ||||
| Total stockholders' equity before noncontrolling interest | ||||||||
| Noncontrolling interest | ||||||||
| Total equity | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Rental income | $ | $ | ||||||
| Fees and other income | ||||||||
| Total revenue | ||||||||
| Costs and expenses: | ||||||||
| Rental operating costs | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Impairment of real estate assets | ||||||||
| Total costs and expenses | ||||||||
| Other income (expense): | ||||||||
| Interest expense-mortgage notes | ( | ) | ( | ) | ||||
| Interest expense - note payable | ( | ) | ||||||
| Interest and other (expense), net | ( | ) | ||||||
| Gain on sales of real estate, net | ( | ) | ||||||
| Gain on extinguishment of government debt | ||||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Total other income (expense), net | ( | ) | ||||||
| Net income (loss) | ( | ) | ||||||
| Less: Income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Net loss attributable to Presidio Property Trust, Inc. stockholders | $ | ( | ) | $ | ( | ) | ||
| Less: Preferred Stock Series D dividends | ( | ) | ||||||
| Less: Series A Warrant dividend | ( | ) | ||||||
| Net loss attributable to Presidio Property Trust, Inc. common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share attributable to Presidio Property Trust, Inc. common stockholders: | ||||||||
| Basic & Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding - basic & diluted | ||||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Three Months Ended and March 31, 2022 and 2021
(Unaudited)
| Additional | Dividends and | Total | Non- | |||||||||||||||||||||||||||||||||
| Preferred Stock Series D | Common Stock | Paid-in | Accumulated | Stockholders’ | controlling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Losses | Equity | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Vesting of restricted stock | ||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends to Series D Preferred Stockholders | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Remeasurement of SPAC Class A common stock subject to possible redemption | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Distributions in excess of contributions received | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||
| Additional | Dividends and | Total | Non- | |||||||||||||||||||||||||||||||||
| Preferred Stock Series D | Common Stock | Paid-in | Accumulated | Stockholders’ | controlling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Losses | Equity | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Distributions in excess of contributions received | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock compensation | ||||||||
| Bad debt expense | ||||||||
| Loss (Gain) on sale of real estate assets, net | ( | ) | ||||||
| Gain on extinguishment of government debt | ( | ) | ||||||
| Net change in fair value marketable securities | ||||||||
| Impairment of real estate assets | ||||||||
| Amortization of financing costs | ||||||||
| Amortization of above-market leases | ||||||||
| Amortization of below-market leases | ( | ) | ( | ) | ||||
| Straight-line rent adjustment | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Other assets | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Accrued real estate taxes | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Real estate acquisitions | ( | ) | ||||||
| Additions to buildings and tenant improvements | ( | ) | ( | ) | ||||
| Investment in marketable securities | ( | ) | ||||||
| Proceeds from sale of marketable securities | ||||||||
| Investment of SPAC IPO proceeds into Trust Account | ( | ) | ||||||
| Additions to deferred leasing costs | ( | ) | ( | ) | ||||
| Proceeds from sales of real estate, net | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from mortgage notes payable, net of issuance costs | ||||||||
| Repayment of mortgage notes payable | ( | ) | ( | ) | ||||
| Repayment of note payable | ( | ) | ||||||
| Payment of deferred offering costs | ( | ) | ( | ) | ||||
| Distributions to noncontrolling interests, net | ( | ) | ( | ) | ||||
| Proceeds from initial public offering of SPAC | ||||||||
| Dividends paid to preferred stockholders | ( | ) | ||||||
| Dividends paid to common stockholders | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash - beginning of period | ||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid-mortgage notes payable | $ | $ | ||||||
| Interest paid-notes payable | $ | $ | ||||||
| Non-cash financing activities: | ||||||||
| Deferred offering cost SPAC, underwriting commission payable | $ | $ | ||||||
| Dividends payable - Preferred Stock Series D | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 2022
1. ORGANIZATION
Organization. Presidio Property Trust, Inc. (“we”, “our”, “us” or the “Company”) is an internally-managed real estate investment trust (“REIT”), with holdings in office, industrial, retail and model home properties. We were incorporated in the State of California on September 28, 1999, and in August 2010, we reincorporated as a Maryland corporation. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” Through Presidio Property Trust, Inc., its subsidiaries, and its partnerships, we own
The Company or one of its affiliates operates the following partnerships during the periods covered by these condensed consolidated financial statements:
| • | The Company is the sole general partner and limited partner in limited partnerships (NetREIT Palm Self-Storage LP and NetREIT Casa Grande LP), both of which, at March 31, 2022, had ownership interests in an entity that owns income producing real estate. The Company refers to these entities collectively as the "NetREIT Partnerships". | |
| • | The Company is the general and limited partner in limited partnerships that purchase model homes and lease them back to homebuilders (Dubose Model Home Investors #202, LP, Dubose Model Home Investors #203, LP, Dubose Model Home Investors #204, LP, Dubose Model Home Investors #205, LP, and Dubose Model Home Investors #206, LP). The Company refers to these entities collectively as the “Model Home Partnerships”. |
The Company has determined that the limited partnerships in which it owns less than 100% should be included in the Company’s consolidated financial statements as the Company directs their activities and has control of such limited partnerships.
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (the “Code”), for federal income tax purposes. To maintain our qualification as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels, and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to maintain our qualification as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. We are subject to certain state and local income taxes.
We, together with one of our entities, have elected to treat our subsidiaries as a taxable REIT subsidiary (a “TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes. The Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries have been assessed any significant interest or penalties for tax positions by any tax jurisdictions.
Reverse Stock Split. On July 29, 2020, we amended our charter to effect a one-for- reverse stock split of every outstanding share of our Series A Common Stock. The financial statements and accompanying footnotes have been retroactively restated to reflect the reverse stock split.
Additional Offerings & Warrants. Our Form S-3 Registration Statement was declared effective by the SEC on April 27, 2021. Under this registration statement, we may offer and sell from time to time, in one or more series, subject to limitation that may apply (such as under Rule 415 of the Securities Act of 1933) various securities of the Company for total gross proceeds of up to $
In connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to
The Company evaluated the accounting guidance in ASC 480 and ASC 815 regarding the classification of the Pre-Funded Warrant, Common Stock Warrants, and Placement Agent Warrants as equity or a liability and ultimately determined that it should be classified as permanent equity. As of March 31, 2022,
Warrant Dividend. In January 2022 we distributed -year listed warrants (the “Series A Warrants”) to our Series A Common Stockholders. The Series A Warrants and the shares of Series A Common Stock issuable upon the exercise of the Series A Warrants were registered on a registration statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held Series A Common Stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired Series A Common Stock in the market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants give the holder the right to purchase share of common stock at $
Preferred Stock Series D. On June 15, 2021, the Company completed its secondary offering of
Liquidity. The Company's anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, and the sale of equity or debt securities. Future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. The Company is also seeking investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders and may seek a revolving line of credit to provide short-term liquidity. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.
Short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on mortgage notes payables, during the last nine months of 2022, total approximately $
As the Company continues its operations, it may re-finance or seek additional financing; however, there can be no assurance that any such re-financing or additional financing will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans and/or certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. Management believes that the combination of working capital on hand and the ability to refinance commercial and model home mortgages will fund operations through at least the next twelve months from the date of the issuance of these unaudited interim financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2021. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2022.
Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared by the Company's management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and footnote disclosures required for annual consolidated financial statements have been condensed or excluded pursuant to rules and regulations of the SEC. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of our financial position, results of our operations, and cash flows as of, and for the three months ended March 31, 2022 and 2021, respectively. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements included in the Form 10-K filed with the SEC on March 30, 2022. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 due to real estate market flections, available mortgage lending rates and other factors, such as the effects of COVID-19 and its possible influence on our future results.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Presidio Property Trust and its subsidiaries, NetREIT Advisors, LLC and Dubose Advisors LLC (collectively, the “Advisors”), and NetREIT Dubose Model Home REIT, Inc. The consolidated financial statements also include the results of the NetREIT Partnerships and the Model Home Partnerships. As used herein, references to the “Company” include references to Presidio Property Trust, its subsidiaries, and the partnerships. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements also include the accounts of (a) Murphy Canyon Acquisition Corp. ("Murphy Canyon"), which is a SPAC, for which we serve as the financial sponsor (as described below), and which is deemed to be controlled by us as a result of our
The Company classifies the noncontrolling interests in the NetREIT Partnerships as part of consolidated net income (loss) in 2022 and 2021 and has included the accumulated amount of noncontrolling interests as part of equity since inception in February 2010. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interest will be remeasured, with the gain or loss reported in the statement of operations. Management has evaluated the noncontrolling interests and determined that they do not contain any redemption features.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allocation of purchase price paid for property acquisitions between land, building and intangible assets acquired including their useful lives; valuation of long-lived assets, and the allowance for doubtful accounts, which is based on an evaluation of the tenants’ ability to pay. Actual results may differ from those estimates.
Real Estate Assets and Lease Intangibles. Land, buildings and improvements are recorded at cost, including tenant improvements and lease acquisition costs (including leasing commissions, space planning fees, and legal fees). The Company capitalizes any expenditure that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred. The Company allocates the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land, buildings, tenant improvements, and long-term debt) and identified intangible assets and liabilities (including the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships), in each case based on their respective fair values.
The Company allocates the purchase price to tangible assets of an acquired property based on the estimated fair values of those tangible assets, assuming the property was vacant. Estimates of fair value for land, building and building improvements are based on many factors including but not limited to comparisons to other properties sold in the same geographic area and independent third-party valuations. In estimating the fair values of the tangible assets, intangible assets, and liabilities acquired, the Company also considers information obtained about each property as a result of its pre‑acquisition due diligence, marketing and leasing activities.
The value allocated to acquired lease intangibles is based on management’s evaluation of the specific characteristics of each tenant’s lease. Characteristics considered by management in allocating these values include but are not limited to the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease, the tenant’s credit quality, and other factors.
The value attributable to the above-market or below-market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below-market leases are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases. Amortization of above and below-market rents resulted in a net increase in rental income of approximately $
The value of in-place leases and unamortized lease origination costs are amortized to expenses over the remaining term of the respective leases, which range from less than a year to years. The amount allocated to acquired in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what the Company would have paid to a third-party to secure a new tenant reduced by the expired term of the respective lease. The amount allocated to tenant relationships is the benefit resulting from the likelihood of a tenant renewing its lease. Amortization expense related to these assets was approximately $
Deferred Leasing Costs. Costs incurred in connection with successful property leases are capitalized as deferred leasing costs and amortized to leasing commission expense on a straight-line basis over the terms of the related leases which generally range from to years. Deferred leasing costs consist of third-party leasing commissions. Management re-evaluates the remaining useful lives of leasing costs as the creditworthiness of the tenants and economic and market conditions change. If management determines the estimated remaining life of the respective lease has changed, the amortization period is adjusted. At March 31, 2022 and December 31, 2021, the Company had net deferred leasing costs of approximately $
Cash Equivalents and Restricted Cash. At March 31, 2022 and December 31, 2021, we had approximately $
Real Estate Held for Sale. Real estate held for sale during the current period is classified as “real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. Mortgage notes payable related to the real estate held for sale during the current period are classified as “mortgage notes payable related to real estate held for sale, net” for all prior periods presented in the accompanying condensed consolidated financial statements. As of March 31, 2022, commercial property met the criteria to be classified as held for sale and model homes were classified as held for sale.
Deferred Offering Costs. Deferred offering costs represent legal, accounting and other direct costs related to our offerings. As of March 31, 2022 and December 31, 2021, we have incurred approximately $
Impairments of Real Estate Assets. We regularly review for impairment on a property-by-property basis. Impairment is recognized on a property held for use when the expected undiscounted cash flows for a property are less than the carrying amount at which time the property is written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows including but not limited to revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used to estimate the future recoverability of carrying value requires significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.
Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be material.
Fair Value Measurements. Certain assets and liabilities are required to be carried at fair value, or if long-lived assets are deemed to be impaired, to be adjusted to reflect this condition. The guidance requires disclosure of fair values calculated under each level of inputs within the following hierarchy:
| • | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
| • | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| • | Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
When available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement.
Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. As of March 31, 2022 and December 31, 2021, our marketable securities presented on the balance sheet were measured at fair value using Level 1 market prices and totaled approximately $
Earnings per share (“EPS”). The EPS on Common stock has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted stock, which contain rights to receive non-forfeitable dividends, as participating securities requiring the two-class method of computing net income per share of common stock. In accordance with the two-class method, earnings per share have been computed by dividing the net income less net income attributable to unvested restricted shares by the weighted average number of shares of common stock outstanding less unvested restricted shares. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock and potentially dilutive securities outstanding in accordance with the treasury stock method.
Dilutive common stock equivalents include the dilutive effect of in-the-money stock equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common stock shares are considered anti-dilutive and thus are excluded from the calculation. Securities that are excluded from the calculation of weighted average dilutive common stock, because their inclusion would have been antidilutive, are:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Common Stock Warrants | ||||||||
| Placement Agent Warrants | ||||||||
| Series A Warrants | ||||||||
| Unvested Common Stock Grants | ||||||||
| Total potentially dilutive shares | ||||||||
Variable Interest Entity. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. Our determination of whether an entity in which we hold a direct or indirect variable interest is a VIE is based on several factors, including whether we participated in the design of the entity and the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.
We analyze any investments in VIEs to determine if we are the primary beneficiary. In evaluating whether we are the primary beneficiary, we evaluate our direct and indirect economic interests in the entity. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in the VIE. Determining which reporting entity, if any, has a controlling financial interest in a VIE is primarily a qualitative approach focused on identifying which reporting entity has both: (i) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.
We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct operating decisions and activities. In addition, we consider the rights of other investors to participate in those decisions. We determine whether we are the primary beneficiary of a VIE at the time we become involved with a variable interest entity and reconsider that conclusion continually. We consolidate any VIE of which we are the primary beneficiary.
The Company is involved in the formation of an entity considered to be Variable Interest Entity (“VIE”). The Company evaluates the consolidation of this entity as required pursuant to ASC Topic 810 relating to the consolidation of such VIE. The Company’s determination of whether it is the primary beneficiary of the VIE is based in part on an assessment of whether or not the Company and its related parties have the power to direct activities of the VIE and are exposed to the majority of the risks and rewards of the entity.
