Presidio Property Trust, Inc 10-Q for FY2021 Q3
Presidio Property Trust, Inc. (SQFT)
About this 10-Q
Presidio Property Trust, Inc filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.38M
- down 22.7% from $5.66M a year earlier
- Net loss
- $851.83K
- compared with a net loss of $1.75M a year earlier
| Table of Contents |
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 |
________________________________________________
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 November 11, 2021, 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 in 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; |
| • |
our inability to borrow or raise sufficient capital to maintain and/or expand our real estate investment portfolio; |
| • |
adverse changes in the real estate financing markets, including potential increases in interest rates and/or borrowing costs; |
| • |
potential losses, including from adverse weather conditions, natural disasters, and title claims, may not be covered by insurance; |
| • |
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 and elsewhere herein. |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (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 | ||||||||
| 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 | ||||||||
| Accrued real estate taxes | ||||||||
| Dividends payable preferred stock | ||||||||
| Lease liability, net | ||||||||
| Below-market leases, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Equity: | ||||||||
| Series D Preferred Stock, par value per share; shares authorized; and shares issued and outstanding (liquidation preference per share) as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Series A Common Stock, par value per share, shares authorized: ; shares and shares were issued and outstanding at September 30, 2021 and December 31, 2020, 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 September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| 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 expense, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Less: Income attributable to noncontrolling interests |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss attributable to Presidio Property Trust, Inc. stockholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Less: Preferred Stock Series D dividends |
( |
) | ( |
) | ||||||||||||
| Net loss attributable to Presidio Property Trust, Inc. common stockholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net income (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 and Nine Months Ended September 30, 2021 and 2020
(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, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends paid on common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Distributions in excess of contributions received | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Dividends paid on common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends to Series D preferred stockholder | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of preferred stock Series D, net of issuance costs | ||||||||||||||||||||||||||||||||||||
| Distributions in excess of contributions received | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends paid | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends to Series D preferred stockholder | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of Common Stock, net of issuance costs, including warrants | ||||||||||||||||||||||||||||||||||||
| Distributions in excess of contributions received | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Repurchase of Common Stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| 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, 2019 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Contributions received from noncontrolling interests, net of distributions paid |
— | — | ||||||||||||||||||||||||||||||||||
| Share reconciliation adjustment |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Issuance of stock for Limited Partnership interests |
( |
) | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance, September 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Stock compensation |
||||||||
| Bad debt expense |
||||||||
| 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 |
||||||||
| Accretion of original issue discount |
||||||||
| 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 provided by 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 |
||||||||
| Additions to deferred leasing costs |
( |
) | ( |
) | ||||
| Proceeds from sales of real estate, net |
||||||||
| Net cash provided by 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 extension costs, note payable |
( |
) | ||||||
| Payment of deferred offering costs |
( |
) | ( |
) | ||||
| Distributions to noncontrolling interests, net |
( |
) | ( |
) | ||||
| Issuance of Common Stock Series A, net of offering costs |
||||||||
| Issuance of Preferred Stock Series D, net of offering costs |
||||||||
| Repurchase of common stock, at cost |
( |
) | ( |
) | ||||
| Dividends paid to preferred stockholders |
( |
) | ||||||
| Dividends paid to common stockholders |
( |
) | ||||||
| Net cash 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: |
||||||||
| Issuance of stock for limited partnership interests |
$ | $ | ||||||
| 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)
September 30, 2021
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 | |
| • | 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, Dubose Model Home Investors #206, LP and NetREIT Dubose Model Home REIT, 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-
Initial Public Offering. On October 6, 2020, we completed an initial public offering ("IPO"), selling
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 September 30, 2021, of the Common Stock Warrants and Placement Agent Warrants have been exercised.
Preferred Stock Series D. On June 15, 2021, the Company completed its secondary offering of
Repaid Note. On September 17, 2019, the Company issued a Promissory Note (the “Polar Note”) pursuant to which Polar Multi-Strategy Master Fund ("Polar"), provided a loan in the principal amount 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, financial aid from government programs instituted as a result of COVID-19, 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 three months of 2021, 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, 2020. 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, 2020, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2021.
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 and nine months ended September 30, 2021 and 2020, 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, 2021. 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, 2020. The condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements included in the Form 10-K filed with the SEC on March 30, 2021. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 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 Company classifies the noncontrolling interests in the NetREIT Partnerships as part of consolidated net income (loss) in 2021 and 2020 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 September 30, 2021 and December 31, 2020, the Company had net deferred leasing costs of approximately $
Cash Equivalents and Restricted Cash. At September 30, 2021 and December 31, 2020, 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 September 30, 2021,
Deferred Offering Costs. Deferred offering costs represent legal, accounting, and other direct costs related to our public offerings. Total deferred offering costs, as of September 30, 2021 and December 31, 2020, were 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.
