(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission ("SEC") on March 30, 2022.
We may refer to the three months ended March 31, 2022 and March 31, 2021 as the "2022 Quarter" and the "2021 Quarter," respectively.
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" and/or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and also of which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the most significant factors is the potential adverse effect of COVID-19 and ensuing economic turmoil on the financial condition, results of operations, cash flows and performance of the Company, particularly our ability to collect rent, on the financial condition, results of operations, cash flows and performance of our tenants, and on the global economy and financial markets. The extent to which COVID-19 impacts the Company and its tenants will depend on current and future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 30, 2022, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to the risks associated with the ownership of real estate in general and our real estate assets in particular; the economic health of the metro regions where we conduct business; the risk of failure to enter into/and or complete contemplated acquisitions and dispositions, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition of our portfolio; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers and joint venture partners; the ability to control our operating expenses; the economic health of our tenants; the supply of competing properties; shifts away from brick and mortar stores to e-commerce; the availability and terms of financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; terrorist attacks or actions and/or risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions; weather conditions, natural disasters and pandemics; ability to maintain key personnel; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2021 Annual Report on Form 10-K filed on March 30, 2022. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
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.
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The CARES Act includes several significant provisions related to taxes, refundable payroll tax credits and deferment of social security payments. We utilized certain relief options offered under the CARES Act and continue to evaluate the relief options for us and our tenants available under the CARES Act, as well as other emergency relief initiatives and stimulus packages instituted by the federal government. Several of the relief options contain restrictions on future business activities, which require careful evaluation and consideration, such as restrictions on the ability to repurchase shares and pay dividends. We will continue to assess these options, and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the effects of the pandemic continue to evolve.
The effects of the COVID-19 pandemic did not significantly impact our operating results during 2021 or the first quarter of 2022. We continue to monitor and communicate with our tenants to assess their needs and ability to pay rent. We have negotiated lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which have included or may include rent deferral, temporary rent abatement, or reduced rental rates and/or lease extension periods, however no new negotiations were initiated during the first quarter of 2022. While these amendments have affected our short-term cash flows, we do not believe they represent a change in the valuation of our assets for the properties affected and have not significantly affected our results of operations. Given the longevity of this pandemic and the potential for other variants of the coronavirus, such as the delta variant, the COVID-19 outbreak may materially affect our financial condition and results of operations going forward, including but not limited to real estate rental revenues, credit losses, leasing activity, and potentially the valuation of our real estate assets. We do expect additional rent deferrals, abatements, and/or credit losses from our commercial tenants during the remainder of 2022 and we do not expect our existing rent deferrals, abatements, and/or credit losses to have a material impact on our real estate rental revenue and cash collections. While we do expect that the effects of the COVID-19 pandemic will impact our ability to lease up available commercial space, our business operations and activities in many regions may be subject to future quarantines, "shelter-in-place" rules, and various other restrictions for the foreseeable future. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time. We are currently focused on growing our portfolio with the recent capital raised from the sale of our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock in June 2021 and our Series A Common Stock in July 2021. For more information, see Part II - Item 1A. Risk Factors and Part II - Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022.
The Company operates as an internally managed, diversified REIT, with primary holdings in office, industrial, retail, and triple-net leased model home properties. In October 2017, we changed our name from "NetREIT, Inc." to "Presidio Property Trust, Inc." The Company acquires, owns, and manages a geographically diversified portfolio of real estate assets including office, industrial, retail and model home residential properties leased to homebuilders located in the United States. As of March 31, 2022, the Company owned or had an equity interest in:
Eight office buildings and One industrial property ("Office/Industrial Properties"), which totals approximately 755,862 rentable square feet;
Three retail shopping centers ("Retail Properties"), which total approximately 65,242 rentable square feet; and
85 model home residential properties ("Model Homes" or "Model Home Properties"), totaling approximately 260,144 square feet, leased back on a triple-net basis to homebuilders that are owned by five affiliated limited partnerships and one wholly-owned corporation, all of which we control.
We own five commercial properties located in Colorado, four in North Dakota, one in Southern California, one in Texas and one in Maryland. Our model home properties are located in three states. While geographical clustering of real estate enables us to reduce our operating costs through economies of scale by servicing several properties with less staff, it makes us susceptible to changing market conditions in these discrete geographic areas, including those that have developed as a result of COVID-19. We do not develop properties but acquire properties that are stabilized or that we anticipate will be stabilized within two or three years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1 of such year or has been operating for three years.
Most of our office and retail properties are leased to a variety of tenants ranging from small businesses to large public companies, many of which are not investment grade. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense or pay increases in operating expenses over specific base years. Most of our office leases are for terms of three to five years with annual rental increases. Our model homes are typically leased back for two to three years to the home builder on a triple-net lease. Under a triple-net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property.
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We seek to diversify our portfolio by commercial real estate segments, including office, industrial, retail and model home properties to reduce the adverse effect of a single under-performing segment and/or tenant. We further mitigate risk at the tenant level through our credit review process, which varies by tenant class. For example, our commercial and industrial tenants tend to be corporations or individual owned businesses. In these cases, we typically obtain financial records, including financial statements and tax returns (depending on the circumstance), and run credit reports for any prospective tenant to support our decision to enter into a rental arrangement. We also typically obtain security deposits from these commercial tenants. Our Model Home commercial tenants are well-known homebuilders with established credit histories. These tenants are subjected to financial review and analysis prior to us entering into a sales-leaseback transaction.