Following the completion of the Murphy Canyon IPO, we determined that Murphy Canyon is a Variable Interest Entity ("VIE") in which we have a variable interest because we participated in its formation and design, manage the significant activities, and Murphy Canyon does not have enough equity at risk to finance its activities without additional subordinated financial support. We have also determined that Murphy Canyon's public stockholders do not have substantive rights, and their equity interest constitutes temporary equity, outside of permanent equity, in accordance with ASC 480-10-S99-3A. As such, we have concluded that we are currently the primary beneficiary of Murphy Canyon as a VIE, as we have the right to receive benefits or the obligation to absorb losses of the entity, as well as the power to direct a majority of the activities that significantly impact Murphy Canyon's economic performance. Since we are the primary beneficiary, Murphy Canyon is consolidated into our condensed consolidated financial statements. See Note 9 Commitments and Contingencies for additional details regarding Murphy Canyon.
Shares Subject to Possible Redemption. The Company accounts for common stock issued by the SPAC, (which is consolidated in our condensed consolidated financial statements), that is subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Under ASC 480, shares of common stock subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable shares of common stock (including shares of common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, shares of common stock are classified as shareholders’ equity.
All of the Public Shares of Murphy Canyon SPAC (Class A Common Shares) contain a redemption feature which allows for the redemption of such Public Shares in connection with our liquidation, if there is a stockholder vote or tender offer in connection with our initial business combination and in connection with certain amendments to our amended and restated certificate of incorporation. In accordance with SEC and its guidance on redeemable equity instruments, which has been codified in ASC 480-10-S99, redemption provisions not solely within the control of a company require common stock subject to redemption to be classified outside of permanent equity. Accordingly, as of March 31, 2022, the Public Shares are presented as temporary equity, outside the shareholder's equity section of the Company's March 31, 2022 balance sheet.
Given that the Public Shares were issued with other freestanding instruments (i.e., public warrants which were classified as permanent equity as described below), the proceeds and initial carrying value of Class A common stock classified as temporary equity was allocated in accordance with ASC 470-20. The Murphy Canyon Class A common stock is subject to ASC 480-10-S99. In addition, because it is probable that the equity instrument will become redeemable, we have the option to either (i) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument or (ii) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. We have elected to recognize the accretion resulting from changes in redemption value immediately during the three months ended March 31, 2022. See Note 9 Commitments and Contingencies for additional details regarding Murphy Canyon.
Warrant Instruments SPAC. Murphy Canyon accounts for warrants in accordance with the guidance contained in ASC 480 and FASB ASC 815, “Derivatives and Hedging”. Under ASC 815-40 and ASC 840 warrants that meet the criteria for equity treatment are recorded in stockholder’s equity. The warrants are subject to re-evaluation of the proper classification and accounting treatment at each reporting period. If the warrants no longer meet the criteria for equity treatment, they will be recorded as a liability and remeasured each period with changes recorded in the statement of operations. The warrants meet the criteria for classification as equity because they are not exercisable until after the SPAC business combination is completed, at which point the common shares are no longer redeemable and because they are indexed the Company's common stock and meet the other criteria for equity classification. See Note 9 Commitments and Contingencies for additional details regarding Murphy Canyon.
Subsequent Events. We evaluate subsequent events up until the date the condensed consolidated financial statements are issued.
Recently Issued and Adopted Accounting Pronouncements. In June 2017, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, amendedin February 2020 with ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842). ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. While ASU 2016-13 was effective for periods beginning after December 15, 2019, the issuance of ASU 2020-02 has allowed for the delay in adoption for certain smaller public companies and is now effective for fiscal periods beginning after December 15, 2022. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company is continuing to evaluate the impact of this guidance on its financial statements and does not believe it will have a material impact on the financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. The amendments in ASU No. 2020-06 are effective for public business entities that meet the definition of a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company has adopted this guidance with no impact on our financial statements.
3. RECENT REAL ESTATE TRANSACTIONS
Acquisitions during the three months ended March 31, 2022:
| • | The Company acquired |
Acquisitions during the three months ended March 31, 2021:
| • | The Company did not acquire any commercial properties or model homes. |
Dispositions during the three months ended March 31, 2022:
| • | World Plaza, which was sold on March 11, 2022, for approximately $ |
| • | The Company disposed of |
Dispositions during the three months ended March 31, 2021:
| • | Waterman Plaza, which was sold on January 28, 2021, for approximately $ |
| • | Garden Gateway, which was sold on February 19, 2021, for approximately $ |
| • | The Company disposed of |
4. REAL ESTATE ASSETS
The Company owns a diverse portfolio of real estate assets. The primary types of properties the Company invests in are office, industrial, retail, and triple-net leased model home properties. We have
| • | | |
| • | ||
| • | |
A summary of the properties owned by the Company as of March 31, 2022 and December 31, 2021 is as follows:
| Date | Real estate assets, net (in thousands) | ||||||||||||
| Property Name | Acquired | Location | March 31, 2022 | December 31, 2021 | |||||||||
| World Plaza (1) | September 2007 | | $ | $ | |||||||||
| Genesis Plaza (3) | August 2010 | | |||||||||||
| Dakota Center | May 2011 | | |||||||||||
| Grand Pacific Center (2) | March 2014 | | |||||||||||
| Arapahoe Center | December 2014 | | |||||||||||
| Union Town Center | December 2014 | | |||||||||||
| West Fargo Industrial | August 2015 | | |||||||||||
| 300 N.P. | August 2015 | | |||||||||||
| Research Parkway | August 2015 | | |||||||||||
| One Park Center | August 2015 | | |||||||||||
| Shea Center II | December 2015 | | |||||||||||
| Mandolin (4) | August 2021 | | |||||||||||
| Baltimore | December 2021 | | |||||||||||
| Presidio Property Trust, Inc. properties | |||||||||||||
| Model Home properties (5) | 2016 - 2022 | | |||||||||||
| Total real estate assets and lease intangibles, net | $ | $ | |||||||||||
(1) This property was sold during the three months ended March 31, 2022.
(2) This property is held for sale as of March 31, 2022.
(3) Genesis Plaza is owned by
(4) Mandolin is owned by NetREIT Palm Self-Storage LP, through its wholly owned subsidiary NetREIT Highland LLC, and the Company is the sole general partner and owns
(5) Includes Model Homes listed as held for sale as of March 31, 2022.