During the fourth quarter of 2020, the Company recorded its Highland Court property (“Highland Court”) as held for sale and subsequently entered into a purchase and sale agreement (“PSA”) with an unrelated third-party. Highland Court had a book value of approximately $
Fair Value Measurements. Under GAAP, we are required to measure certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
| • | 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 September 30, 2021 and December 31, 2020, our marketable securities presented on the balance sheet were measured using Level 1 market prices. There were no financial liabilities measured at fair value as of September 30, 2021 and December 31, 2020.
Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
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.
As of September 30, 2021, there were
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, amended in 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 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.
3. RECENT REAL ESTATE TRANSACTIONS
During the nine months ended September 30, 2021, the Company disposed of the following properties:
| • | Waterman Plaza, which was sold on January 28, 2021, for approximately $ |
| • | Garden Gateway, which was sold on February 19, 2021, for approximately $ |
| • | Highland Court, which was sold on May 20, 2021, for approximately $ |
| • | Executive Office Park, which was sold on May 21, 2021, for approximately $ |
During the nine months ended September 30, 2021, the Company acquired the following properties:
On August 17, 2021, the Company, through its
During the nine months ended September 30, 2021, the Company acquired six model homes for approximately $
During the nine months ended September 30, 2021, the Company disposed of
During the nine months ended September 30, 2020, the Company disposed of the following properties:
| • | Centennial Tech Center, which was sold on February 5, 2020 for approximately $ |
| • | Union Terrace, which was sold on March 13, 2020 for approximately $ |
During the nine months ended September 30, 2020, the Company acquired
During the nine months ended September 30, 2020, 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 commercial properties located in Colorado, in North Dakota, in Southern California and
| • | office buildings and industrial property (“Office/Industrial Properties”) which total approximately | |
| • | retail shopping centers (“Retail Properties”) which total approximately | |
| • |
A summary of the properties owned by the Company as of September 30, 2021 and December 31, 2020 is as follows:
| Date | Real estate assets, net (in thousands) | ||||||||||||
| Property Name | Acquired | Location | 2021 | 2020 | |||||||||
| Garden Gateway Plaza (1) | March 2007 | | $ | ||||||||||
| World Plaza (2) | September 2007 | | |||||||||||
| Executive Office Park (1) | July 2008 | | |||||||||||
| Waterman Plaza (1) | August 2008 | | |||||||||||
| Genesis Plaza (3) | August 2010 | | |||||||||||
| Dakota Center | May 2011 | | |||||||||||
| Grand Pacific Center | 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 | | |||||||||||
| Highland Court (1) (4) | August 2015 | | |||||||||||
| Shea Center II | December 2015 | | |||||||||||
| Mandolin (4) | August 2021 | | |||||||||||
| Presidio Property Trust, Inc. properties | |||||||||||||
| Model Home properties (5) | 2014 - 2020 | | |||||||||||
| Total real estate assets and lease intangibles, net | $ | $ | |||||||||||
(1) This property was sold during the nine months ended September 30, 2021.
(2) This property is held for sale as of September 30, 2021.
(3) Genesis Plaza is owned by tenants-in-common, each of which owns
(4) A portion of the proceeds from the sale of Highland Court were used in like-kind exchange transactions pursued under Section 1031 of the Internal Revenue for the acquisition of our Mandolin property. 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 September 30, 2021.
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:
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Lease Intangibles | Accumulated Amortization | Lease Intangibles, net | Lease Intangibles | Accumulated Amortization | Lease Intangibles, net | |||||||||||||||||||
| In-place leases | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Leasing costs | ( | ) | ( | ) | ||||||||||||||||||||
| Above-market leases | ( | ) | ( | ) | ||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||
At September 30, 2021 and December 31, 2020, 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:
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ |
6. OTHER ASSETS
Other assets consist of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| 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 September 30, 2021, we owned common shares of
7. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
| Principal as of | |||||||||||||||||
| September 30, | December 31, | Loan | Interest | ||||||||||||||
| Mortgage note property | 2021 | 2020 | Type | Rate (1) | Maturity | ||||||||||||
| Waterman Plaza (2) | $ | $ | Variable | — | |||||||||||||
| World Plaza (3) (4) | Variable | % |
| ||||||||||||||
| Garden Gateway Plaza (2) | Fixed | % |
| ||||||||||||||
| 300 N.P. | Fixed | % |
| ||||||||||||||
| Highland Court (2) | Fixed | % |
| ||||||||||||||
| Dakota Center | Fixed | % |
| ||||||||||||||
| Research Parkway | Fixed | % |
| ||||||||||||||
| Arapahoe Service Center | Fixed | % |
| ||||||||||||||
| Union Town Center | Fixed | % |
| ||||||||||||||
| One Park Centre | Fixed | % |
| ||||||||||||||
| Genesis Plaza | Fixed | % |
| ||||||||||||||
| Shea Center II | Fixed | % |
| ||||||||||||||
| Executive Office Park (2) | Fixed | % |
| ||||||||||||||
| West Fargo Industrial | Fixed | % |
| ||||||||||||||
| Grand Pacific Center (5) | Fixed | % |
| ||||||||||||||
| Subtotal, Presidio Property Trust, Inc. Properties | $ | $ | |||||||||||||||