5. LEASE INTANGIBLES
The following table summarizes the net value of other intangible assets acquired and the accumulated amortization for each class of intangible asset:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Lease Intangibles | Accumulated Amortization | Lease Intangibles, net | Lease Intangibles | Accumulated Amortization | Lease Intangibles, net | |||||||||||||||||||
| In-place leases | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Leasing costs | ( | ) | ( | ) | ||||||||||||||||||||
| Above-market leases | ( | ) | ( | ) | ||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||
At March 31, 2022 and December 31, 2021, gross lease intangible assets of $
The net value of acquired intangible liabilities was approximately $
Future aggregate approximate amortization expense for the Company's lease intangible assets is as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ |
6. OTHER ASSETS
Other assets consist of the following:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Deferred rent receivable | $ | $ | ||||||
| Prepaid expenses, deposits and other | ||||||||
| Investment in marketable securities | ||||||||
| Accounts receivable, net | ||||||||
| Right-of-use assets, net | ||||||||
| Other intangibles, net | ||||||||
| Notes receivable | ||||||||
| Deferred offering costs | ||||||||
| Total other assets | $ | $ | ||||||
As of March 31, 2022, we owned common shares of
7. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
| Principal as of | |||||||||||||||||
| March 31, | December 31, | Loan | Interest | ||||||||||||||
| Mortgage note property | 2022 | 2021 | Type | Rate (1) | Maturity | ||||||||||||
| 300 N.P. (2) | Fixed | % | 6/11/2022 | ||||||||||||||
| Dakota Center | Fixed | % | 7/6/2024 | ||||||||||||||
| Research Parkway | Fixed | % | 1/5/2025 | ||||||||||||||
| Arapahoe Service Center | Fixed | % | 1/5/2025 | ||||||||||||||
| Union Town Center | Fixed | % | 1/5/2025 | ||||||||||||||
| One Park Centre | Fixed | % | 9/5/2025 | ||||||||||||||
| Genesis Plaza | Fixed | % | 9/6/2025 | ||||||||||||||
| Shea Center II | Fixed | % | 1/5/2026 | ||||||||||||||
| West Fargo Industrial | Fixed | % | 8/5/2029 | ||||||||||||||
| Baltimore | Fixed | % | 4/6/2032 | ||||||||||||||
| Grand Pacific Center (3) (4) | Fixed | % | 8/1/2037 | ||||||||||||||
| Subtotal, Presidio Property Trust, Inc. Properties | $ | $ | |||||||||||||||
| Model Home mortgage notes (4) (5) | Fixed | 2022 - 2024 | |||||||||||||||
| Mortgage Notes Payable | $ | $ | |||||||||||||||
| Unamortized loan costs | ) | ) | |||||||||||||||
| Mortgage Notes Payable, net | $ | $ | |||||||||||||||
| (1) | Interest rates as of March 31, 2022. |
| (2) | The mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $ |
| (3) | Interest rate is subject to reset on September 1, 2023. |
| (4) | Property held for sale as of March 31, 2022. There were four model homes included as real estate assets held for sale. |
| (5) | Our model homes have stand-alone mortgage note at interest rates ranging from |
The Company is in compliance with all material conditions and covenants of its mortgage notes payable.
Scheduled principal payments of mortgage notes payable were as follows as of March 31, 2022:
| Presidio Property | Model | |||||||||||
| Trust, Inc. | Homes | Total Principal | ||||||||||
| Years ending December 31: | Notes Payable | Notes Payable | Payments | |||||||||
| 2022 | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total | $ | $ | $ | |||||||||
8. NOTES PAYABLE
On April 22, 2020, the Company received an Economic Injury Disaster Loan of $
On September 3, 2021, we issued promissory notes to our majority owned subsidiary Dubose Model Home Investors 202 LP and Dubose Model Home Investors 204 LP for the refinancing of four model home properties in Texas and Wisconsin, for $
On August 17, 2021, we issued a promissory note to our majority owned subsidiary NetREIT Highland for the acquisition of the Mandolin property in Houston Texas, for $
On December 20, 2021, we issued a promissory note to our majority owned subsidiary PPT Baltimore for the acquisition of the Baltimore property in Baltimore, MD, for $
9. COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.
Litigation. From time to time, we may become involved in various lawsuits or legal proceedings which arise in the ordinary course of business. Neither the Company nor any of the Company’s properties are presently subject to any material litigation nor, to the Company’s knowledge, is there any material threatened litigation.
Environmental Matters. The Company monitors its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, the Company is not currently aware of any environmental liability with respect to the properties that would have a material effect on the Company’s financial condition, results of operations and cash flow. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that the Company believes would require additional disclosure or recording of a loss contingency.
Financial Markets. The Company monitors concerns over economic recession, the COVID-19 pandemic, interest rate increases, policy priorities of the U.S. presidential administration, trade wars, labor shortages, or inflation may contribute to increased volatility and diminished expectations for the economy and markets. Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability. For example, the conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries. The U.S. government and other governments in jurisdictions have imposed severe economic sanctions and export controls against Russia and Russian interests, have removed Russia from the SWIFT system, and have threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia, is unknown. We have not currently experienced a direct material impact to our Company or operations; however, we will continue to monitor the financial markets for events that could impact our commercial real estate properties.
Sponsorship of Special Purpose Acquisition Company. On January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary, Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”), of a special purpose acquisition company (“SPAC”) initial public offering. The SPAC raised $132,250,000 in capital investment to acquire businesses in the real estate industry, including construction, homebuilding, real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and technologies targeting the real estate space, which we may refer to as “Proptech” businesses. We, through our wholly-owned subsidiary, owned approximately
The SPAC's ability to complete a business combination may be extended in additional increments of three months up to a total of six (6) additional months from the closing date of the offering, subject to the payment into the Trust Account by the Sponsor (or its designees or affiliates) of the sum of $
The Murphy Canyon IPO, of
Immediately following the IPO, Murphy Canyon began to evaluate acquisition candidates in the real estate industry, including construction, homebuilding, real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and technologies targeting the real estate space with an aggregate combined enterprise value of approximately $
10. STOCKHOLDERS' EQUITY
Preferred Stock. The Company is authorized to issue up to
On June 15, 2021, the Company completed its secondary offering of
Dividends:
Holders of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of
Voting Rights:
Holders of shares of the Series D Preferred Stock will generally have no voting rights. However, if the Company does not pay dividends on the Series D Preferred Stock for eighteen or more monthly dividend periods (whether or not consecutive), the holders of the Series D Preferred Stock (voting separately as a class with the holders of all other classes or series of the Company’s preferred stock it may issue upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Series D Preferred Stock in the election referred to below) will be entitled to vote for the election of additional directors to serve on the Company’s Board of Directors until the Company pays, or declares and sets apart funds for the payment of, all dividends that it owes on the Series D Preferred Stock, subject to certain limitations.
In addition, the affirmative vote of the holders of at least -thirds of the outstanding shares of Series D Preferred Stock (voting together as a class with all other series of parity preferred stock the Company may issue upon which like voting rights have been conferred and are exercisable) is required at any time for the Company to (i) authorize or issue any class or series of its stock ranking senior to the Series D Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution or winding up or (ii) to amend any provision of the Company charter so as to materially and adversely affect any rights of the Series D Preferred Stock or to take certain other actions.
Liquidation Preference:
In the event of the Company’s voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of Series D Preferred Stock will be entitled to be paid out of the assets the Company has legally available for distribution to its stockholders, subject to the preferential rights of the holders of any class or series of its stock the Company may issue ranking senior to the Series D Preferred Stock with respect to the distribution of assets upon liquidation, dissolution or winding up, a liquidation preference of $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any distribution of assets is made to holders of the Company’s common stock or any other class or series of the Company’s stock it may issue that ranks junior to the Series D Preferred Stock as to liquidation rights.
In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the Company’s available assets are insufficient to pay the amount of the liquidating distributions on all outstanding shares of Series D Preferred Stock and the corresponding amounts payable on all shares of other classes or series of the Company’s stock that it issues ranking on parity with the Series D Preferred Stock in the distribution of assets, then the holders of the Series D Preferred Stock and all other such classes or series of stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
Redemption:
Commencing on or after June 15, 2026, the Company may redeem, at its option, the Series D Preferred Stock, in whole or in part, at a cash redemption price equal to $
In accordance with the terms of the Series D Preferred Stock, the Series D monthly dividend has been approved by the Board of Directors through June 2022 in the amount of $
Common Stock. The Company is authorized to issue up to
On July 12, 2021, the Company entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of
In connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to
The Company evaluated the accounting guidance in ASC 480 and ASC 815 regarding the classification of the Pre-Funded Warrant, Common Stock Warrants, and Placement Agent Warrants as equity or a liability and ultimately determined that it should be classified as permanent equity. As of March 31, 2022, of the Common Stock Warrants and Placement Agent Warrants have been exercised.
Stock Repurchase Program. On September 17, 2021, the Board of Directors authorized a stock repurchase program of up to $
Cash Dividends on Common Stock. For the three months ended March 31, 2022, the Company declared and paid cash dividends of approximately $
Series A Common Stock
| Quarter Ended | 2022 | 2021 | ||||||
| Distributions Declared | Distributions Declared | |||||||
| March 31 | $ | $ | ||||||
| Total | $ | $ | ||||||
Series D Preferred Stock
| Month | 2022 | 2021 | ||||||
| Distributions Declared | Distributions Declared | |||||||
| January | $ | $ | ||||||
| February | ||||||||
| March | ||||||||
| Total | $ | $ | ||||||
Warrant Dividend. In January 2022, we distributed the Series A Warrants to our Series A Common Stockholders. The Series A Warrants and the shares of Series A Common Stock issuable upon the exercise of the Series A Warrants were registered on a registration statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held shares of common stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired shares of Series A Common Stock in the market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants give the holder the right to purchase one share of Series A Common Stock at $
Partnership Interests. Through the Company, its subsidiaries, and its partnerships, we own 12 commercial properties in fee interest, of which we own partial interests in through our holdings in various affiliates in which we serve as general partner, member and/or manager. Each of the limited partnerships is referred to as a “DownREIT.” In each DownREIT, we have the right, through put and call options, to require our co-investors to exchange their interests for shares of our Common Stock at a stated price after a defined period (generally five years from the date they first invested in the entity’s real property), the occurrence of a specified event or a combination thereof. The Company is a limited partner in partnerships and sole stockholder in one corporation, which entities purchase and leaseback model homes from homebuilders.
Dividend Reinvestment Plan. The Company adopted a distribution reinvestment plan (the “DRIP”) that allowed stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of the Company’s Common Stock. The Company registered
11. SHARE-BASED INCENTIVE PLAN
The Company maintains a restricted stock incentive plan for the purpose of attracting and retaining officers, employees, and non-employee board members. Share awards generally vest in equal annual installments over a to year period from date of issuance. Non-vested shares have voting rights and are eligible for any dividends paid to common shares. The Company recognized compensation cost for these fixed awards over the service vesting period, which represents the requisite service period, using the straight-line method. Prior to our IPO, the value of non-vested shares was calculated based on the offering price of the shares in the most recent private placement offering of $
A summary of the activity for the Company’s restricted stock was as follows:
| Outstanding shares: | Common Shares | |||
| Balance at December 31, 2021 | ||||
| Granted | ||||
| Forfeited | ( | ) | ||
| Vested | ( | ) | ||
| Balance at March 31, 2021 | ||||
The non-vested restricted shares outstanding as of March 31, 2022 will vest over the next to years.
The value of non-vested restricted stock granted as of March 31, 2022 and December 31, 2021 was approximately $
Share-based compensation expense for the three months ended March 31, 2022, was approximately $
12. SEGMENTS
The Company’s reportable segments consist of
The Company evaluates the performance of its segments based upon net operating income (“NOI”), which is a non-GAAP supplemental financial measure. The Company defines NOI for its segments as operating revenues (rental income, tenant reimbursements and other operating income) less property and related expenses (property operating expenses, real estate taxes, insurance, asset management fees, impairments and provision for bad debt). NOI excludes certain items that are not considered to be controllable in connection with the management of an asset such as non-property income and expenses, depreciation and amortization, real estate acquisition fees and expenses and corporate general and administrative expenses. The Company uses NOI to evaluate the operating performance of the Company’s real estate investments and to make decisions regarding allocation of resources.
The following tables compare the Company’s segment activity to its results of operations and financial position as of and for the three months ended March 31, 2022 and March 31, 2021:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Office/Industrial Properties: | ||||||||
| Rental, fees and other income | $ | $ | ||||||
| Property and related expenses | ( | ) | ( | ) | ||||
| Net operating income, as defined | ||||||||
| Model Home Properties: | ||||||||
| Rental, fees and other income | ||||||||
| Property and related expenses | ( | ) | ( | ) | ||||
| Net operating income, as defined | ||||||||
| Retail Properties: | ||||||||
| Rental, fees and other income | ||||||||
| Property and related expenses | ( | ) | ( | ) | ||||
| Net operating income, as defined | ||||||||
| Reconciliation to net loss: | ||||||||
| Total net operating income, as defined, for reportable segments | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain on extinguishment of government debt | ||||||||
| Other income (expense), net | ( | ) | ||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Gain (loss) on sale of real estate | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| March 31, | December 31, | |||||||
| Assets by Reportable Segment: | 2022 | 2021 | ||||||
| Office/Industrial Properties: | ||||||||
| Land, buildings and improvements, net (1) | $ | $ | ||||||
| Total assets (2) | $ | $ | ||||||
| Model Home Properties: | ||||||||
| Land, buildings and improvements, net (1) | $ | $ | ||||||
| Total assets (2) | $ | $ | ||||||
| Retail Properties: | ||||||||
| Land, buildings and improvements, net (1) | $ | $ | ||||||
| Total assets (2) | $ | $ | ||||||
| Reconciliation to Total Assets: | ||||||||
| Total assets for reportable segments | $ | $ | ||||||
| Other unallocated assets: | ||||||||
| Cash, cash equivalents and restricted cash | ||||||||
| Other assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| (1) | Includes lease intangibles and the land purchase option related to property acquisitions. |
| (2) | Includes land, buildings and improvements, cash, cash equivalents, and restricted cash, current receivables, deferred rent receivables and deferred leasing costs and other related intangible assets, all shown on a net basis. |
| For the Three Months Ended March 31, | ||||||||
| Capital Expenditures by Reportable Segment | 2022 | 2021 | ||||||
| Office/Industrial Properties: | ||||||||
| Capital expenditures and tenant improvements | $ | $ | ||||||
| Model Home Properties: | ||||||||
| Acquisition of operating properties | ||||||||
| Retail Properties: | ||||||||
| Acquisition of operating properties | ||||||||
| Capital expenditures and tenant improvements | ||||||||
| Totals: | ||||||||
| Acquisition of operating properties, net | ||||||||
| Capital expenditures and tenant improvements | ||||||||
| Total real estate investments | $ | $ | ||||||
On August 17, 2021, we issued a promissory note to our majority owned subsidiary NetREIT Highland for the acquisition of the Mandolin property in Houston Texas, for $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 30, 2022.