| Model Home mortgage notes (3) | Fixed | (6 | ) | - | |||||||||||||
| Mortgage Notes Payable | $ | $ | |||||||||||||||
| Unamortized loan costs | ( | ) | ( | ) | |||||||||||||
| Mortgage Notes Payable, net | $ | $ | |||||||||||||||
| (1) | Interest rates as of September 30, 2021. |
| (2) | Waterman Plaza and Garden Gateway Plaza were sold during the first quarter of 2021, while Highland Court and Executive Office Park were sold in the second quarter of 2021. |
| (3) | Property held for sale as of September 30, 2021. There were |
| (4) | During June 2021, this loan was paid in full with cash from the sale of other properties and excess cash on hand. |
| (5) | Interest rate is subject to reset on September 1, 2023. |
| (6) | 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 September 30, 2021:
| Presidio Property | Model | |||||||||||
| Trust, Inc. | Homes | Total Principal | ||||||||||
| Years ending December 31: | Notes Payable | Notes Payable | Payments | |||||||||
| 2021 | $ | $ | $ | |||||||||
| 2022 | ||||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| Thereafter | ||||||||||||
| Total | $ | $ | $ | |||||||||
8. NOTES PAYABLE
On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar, extended a loan in the principal amount of $
The Company incurred approximately $
On April 22, 2020, the Company received an Economic Injury Disaster Loan of $
On April 30, 2020, the Company received a Paycheck Protection Program ("PPP") loan of $
On April 1, 2021, our wholly-subsidiary, Dubose Model Homes Investors #203 LP ("DMH 203"), issued an unsecured promissory note with LGD Investments Ltd ("LGD") for $
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 $
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.
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
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 $
The Company evaluated the accounting guidance in ASC 480 regarding the classification of the Series D Preferred Stock as equity or a liability and ultimately determined that it should be classified as permanent equity. On June 24, 2021, the Board of Directors of the Company declared the first dividend on its Series D Preferred Stock for the initial period from the issue date of June 15, 2021 to June 30, 2021. 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 December 2021 in the amount of $
Common Stock. The Company is authorized to issue 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 September 30, 2021, 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. During the nine months ended September 30, 2021 the Company paid three cash dividends to the common stockholders of approximately $
Partnership Interests. Through the Company, its subsidiaries, and its partnerships, we own
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:
| Common Shares | |||||
| Outstanding shares: | |||||
| Balance at December 31, 2020 | |||||
| Granted | |||||
| Forfeited | ( | ) |
| ||
| Vested |
| ||||
| Balance at September 30, 2021 | |||||
The non-vested restricted shares outstanding as of September 30, 2021 will vest over the next to years.
The value of non-vested restricted stock granted as of September 30, 2021 and December 31, 2020 was approximately $
Share-based compensation expense for the three and nine months ended September 30, 2021, 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 and nine months ended September 30, 2021 and September 30, 2020:
| Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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 (loss) 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) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| September 30, | December 31, | |||||||
| Assets by Reportable Segment: | 2021 | 2020 | ||||||
| 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 Nine Months Ended September 30, | ||||||||
| Capital Expenditures by Reportable Segment | 2021 | 2020 | ||||||
| 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 October 15, 2021, the Company announced the continued monthly dividend on its Preferred Stock Series D in the amount of $
On October 28, 2021 the Company acquired model home properties in Houston, TX, for approximately $
During October 2021, the Company entered into a purchase and sales agreement to acquire a property in Baltimore, MD for approximately $
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, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021.
We may refer to the three months ended September 30, 2021 and September 30, 2020 as the “2021 Quarter” and the “2020 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, 2020, filed with the SEC on March 30, 2021, 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 2020 Annual Report on Form 10-K filed on March 30, 2021, and subsequent Quarterly Reports on Form 10-Q. 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 the first three quarters of 2021. 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 three quarters of 2021. 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 2021 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 included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 30, 2021.
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 September 30, 2021, the Company owned or had an equity interest in:
| • |
Seven office buildings and one industrial property (“Office/Industrial Properties”), which totals approximately 724,000 rentable square feet; |
| • |
Four retail shopping centers (“Retail Properties”), which total approximately 121,000 rentable square feet; and |
| • |
85 model home residential properties (“Model Homes” or “Model Home Properties”), totaling approximately 255,000 square feet, leased back on a triple-net basis to homebuilders that are owned by six 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, two in Southern California and one in Texas. Our model home properties are located in four 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.