We may refer to the three months ended March 31, 2022 and March 31, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” and/or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and also of which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the most significant factors is the potential adverse effect of COVID-19 and ensuing economic turmoil on the financial condition, results of operations, cash flows and performance of the Company, particularly our ability to collect rent, on the financial condition, results of operations, cash flows and performance of our tenants, and on the global economy and financial markets. The extent to which COVID-19 impacts the Company and its tenants will depend on current and future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 30, 2022, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to the risks associated with the ownership of real estate in general and our real estate assets in particular; the economic health of the metro regions where we conduct business; the risk of failure to enter into/and or complete contemplated acquisitions and dispositions, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition of our portfolio; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers and joint venture partners; the ability to control our operating expenses; the economic health of our tenants; the supply of competing properties; shifts away from brick and mortar stores to e-commerce; the availability and terms of financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; terrorist attacks or actions and/or risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions; weather conditions, natural disasters and pandemics; ability to maintain key personnel; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2021 Annual Report on Form 10-K filed on March 30, 2022. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
Outlook
On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic caused state and local governments within our areas of business operations to institute quarantines, “shelter-in-place” mandates, including rules and restrictions on travel and the types of businesses that may continue to operate. While certain areas have re-opened, others have seen an increase in the number of cases reported, prompting local governments to consider enforce further restrictions. We continue to monitor our operations and government recommendations. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law to provide widespread emergency relief for the economy and to provide aid to corporations.
The CARES Act includes several significant provisions related to taxes, refundable payroll tax credits and deferment of social security payments. We utilized certain relief options offered under the CARES Act and continue to evaluate the relief options for us and our tenants available under the CARES Act, as well as other emergency relief initiatives and stimulus packages instituted by the federal government. Several of the relief options contain restrictions on future business activities, which require careful evaluation and consideration, such as restrictions on the ability to repurchase shares and pay dividends. We will continue to assess these options, and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the effects of the pandemic continue to evolve.
The effects of the COVID-19 pandemic did not significantly impact our operating results during 2021 or the first quarter of 2022. We continue to monitor and communicate with our tenants to assess their needs and ability to pay rent. We have negotiated lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which have included or may include rent deferral, temporary rent abatement, or reduced rental rates and/or lease extension periods, however no new negotiations were initiated during the first quarter of 2022. While these amendments have affected our short-term cash flows, we do not believe they represent a change in the valuation of our assets for the properties affected and have not significantly affected our results of operations. Given the longevity of this pandemic and the potential for other variants of the coronavirus, such as the delta variant, the COVID-19 outbreak may materially affect our financial condition and results of operations going forward, including but not limited to real estate rental revenues, credit losses, leasing activity, and potentially the valuation of our real estate assets. We do expect additional rent deferrals, abatements, and/or credit losses from our commercial tenants during the remainder of 2022 and we do not expect our existing rent deferrals, abatements, and/or credit losses to have a material impact on our real estate rental revenue and cash collections. While we do expect that the effects of the COVID-19 pandemic will impact our ability to lease up available commercial space, our business operations and activities in many regions may be subject to future quarantines, "shelter-in-place" rules, and various other restrictions for the foreseeable future. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time. We are currently focused on growing our portfolio with the recent capital raised from the sale of our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock in June 2021 and our Series A Common Stock in July 2021. For more information, see Part II - Item 1A. Risk Factors and Part II - Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022.
OVERVIEW
The Company operates as an internally managed, diversified REIT, with primary holdings in office, industrial, retail, and triple-net leased model home properties. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” The Company acquires, owns, and manages a geographically diversified portfolio of real estate assets including office, industrial, retail and model home residential properties leased to homebuilders located in the United States. As of March 31, 2022, the Company owned or had an equity interest in:
| • |
Eight office buildings and One industrial property (“Office/Industrial Properties”), which totals approximately 755,862 rentable square feet; |
| • |
Three retail shopping centers (“Retail Properties”), which total approximately 65,242 rentable square feet; and |
| • |
85 model home residential properties (“Model Homes” or “Model Home Properties”), totaling approximately 260,144 square feet, leased back on a triple-net basis to homebuilders that are owned by five affiliated limited partnerships and one wholly-owned corporation, all of which we control. |
We own five commercial properties located in Colorado, four in North Dakota, one in Southern California, one in Texas and one in Maryland. Our model home properties are located in three states. While geographical clustering of real estate enables us to reduce our operating costs through economies of scale by servicing several properties with less staff, it makes us susceptible to changing market conditions in these discrete geographic areas, including those that have developed as a result of COVID-19. We do not develop properties but acquire properties that are stabilized or that we anticipate will be stabilized within two or three years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1 of such year or has been operating for three years.
Most of our office and retail properties are leased to a variety of tenants ranging from small businesses to large public companies, many of which are not investment grade. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense or pay increases in operating expenses over specific base years. Most of our office leases are for terms of three to five years with annual rental increases. Our model homes are typically leased back for two to three years to the home builder on a triple-net lease. Under a triple-net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property.
We seek to diversify our portfolio by commercial real estate segments, including office, industrial, retail and model home properties to reduce the adverse effect of a single under-performing segment and/or tenant. We further mitigate risk at the tenant level through our credit review process, which varies by tenant class. For example, our commercial and industrial tenants tend to be corporations or individual owned businesses. In these cases, we typically obtain financial records, including financial statements and tax returns (depending on the circumstance), and run credit reports for any prospective tenant to support our decision to enter into a rental arrangement. We also typically obtain security deposits from these commercial tenants. Our Model Home commercial tenants are well-known homebuilders with established credit histories. These tenants are subjected to financial review and analysis prior to us entering into a sales-leaseback transaction.
For additional information regarding our Common Stock activity, see Footnote 10. Stockholders’ Equity in Item 1. Financial Statements.
SIGNIFICANT TRANSACTIONS IN 2022 AND 2021
| • |
The Company acquired four model homes for approximately $2.4 million. The purchase price was paid through cash payments of approximately $0.7 million and mortgage notes of approximately $1.7 million. |
| • |
The Company did not acquire any commercial properties or model homes. |
| • |
World Plaza, which was sold on March 11, 2022, for approximately $10.0 million and the Company recognized a loss of approximately $0.3 million. |
| • |
The Company disposed of 11 model homes for approximately $5.6 million and recognized a gain of approximately $1.8 million. |
| • |
Waterman Plaza, which was sold on January 28, 2021, for approximately $3.5 million and the Company recognized a loss of approximately $0.2 million. |
| • |
Garden Gateway, which was sold on February 19, 2021, for approximately $11.2 million and the Company recognized a loss of approximately $1.4 million. |
| • |
The Company disposed of 12 model homes for approximately $4.9 million and recognized a gain of approximately $0.4 million. |
Management does not expect that the level of commercial property sales experienced over the last 24 months to continue in the near future. Additionally, with the recent equity raised in June and July 2021 and the refinancing of our commercial properties during 2022, management is working to increase the number of commercial properties in the portfolio with new acquisitions. However, elevated real estate prices in both commercial and residential real estate and compressing capitalization rates have made it challenging to acquire properties that fit our portfolio needs. Management will continue to evaluate potential acquisitions in an effort to increase our portfolio of commercial real estate.