Initial Public Offering. On October 6, 2020, we completed an initial public offering ("IPO"), selling 500,000 shares of our Series A Common Stock at $5.00 per share. Proceeds from our IPO were $2.0 million after deducting approximately $0.5 million in underwriting discounts, commissions and fees and before giving effect to $0.5 million in other expenses relating to the IPO. Incremental costs of $0.5 million that were directly attributable to issuing new shares were deducted from equity in the Consolidated Statements of Equity, while costs that were not directly related to issuing new shares of $0.5 million were expensed in deferred offering costs in the Consolidated Statements of Operation. We utilized the net proceeds of this offering for general corporate and working capital purposes.
9.375% Series D Cumulative Redeemable Perpetual Preferred Stock.
Dividends:
Holders of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 9.375% per annum of the $25.00 per share liquidation preference (equivalent to $2.34375 per annum per share). Dividends will be payable monthly on the 15th day of each month (each, a “Dividend Payment Date”), provided that if any Dividend Payment Date is not a business day, then the dividend that would otherwise have been payable on that Dividend Payment Date may be paid on the next succeeding business day without adjustment in the amount of the dividend.
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 two 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.
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 $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date. Prior to June 15, 2026, upon a Change of Control (as defined in the Articles Supplementary), the Company may redeem, at its option, the Series D Preferred Stock, in whole or part, at a cash redemption price of $25.00 per share, plus any accumulated and unpaid dividends to, but not including the redemption date. The Series D Preferred Stock has no stated maturity, will not be subject to any sinking fund or other mandatory redemption, and will not be convertible into or exchangeable for any of our other securities.
Reverse Stock Split. On July 29, 2020, we amended our charter to effect a one-for-two 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.
SIGNIFICANT TRANSACTIONS IN 2021 AND 2020
During the nine months ended September 30, 2021, the Company disposed of the following properties:
| • |
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. |
| • |
Highland Court, which was sold on May 20, 2021 for approximately $10.23 million and the Company recognized a loss of approximately $1.6 million. |
| • |
Executive Office Park, which was sold on May 21, 2021, 2021 for approximately $8.125 million and the Company recognized a gain of approximately $2.5 million. |
During the nine months ended September 30, 2021, the Company acquired the following property:
On August 17, 2021, the Company, through its 61.3% owned subsidiaries NetREIT Palm Self Storage, LP and NetREIT Highland LLC, acquired a single story newly constructed 10,500 square foot building in Houston, Texas for a purchase price of approximately $4.9 million, in connection with a like-kind exchange transaction pursued under Section 1031 of the Internal Revenue Code 1986, as amended (the "Internal Revenue Code"). The building is 100% occupied under a 15-year triple net lease.
During the nine months ended September 30, 2021, the Company disposed of 39 model homes for approximately $19.0 million and recognized a gain of approximately $2.9 million.
During the nine months ended September 30, 2020, the Company disposed of the following properties:
| • |
Centennial Tech Center, which was sold on February 5, 2020 for approximately $15.0 million and the Company recognized a loss of approximately $0.9 million. |
| • |
Union Terrace, which was sold on March 13, 2020 for approximately $11.3 million and the Company recognized a gain of approximately $0.69 million |
During the nine months ended September 30, 2020, the Company acquired 25 model homes for approximately $9.0 million. The purchase price was paid through cash payments of approximately $2.7 million and mortgage notes of approximately $6.3 million.
During the nine months ended September 30, 2020, the Company disposed of 33 model homes for approximately $12.6 million and recognized a gain of approximately $0.9 million.
Management does not expect that the level of commercial property sales experienced over the last 12 months to continue in the near future. Additionally, with the recent equity raised in June and July 2021, 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.
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, 2020 filed with the SEC on March 30, 2021.
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 September 30, 2021 and 2020
Revenues. Total revenues were $4.4 million for the three months ended September 30, 2021 compared to $5.7 million for the same period in 2020, a decrease of approximately $1.3 million or 23%, which is primarily related to the sale of four commercial properties during the nine months ended September 30, 2021. The decrease in rental income is also attributed to COVID-19 related tenant workouts, which included rent abatements and deferrals that are being recognized over the remaining lease term.
Rental Operating Costs. Rental operating costs decreased by $0.7 million to $1.4 million for the three months ended September 30, 2021, compared to $2.1 million for the same period in 2020. Rental operating costs as a percentage of total revenue also decreased to 32.3% as compared to 37.2% for the three months ended September 30, 2021 and 2020, respectively. The overall decrease in rental operating costs for the three months ended September 30, 2021 as compared to 2020 is primarily related to the sale of four commercial properties during the nine months ended September 30, 2021, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.
Depreciation and Amortization. Depreciation and amortization expense was $1.3 million for the three months ended September 30, 2021, compared to $1.6 million for the same period in 2020, representing a decrease of $0.3 million or 18%. The decrease in depreciation and amortization expense in 2021 compared to the same period in 2020 is primarily related to the sale of four commercial properties during the nine months ended September 30, 2021.
Asset Impairments. We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. The Company did not recognize an impairment during the three months ended September 30, 2021. Management considered the impact of COVID-19 on all other remaining assets as of September 30, 2021 and determined that there were no other indicators of impairment had occurred as of that date.
Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was $1.0 million for the three months ended September 30, 2021 compared to $1.4 million for the same period in 2020, a decrease of $0.4 million or 28%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2021 compared to 2020 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.2% and 3.9% as of September 30, 2021 and 2020, 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 $1.4 million, totaled $0 and $0.9 million for the three months ended September 30, 2021 and 2020, 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 2021 and 2020" above for further detail.
Income allocated to non-controlling interests. Income allocated to non-controlling interests for the three months ended September 30, 2021 and 2020 totaled approximately $0.4 million and $0.4 million.
RESULTS OF OPERATIONS FOR THE Nine MONTHS ENDED September 30, 2021 and 2020
Revenues. Total revenues were $14.9 million for the nine months ended September 30, 2021 compared to $18.8 million for the same period in 2020, a decrease of approximately $3.9 million or 21%, which is primarily related to the sale of four commercial properties during the nine months ended September 30, 2021. The decrease in rental income is also attributed to COVID-19 related tenant workouts, which included rent abatements and deferrals that are being recognized over the remaining lease term.
Rental Operating Costs. Rental operating costs decreased by $1.8 million to $4.7 million for the nine months ended September 30, 2021, compared to $6.5 million for the same period in 2020. Rental operating costs as a percentage of total revenue also decreased to 31.8% as compared to 34.5% for the nine months ended September 30, 2021 and 2020, respectively. The overall decrease in rental operating costs for the nine months ended September 30, 2021 as compared to 2020 is primarily related to the sale of four commercial properties during the nine months ended September 30, 2021, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.
General and Administrative Expenses. General & Administrative (“G&A”) expenses for the nine months ended September 30, 2021 and 2020 totaled approximately $4.4 million and $4.0 million, respectively. These expenses increased by approximately $0.4 million for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to the increase in stock compensation and legal expenses, which had an increase of approximately $0.3 million and $0.1 million, respectively. In connection with the Company becoming publicly traded in October 2020, the Company plans to continue rewarding its employee through stock-based compensation at a greater rate than historically. The increase was slightly offset by the decreased payroll related costs, temporally reduced by the Employee Retention Credit ("ERC") received during the second quarter of 2021. G&A expenses as a percentage of total revenue was 29.3% and 21.2% for nine months ended September 30, 2021 and 2020, respectively.
Depreciation and Amortization. Depreciation and amortization expense was $4.1 million for the nine months ended September 30, 2021, compared to $4.8 million for the same period in 2020, representing a decrease of $0.7 million or 15%. The decrease in depreciation and amortization expense in 2021 compared to the same period in 2020 is primarily related to the sale of four commercial properties during the nine months ended September 30, 2021.
Asset Impairments. We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. The Company recognize impairment of $0.3 million, related to the potential sale or our Highland Court property, in the Condensed Consolidated Statements of Operations during the nine months ended September 30, 2021. Management considered the impact of COVID-19 on all other remaining assets as of September 30, 2021 and determined that there were no other indicators of impairment had occurred as of that date.
Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was $3.5 million for the nine months ended September 30, 2021 compared to $4.6 million for the same period in 2020, a decrease of $1.1 million or 24%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2021 compared to 2020 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.2% and 3.9% as of September 30, 2021 and 2020, respectively.
Interest expense - note payable. On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar, extended a loan in the principal amount of $14.0 million to the Company. 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 $1.4 million, totaled $- and $0.9 million for the nine months ended September 30, 2021 and 2020, 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 2021 and 2020" above for further detail.
Income allocated to non-controlling interests. Income allocated to non-controlling interests for the nine months ended September 30, 2021 and 2020 totaled approximately $1.8 million and $0.9 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 September 30, 2021:
| Aggregate |
Current |
Approximate % |
|||||||||||||||||
| No. of |
Square |
Approximate % |
Base Annual |
of Aggregate |
|||||||||||||||
| State |
Properties |
Feet |
of Square Feet |
Rent |
Annual Rent |
||||||||||||||
| California |
2 | 113,617 | 13.4 | % | $ | 1,577,261 | 14.9 | % | |||||||||||
| Colorado |
5 | 324,245 | 38.4 | % | 5,580,329 | 52.6 | % | ||||||||||||
| North Dakota |
4 | 396,981 | 47.0 | % | 3,127,744 | 29.5 | % | ||||||||||||
| Texas |
1 | 10,500 | 1.2 | % | 322,875 | 3.0 | % | ||||||||||||
| Total |
12 | 845,343 | 100.0 | % | $ | 10,608,209 | 100.0 | % | |||||||||||
The following tables show a list of our Model Home properties by geographic region as of September 30, 2021:
| Current |
Approximate |
||||||||||||||||||
| No. of |
Aggregate |
Approximate % |
Base Annual |
of Aggregate |
|||||||||||||||
| Geographic Region |
Properties |
Square Feet |
of Square Feet |
Rent |
% Annual Rent |
||||||||||||||
| Southwest |
79 | 237,416 | 92.4 | % | $ | 2,206,128 | 90.0 | % | |||||||||||
| Southeast |
3 | 8,201 | 3.0 | % | $ | 61,528 | 3.3 | % | |||||||||||
| Northeast |
2 | 6,153 | 2.2 | % | $ | 80,844 | 3.0 | % | |||||||||||
| Midwest | 1 | 3,663 | 2.4 | % | $ | 57,420 | 3.7 | % | |||||||||||
| Total |
85 | 255,433 | 100 | % | $ | 2,405,920 | 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. Our cash and restricted cash at September 30, 2021 was approximately $27.8 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 the last three months of 2021, total approximately $0.9 million, of which $0.6 million 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.