For details regarding our sponsorship of a special purpose acquisition company, Murphy Canyon Acquisition Corp. ("Murphy Canyon"), see Note 9, Commitments and Contingencies, to the Notes to the Condensed Consolidated Financial Statements in “Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)” of this Quarterly Report.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022.
MANAGEMENT EVALUATION OF RESULTS OF OPERATIONS
Management’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service and to fund distributions to our stockholders. As a result, management’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Management’s evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets.
In addition, management evaluates the results of the operations of our portfolio and individual properties with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties are regularly evaluated for potential added value appreciation and cashflow and, if lacking such potential, are sold with the equity reinvested in new acquisitions or otherwise allocated in a manner we believe is accretive to our stockholders. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED March 31, 2022 and 2021
Revenues. Total revenues were approximately $4.6 million for the three months ended March 31, 2022 compared to approximately $5.7 million for the same period in 2021, a decrease of approximately $1.1 million or 19%, which is primarily related to the sale of four commercial properties and 44 model homes during 2021. As of March 31, 2022, we had approximately $126.9 million in net real estate assets, compared to approximately $145.3 million in real estate assets at March 31, 2021.
Rental Operating Costs. Rental operating costs decreased by approximately $0.2 million to $1.6 million for the three months ended March 31, 2022, compared to approximately $1.8 million for the same period in 2021. The overall decrease in rental operating costs for the three months ended March 31, 2022 as compared to 2021 is primarily related to the decrease in real estate assets note above, as well as the mix of properties that were triple net lease, like Mandolin and Baltimore as well as model homes, which have significantly lower operating costs than non-triple net leased properties.
Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was approximately $1.0 million for the three months ended March 31, 2022 compared to approximately $1.3 million for the same period in 2021, a decrease of $0.3 million or 23%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2022 compared to 2021 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.3% and 3.9% as of March 31, 2022 and 2021, respectively.
Interest expense - note payable. On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to the Company (the "Polar Note"). The Polar Note bore interest at a fixed rate of 8% per annum and required monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and Original Issue Discount of approximately $1.4 million, totaled $0 and $0.9 million for the three months ended March 31, 2022 and 2021, respectively. The Polar Note was paid in full during March 2021.
Gain on Sale of Real Estate Assets, net. The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See "Significant Transactions in 2022 and 2021" above for further detail.
Income allocated to non-controlling interests. Income allocated to non-controlling interests for the three months ended March 31, 2022 and 2020 totaled approximately $1.2 million and $0.4 million.
Geographic Diversification Tables
The following tables show a list of commercial properties owned by the Company grouped by state and geographic region as of March 31, 2022:
| Aggregate |
Current |
Approximate % |
|||||||||||||||||
| No. of |
Square |
Approximate % |
Base Annual |
of Aggregate |
|||||||||||||||
| State |
Properties |
Feet |
of Square Feet |
Rent |
Annual Rent |
||||||||||||||
| California |
1 | 57,807 | 7.0 | % | $ | 1,018,483 | 9.4 | % | |||||||||||
| Colorado |
5 | 324,245 | 39.5 | % | 5,679,250 | 52.5 | % | ||||||||||||
| Maryland |
1 | 31,752 | 3.9 | % | 696,321 | 6.4 | % | ||||||||||||
| North Dakota |
4 | 396,800 | 48.3 | % | 3,103,594 | 28.7 | % | ||||||||||||
| Texas |
1 | 10,500 | 1.3 | % | 329,385 | 3.0 | % | ||||||||||||
| Total |
12 | 821,104 | 100.0 | % | $ | 10,827,033 | 100.0 | % | |||||||||||
The following tables show a list of our Model Home properties by geographic region as of March 31, 2022:
| Current |
Approximate |
||||||||||||||||||
| No. of |
Aggregate |
Approximate % |
Base Annual |
of Aggregate |
|||||||||||||||
| Geographic Region |
Properties |
Square Feet |
of Square Feet |
Rent |
% Annual Rent |
||||||||||||||
| Midwest |
1 | 3,663 | 1.4 | % | $ | 57,420 | 2.2 | % | |||||||||||
| Northeast |
2 | 6,153 | 2.4 | % | 80,844 | 3.2 | % | ||||||||||||
| Southwest |
82 | 250,328 | 96.2 | % | 2,416,092 | 94.6 | % | ||||||||||||
| Total |
85 | 260,144 | 100 | % | $ | 2,554,356 | 100 | % | |||||||||||
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, financial aid from government programs instituted as a result of COVID-19, and the sale of equity or debt securities. Management believes that the number of recent real estate sales and resulting cash generated may not be indicative of our future strategic plans. We intend to grow our portfolio with the recent capital raised from the sale of our Series D Preferred Stock in June 2021 and our Series A Common Stock in July 2021 as well are the sale of our commercial property World Plaza in March 2022. Our cash and restricted cash at March 31, 2022 was approximately $22.5 million. Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders, and may seek a revolving line of credit to provide short-term liquidity. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.
Our short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on our mortgage notes payables during 2022, total approximately $ 9,737,270, of which $ 6,508,834 is related to model home properties. Management expects certain model home and commercial properties will be sold, and that the underlying mortgage notes will be paid off with sales proceeds, while other mortgage notes will be refinanced as the Company has done in the past. Additional principal payments will be made with cash flows from ongoing operations. On March 11, 2022, the Company completed the sale our property World Plaza, located in San Bernardino, CA, for $10 million to an unrelated third party. This property was not encumbered by any debt and net cash proceeds will be used for future cash needs.
There can be no assurance that the Company will refinance loans, take out additional financing or capital will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans or certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. We believe that cash on hand, cash flow from our existing portfolio, distributions from joint ventures in Model Home Partnerships and property sales during 2021 will be sufficient to fund our operating costs, planned capital expenditures and required dividends for at least the next twelve months. If our cash flow from operating activities is not sufficient to fund our short-term liquidity needs, we plan to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness, from real estate sales, issuance of debt instruments, additional investors, or we may reduce the rate of dividends to the stockholders.
Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. We are continually reviewing our existing portfolio to determine which properties have met our short- and long-term goals and reinvesting the proceeds in properties with better potential to increase performance. We expect to obtain additional cash in connection with refinancing of maturing mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. If we are unable to arrange a line of credit, borrow on properties, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives.
The following is a summary of distributions declared per share of our Series A Common Stock and for our Series D Preferred Stock for the three months ended March 31, 2022 and 2021. The Company intends to continue to pay dividends to our common stockholders on a quarterly basis, and on a monthly basis for the Series D Preferred stockholders going forward, but there can be no guarantee the Board of Directors will approve any future dividends.