There can be no assurance that any such re-financing or 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.
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 nine months ended September 30, 2021 and for the year ended December 31, 2020. 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.
| Quarter Ended |
2021 |
2020 |
||||||
| Distributions Declared |
Distributions Declared |
|||||||
| March 31 |
$ | 0.101 | $ | — | ||||
| June 30 |
0.102 | — | ||||||
| September 30 |
0.103 | — | ||||||
| December 31 |
— | 0.100 | ||||||
| Total |
$ | 0.306 | $ | 0.100 | ||||
| Month |
2021 |
2020 |
||||||
| Distributions Declared |
Distributions Declared |
|||||||
| January |
$ | — | $ | — | ||||
| February |
— | — | ||||||
| March |
— | — | ||||||
| April |
— | — | ||||||
| May |
— | — | ||||||
| June |
0.10417 | — | ||||||
| July |
0.19531 | — | ||||||
| August |
0.19531 | — | ||||||
| September |
0.19531 | — | ||||||
| October |
— | — | ||||||
| November |
— | — | ||||||
| December 31 |
— | — | ||||||
| Total |
$ | 0.690 | — | |||||
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 September 30, 2021, all our commercial properties had fixed-rate mortgage notes payable in the aggregate principal amount of $67.6 million, collateralized by a total of 10 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 September 30, 2021 was approximately 4.54%, and our debt to estimated market value for our commercial properties was approximately 58.6%. The debt to estimated market value includes the $1.6 million related party loan on our Mandolin property in Houston, TX, which is eliminated in consolidation.
As of September 30, 2021, the Company had 76 fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of $19.3 million, excluding loans eliminated through consolidation, collateralized by a total of 76 Model Homes. These loans generally have a term at issuance of three to five years. As of September 30, 2021, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans are approximately $257,000 and 3.2%, respectively. Our debt to estimated market value on these properties is approximately 59.4%, including loan 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 nine months ended September 30, 2021 and September 30, 2020
Operating Activities: Net cash provided by operating activities for the nine months ended September 30, 2021 totaled approximately $1.1 million, as compared to cash provided by operating activities of $2.9 million for the nine months ended September 30, 2020. 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 provided by investing activities for the nine months ended September 30, 2021 was approximately $37.3 million compared to approximately $22.2 million during the same period in 2020. The change from each period was primarily related to the mix of gross proceeds from the sale of office buildings and Model Homes sold in each period.
We currently project that we could spend up to $0.7 million (net of deposits held in reserve accounts by lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio over the three months of 2021. 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 used in financing activities during the nine months ended September 30, 2021 was $22.1 million compared to $25.4 million for the same period in 2020 and was primarily due to the following activities for the nine months ended September 30, 2021:
| • |
Net increase in dividends paid to stockholders of $3.2 million to Common Stockholders and $0.5 million to Preferred Stockholder; and |
| • |
Net increase in repayment of the Polar Note, the fully payment of mortgage note on the World Plaza property and full payment of the four mortgage notes related to the properties sold during 2021; offset by |
| • |
Distributions to noncontrolling interest increased approximately $5.6 million related to sale of model home properties. |
| • |
The issuance of our Series D Preferred Stock with net proceeds of approximately $20.5 million and net Common Stock proceeds of approximately $8.9 million. |
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 September 30, 2021, were exercised at the price of $5.00 per share, gross proceeds to us would be $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 September 30, 2021, were exercised at the price of $6.25 per share, gross proceeds to us would be $0.5 million and we would as a result issue an additional 80,000 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 September 30, 2021 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.
The following supplements and updates the risk factors in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. If any of the risks discussed below or in our Annual Report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations (individually and collectively referred to in the following risk factor as “Financial Performance”) could be materially and adversely affected. Some statements in this Quarterly Report on Form 10-Q, including statements in the following risk factors, constitute forward-looking statements. Please refer to the introductory section of this Quarterly Report on Form 10-Q, preceding Part I, "Financial Information," entitled “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to COVID-19
The current outbreak of COVID-19, and the resulting volatility it has created, has disrupted our business and we expect that the COVID-19 pandemic, may significantly and adversely impact our business, financial condition and results of operations going forward, and that other potential pandemics or outbreaks, could materially adversely affect our business, financial condition, results of operations and cash flows in the future. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets, and could potentially create widespread business continuity issues of an unknown magnitude and duration. To date our business has not been significantly impacted by the COVID-19 pandemic. While several of our tenants have reported financial challenges, suffered because of the COVID-19 pandemic, only 13 of our tenants have requested rent abatements or reductions from us. The impact of the COVID-19 pandemic on our business is still uncertain and will be largely dependent on future developments.
The COVID-19 pandemic has had in the future will likely continue to have, repercussions across regional and global economies and financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States (including the states and cities that comprise the San Diego, California; Denver and Colorado Springs, Colorado; Fargo and Bismarck, North Dakota; and other metro regions, where we own and operate properties) have instituted quarantines, "shelter in place" mandates, and rules and restrictions on travel and the types of businesses that may continue to operate. While some of these restrictions have been lifted, new variants of the coronavirus and/or the continued spread of the virus could cause government authorities to extend, reinstitute and/or adopt new restrictions. As a result, the COVID-19 pandemic is negatively impacting almost every industry, both inside and outside these metro regions, directly or indirectly and has created business continuity issues. For instance, some our commercial tenants temporarily closed their offices or stores and requested temporary rent deferral or rent abatement during the pandemic. In addition, jurisdictions where we own and operate properties have implemented, or may implement, rent freezes, eviction freezes, or other similar restrictions. The full extent of the impacts on our business over the long term are largely uncertain and dependent on several factors beyond our control.
As a result of the effects of the COVID-19 pandemic, we have been impacted by and may further be impacted by one or more of the following:
| • |
a decrease in real estate rental revenue (our primary source of operating cash flow), as a result of temporary rent deferrals, rent abatement and/or rent reductions, rent freezes or declines impacting new and renewal rental rates on properties, longer lease-up periods for both anticipated and unanticipated vacancies (in part, due to “shelter-in-place” mandates), lower revenue recognized as a result of waiving late fees, as well as our tenants’ ability and willingness to pay rent, and our ability to continue to collect rents, on a timely basis or at all; |
| • |
a complete or partial closure of one or more of our properties resulting from government or tenant action (since Q1, 2021, all of our commercial properties were reopened); |
| • |
reductions in demand for commercial space and the inability to provide physical tours of our commercial spaces may result in our inability to renew leases, re-lease space as leases expire, or lease vacant space, particularly without concessions, or a decline in rental rates on new leases; |
| • |
the inability of one or more major tenants to pay rent, or the bankruptcy or insolvency of one or more major tenants, may be increased due to a downturn in its business or a weakening of its financial condition as a result of shelter-in-place orders, phased re-opening of its business, or other pandemic related causes; |
| • |
the inability to decrease certain fixed expenses at our properties despite decreased operations at such properties; |
| • |
the inability of our third-party service providers to adequately perform their property management and/or leasing activities at our properties due to decreased on-site staff; |
| • |
the effect of existing and future orders by governmental authorities in any of our markets, which might require homebuilders to cease operations for an uncertain or indefinite period of time, which could significantly affect new home orders and deliveries, and negatively impact their home sales revenue and ability to perform on their lease obligations to the Company in such markets; |
| • |
difficulty accessing capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions, which may affect our access to capital and our commercial tenants' ability to fund their business operations and meet their obligations to us; |
| • |
the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of debt agreements; |
| • |
a decline in the market value of real estate may result in the carrying value of certain real estate assets exceeding their fair value, which may require us to recognize an impairment to those assets; |
| • |
future delays in the supply of products or services may negatively impact our ability to complete the renovations and lease-up of our buildings on schedule or for their original estimated cost; |
| • |
a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow or change the complexion of our portfolio of properties; |
| • |
our insurance may not cover loss of revenue or other expenses resulting from the pandemic and related shelter-in-place rules; |
| • |
unanticipated costs and operating expenses and decreased anticipated revenue related to compliance with regulations, such as additional expenses related to staff working remotely, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at each of our properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services; |
| • |
the potential for one or more members of our senior management team to become sick with COVID-19 and the loss of such services could adversely affect our business; |
| • |
the increased vulnerability to cyber-attacks or cyber intrusions while employees are working remotely has the potential to disrupt our operations or cause material harm to our financial condition; |
| • |
the effects of fiscal stimulus programs in response to COVID-19 are unpredictable and may cause inflation in excess of the rent increase under our leases and volatility in the markets for equity and debt securities; and |
| • |
complying with REIT requirements during a period of reduced cash flow could cause us to liquidate otherwise attractive investments or borrow funds on unfavorable conditions. |
The financial aspects of the COVID-19 pandemic are difficult to predict and may not directly correlate to the severity of outbreaks at a particular place or time. For example, there has been significant inflation in the price of lumber, largely as a result of supply shortages specific to the lumber industry resulting from the pandemic, that may affect construction and renovation costs in our industry. Similarly, despite general economic concerns resulting from the COVID-19 pandemic, there has been home price inflation in many markets, which may affect our ability to purchase Model Homes at prices we consider to be reasonable.