Series A Common Stock
| Quarter Ended |
2022 |
2021 |
||||||
| Distributions Declared |
Distributions Declared |
|||||||
| March 31 |
$ | 0.105 | $ | 0.101 | ||||
| Total |
$ | 0.105 | $ | 0.101 | ||||
Series D Preferred Stock
| Month |
2022 |
2021 |
||||||
| Distributions Declared |
Distributions Declared |
|||||||
| January |
$ | 0.19531 | $ | — | ||||
| February |
0.19531 | — | ||||||
| March |
0.19531 | — | ||||||
| Total |
$ | 0.586 | $ | — | ||||
Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. We are continually reviewing our existing portfolio to determine which properties have met our short- and long-term goals and reinvesting the proceeds in properties with better potential to increase performance. We expect to obtain additional cash in connection with refinancing of maturing mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. If we are unable to arrange a line of credit, borrow on properties, issue debt instruments, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives. In addition, the ongoing COVID-19 pandemic may adversely impact our future operating cash flows due to the inability of some of our tenants to pay their rent on time or at all and the overall weakening of economic conditions that the pandemic may cause. The COVID-19 pandemic may also make financing more difficult to obtain for us and for prospective buyers of our properties, resulting in difficulty in selling assets within our expected timeframe, or a decline in our expected sales price.
Secured Debt
As of March 31, 2022, all our commercial properties had fixed-rate mortgage notes payable in the aggregate principal amount of $72.6 million, collateralized by a total of 11 commercial properties with loan terms at issuance ranging from 3 to 22 years. The weighted-average interest rate on these mortgage notes payable as of March 31, 2022 was approximately 4.19%, and our debt to estimated market value for our commercial properties was approximately 59.2%. The debt to estimated market value does not include the $1.6 million related party loan on our Mandolin property in Houston, TX, which is eliminated in consolidation.
As of March 31, 2022, the Company had 78 fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of $20.9 million, excluding loans eliminated through consolidation, collateralized by a total of 78 Model Homes. These loans generally have a term at issuance of three to five years. As of March 31, 2022, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans are approximately $268,000 and 3.53%, respectively. Our debt to estimated market value on these properties is approximately 60.4%, excluding loans eliminated through consolidation. The Company has guaranteed between 25% - 100% of these mortgage loans.
We have been able to refinance maturing mortgages to extend maturity dates and we have not experienced any notable difficulties financing our acquisitions.
Cash Flows for the three months ended March 31, 2022 and March 31, 2021
Operating Activities: Net cash used in operating activities for the three months ended March 31, 2022 totaled approximately $1.0 million, as compared to cash used in operating activities of $1.5 million for the three months ended March 31, 2021. The change in net cash used in operating activities is mainly due to changes in net income, which fluctuates based on timing of receipt and payment, as well as an increase in non-cash addbacks such as straight-line rent.
Investing Activities: Net cash used in investing activities for the three months ended March 31, 2022 was approximately $122.3 million compared to approximately $18.9 million provided by investing activities during the same period in 2021. The change from each period was primarily related to the gross cash invested into the trust account for Murphy Canyon Acquisition Corp.
We currently project that we could spend up to $1.4 million (some of which is held in deposits reserve accounts by our lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio during the rest of year. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.
Financing Activities: Net cash provided by financing activities during the three months ended March 31, 2022 was $131.1 million compared to $22.0 million used in financing activities for the same period in 2021 and was primarily due to the following activities for the three months ended March 31, 2022:
| • |
Proceeds of approximately $132.3 million from public issuance for Murphy Canyon Acquisition common stock during the three months ended March 31, 2022. |
|
| • | Net decrease in repayment of mortgage notes payable totaling approximately $14.0 million. | |
| • | Net increase in proceeds from mortgage notes payable totaling approximately $1.4 million. |
These increases to cash provided by financing activities was offset by the following:
| • | Net increase of payment of deferred offering costs totaling approximately $3.1 million, mainly related to offering costs for Murphy Canyon Acquisition. | |
| • | Net increase in cash dividend payments to Series A Common stockholder and Series D Preferred stockholder of approximately $0.8 million (there were not Series D Preferred dividends during the three months ended March 31, 2021). | |
Off-Balance Sheet Arrangements
On July 12, 2021, the Company entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of 1,000,000 shares of its Series A Common Stock, Common Stock Warrants to purchase up to 2,000,000 shares of Series A Common Stock and Pre-Funded Warrants to purchase up to 1,000,000 shares of Series A Common Stock. Each share of Common Stock and accompanying Common Stock Warrants were sold together at a combined offering price of $5.00, and each share of Common Stock and accompanying Pre-Funded Warrant were sold together at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal exercise price of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, were exercisable upon issuance and will expire five years from the date of issuance.
In connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to 80,000 shares of Series A Common Stock, representing 4.0% of the Series A Common Stock and shares of Series A Common Stock issuable upon exercise of the Pre-Funded Warrants. The Placement Agent Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants with an exercise price of $6.25 and will expire five years from the date of issuance.
Common Stock Warrants:
If all the potential Common Stock Warrants outstanding at March 31, 2022, were exercised at the price of $5.00 per share, gross proceeds to us would be approximately $10 million and we would as a result issue an additional 2,000,000 shares of common stock.
Placement Agent Warrants:
If all the potential Placement Agent Warrants outstanding at March 31, 2022, were exercised at the price of $6.25 per share, gross proceeds to us would be approximately $0.5 million and we would as a result issue an additional 80,000 shares of common stock.
January 14, 2022 was the record date, with respect to the distribution of five-year listed warrants (the “Series A Warrants”). The Series A Warrants and the shares of common stock issuable upon the exercise of the Series A Warrants were registered on a registration statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held shares of common stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired shares of common stock in the market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants give the holder the right to purchase one share of common stock at $7.00 per share, for a period of five years. Should warrantholders not exercise the Series A Warrants during that holding period, the Series A Warrants will automatically convert to 1/10 of a common share at expiration, rounded down to the nearest number of whole shares.
Series A Warrants:
If all the potential Series A Warrants outstanding at March 31, 2022, were exercised at the price of $7.00 per share, gross proceeds to us would be approximately $101.2 million and we would as a result issue an additional 14,450,069 shares of common stock.
Inflation
Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
However, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Inflation and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act report is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Furthermore, we do not believe that these controls have been impacted by COVID-19 related circumstances, including remote work arrangements with our employees.
None.
There have been no material changes to the risk factors under Part I, Item 1A of our Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities. None.
Stock Repurchases. On September 17, 2021, the Board of Directors authorized a stock repurchase program of up to $10 million outstanding shares of our Series A Common Stock. Purchases under the repurchase program may be made in the open market, through block trades, and other negotiated transactions. We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued, or accelerated at any time.
The following table contains information for shares of common stock repurchased during the three months ended March 31, 2022.
| Month |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| January 2022 |
— | $ | — | — | $ | — | ||||||||||
| February 2022 |
— | — | — | — | ||||||||||||
| March 2022 |
— | — | — | 9,889,369 | ||||||||||||
| Total |
— | $ | — | — | $ | 9,889,369 | ||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
None.
None.
| 101.INS |
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 16, 2022 |
Presidio Property Trust, Inc. |
||||||||||
| By: |
/s/ Jack K. Heilbron |
||||||||||
| Name: |
Jack K. Heilbron |
||||||||||
| Title: |
Chief Executive Officer |
||||||||||
| By: |
/s/ Adam Sragovicz |
||||||||||
| Name: |
Adam Sragovicz |
||||||||||
| Title: |
Chief Financial Officer |
||||||||||
| By: |
/s/ Ed Bentzen |
||||||||||
| Name: |
Ed Bentzen |
||||||||||
| Title: |
Chief Accounting Officer |
||||||||||
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