The significance, extent and duration of the impact of COVID-19 remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19, the extent and effectiveness of the containment measures taken, and the response of the overall economy, the financial markets and the population.
The rapid development and volatility of this situation precludes us from making any prediction as to the ultimate adverse impact of COVID-19. As a result, we cannot provide an estimate of the overall impact of the COVID-19 pandemic on our business or when, or if, we (or our tenants) will be able to resume fully normal operations. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results and cash flows.
The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K, any of which could have a material effect on us.
Risks related to cyber-attacks, cyber intrusions and other security breaches.
We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. In addition, the risk of cyber-attack or cyber intrusion has increased and become more costly to monitor and manage with more of our employees and the employees of our vendors, customers or other business partners working remotely as a result of the ongoing pandemic. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems). We make efforts to maintain the security and integrity of our IT networks and systems and have implemented various measures to manage the risk of a security breach or disruption. However, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving our IT networks and related systems could result in unauthorized access to proprietary, confidential, sensitive or otherwise valuable information, significantly disrupt our business operations, cause damage to our reputation and subject us to additional unforeseen costs and require significant time and resources to remedy. Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
Current legislative uncertainty and discourse could cause significant economic impact on markets, including the availability and access to capital markets and other funding sources, adverse changes in real estate values and increased interest rates.
Such impacts could have a material adverse effect on our business, financial condition, results from operation and growth prospects.
Following the election cycle in November 2020, the Democratic party gained control of the executive branch of government and the legislative branch of government. Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections. These changes could result in sweeping reform in many laws and regulations, including without limitation, those relating to taxes, small business aid and recovery from the COVID-19 pandemic. In addition, political discourse continues to be abrasive and an inability of the legislative and executive branches to engage in bipartisan politics may lead to instability on legislative, economic and social matters. These factors could have significant economic impacts on the markets, including without limitation, the stability, availability and access to capital markets and other funding sources, reduced real estate values and increases to interest rates. Such impacts could have a material adverse effect on our business, financial condition, results from operation and growth prospects.
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 September 30, 2021.
| 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 |
||||||||||||
| July 2021 |
— | $ | — | — | $ | — | ||||||||||
| August 2021 |
— | — | — | — | ||||||||||||
| September 2021 |
18,133 | 3.7719 | 18,133 | 9,931,604 | ||||||||||||
| Total |
18,133 | $ | 3.7719 | 18,133 | $ | 9,931,604 | ||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
None.
None.
| Exhibit |
Description |
|
| 4.1 | Form of Common Stock Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2021). | |
| 4.2 | Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2021). | |
| 4.3 | Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2021) | |
| 10.1 | Form of Placement Agency Agreement, dated as of July 12, 2021, by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2021). | |
| 10.2 | Form of Securities Purchase Agreement, dated as of July 12, 2021, by and between the Company and the Purchaser (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2021). | |
| 10.3 | Ninth Amendment to Loan Agreement signed August 19, 2021 (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2021). | |
| 10.4 | Loan Agreement dated February 26, 2016, together with Second Amendment to Loan Agreement dated as of June 29, 2016, Third Amendment to Loan Agreement dated as of April 11, 2017, Joinder and Fourth Amendment to Loan Agreement dated as of February 20, 2018, Fifth Amendment to Loan Agreement dated as of April 11, 2018, Joinder and Sixth Amendment to Loan Agreement dated as of April 11, 2019, Joinder and Seventh Amendment to Loan Agreement dated as May 22, 2020 and Eighth Amendment to Loan Agreement dated as of June 26, 2020 (incorporated by reference to Exhibit 1.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2021). | |
| 31.1 |
||
| 31.2 |
||
| 32.1 |
| 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: November 12, 2021 |
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 |
||||||||||
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Jack K. Heilbron, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Presidio Property Trust, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: November 12, 2021 |
By: |
/s/ Jack K. Heilbron |
|
Jack K. Heilbron, |
||
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Adam Sragovicz, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Presidio Property Trust, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
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(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: November 12, 2021 |
By: |
/s/ Adam Sragovicz |
| Adam Sragovicz, | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Presidio Property Trust, Inc (the "Company") on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, in their capacities as CEO and CFO, respectively, of the Company that, to the best of their knowledge:
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(i) |
the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
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(ii) |
the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. |
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Date: November 12, 2021 |
By: |
/s/ Jack K. Heilbron |
|
Jack K. Heilbron Chief Executive Officer (Principal Executive Officer) |
||
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Date: November 12, 2021 |
By: |
/s/ Adam Sragovicz |
|
Adam Sragovicz (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.