For additional information regarding our Common Stock activity, see Footnote
SIGNIFICANT TRANSACTIONS IN 2022 AND 2021
Acquisitions during the three months ended March 31, 2022 :
The Company acquired four model homes for approximately $2.4 million. The purchase price was paid through cash payments of approximately $0.7 million and mortgage notes of approximately $1.7 million.
Acquisitions during the three months ended March 31, 2021
The Company did not acquire any commercial properties or model homes.
Dispositions during the three months ended March 31, 2022 :
World Plaza, which was sold on March 11, 2022, for approximately $10.0 million and the Company recognized a loss of approximately $0.3 million.
The Company disposed of 11 model homes for approximately $5.6 million and recognized a gain of approximately $1.8 million.
Dispositions during the three months ended March 31, 2021
Waterman Plaza, which was sold on January 28, 2021, for approximately $3.5 million and the Company recognized a loss of approximately $0.2 million.
Garden Gateway, which was sold on February 19, 2021, for approximately $11.2 million and the Company recognized a loss of approximately $1.4 million.
The Company disposed of 12 model homes for approximately $4.9 million and recognized a gain of approximately $0.4 million.
Management does not expect that the level of commercial property sales experienced over the last 24 months to continue in the near future. Additionally, with the recent equity raised in June and July 2021 and the refinancing of our commercial properties during 2022, management is working to increase the number of commercial properties in the portfolio with new acquisitions. However, elevated real estate prices in both commercial and residential real estate and compressing capitalization rates have made it challenging to acquire properties that fit our portfolio needs. Management will continue to evaluate potential acquisitions in an effort to increase our portfolio of commercial real estate.
For details regarding our sponsorship of a special purpose acquisition company, Murphy Canyon Acquisition Corp. ("Murphy Canyon"), see Note 9, Commitments and Contingencies, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report.
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CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022.
MANAGEMENT EVALUATION OF RESULTS OF OPERATIONS
Management's evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service and to fund distributions to our stockholders. As a result, management's assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Management's evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets.
In addition, management evaluates the results of the operations of our portfolio and individual properties with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties are regularly evaluated for potential added value appreciation and cashflow and, if lacking such potential, are sold with the equity reinvested in new acquisitions or otherwise allocated in a manner we believe is accretive to our stockholders. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED March 31, 2022 and 2021
Revenues. Total revenues were approximately $4.6 million for the three months ended March 31, 2022 compared to approximately $5.7 million for the same period in 2021, a decrease of approximately $1.1 million or 19%, which is primarily related to the sale of four commercial properties and 44 model homes during 2021. As of March 31, 2022, we had approximately $126.9 million in net real estate assets, compared to approximately $145.3 million in real estate assets at March 31, 2021.
Rental Operating Costs. Rental operating costs decreased by approximately $0.2 million to $1.6 million for the three months ended March 31, 2022, compared to approximately $1.8 million for the same period in 2021. The overall decrease in rental operating costs for the three months ended March 31, 2022 as compared to 2021 is primarily related to the decrease in real estate assets note above, as well as the mix of properties that were triple net lease, like Mandolin and Baltimore as well as model homes, which have significantly lower operating costs than non-triple net leased properties.
General and Administrative Expenses. General & Administrative ("G&A") expenses for the three months ended March 31, 2022 and 2021 totaled approximately $1.6 million and $1.5 million, respectively. These expenses increased only slightly by approximately $0.1 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to new formation and operating costs related to Murphy Canyon Acquisition and increased costs for audit, tax and legal services. These increases were offset by the reduction in overall payroll costs. G&A expenses as a percentage of total revenue was 34.6% and 27.1% for three months ended March 31, 2022 and 2021, respectively. The increase in percentage is primarily due to a net decrease in rental income related to the sale of properties noted above, while G&A remained relatively flat, including the Murphy Canyon G&A expenses of approximately $0.3 million.
Depreciation and Amortization. Depreciation and amortization expense was approximately $1.3 million for the three months ended March 31, 2022, compared to approximately $1.4 million for the same period in 2021, representing a decrease of approximately $0.1 million or 7%. The decrease in depreciation and amortization expense in 2022 compared to the same period in 2021 is primarily related to the sale of four commercial properties during 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 March 31, 2022, compared to an impairment of $0.3 million during the three months ended March 31, 2021.
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Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was approximately $1.0 million for the three months ended March 31, 2022 compared to approximately $1.3 million for the same period in 2021, a decrease of $0.3 million or 23%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2022 compared to 2021 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.3% and 3.9% as of March 31, 2022 and 2021, respectively.
Interest expense - note payable. On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund ("Polar"), extended a loan in the principal amount of $14.0 million to the Company (the "Polar Note"). The Polar Note bore interest at a fixed rate of 8% per annum and required monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and Original Issue Discount of approximately $1.4 million, totaled $0 and $0.9 million for the three months ended March 31, 2022 and 2021, respectively. The Polar Note was paid in full during March 2021.
Gain on Sale of Real Estate Assets, net. The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See "Significant Transactions in 2022 and 2021" above for further detail.
Income allocated to non-controlling interests. Income allocated to non-controlling interests for the three months ended March 31, 2022 and 2020 totaled approximately $1.2 million and $0.4 million.
Geographic Diversification Tables The following tables show a list of commercial properties owned by the Company grouped by state and geographic region as of March 31, 2022: Aggregate Current Approximate % No. of Square Approximate % Base Annual of Aggregate State Properties Feet of Square Feet Rent Annual Rent California 1 57,807 7.0 % $ 1,018,483 9.4 % Colorado 5 324,245 39.5 % 5,679,250 52.5 % Maryland 1 31,752 3.9 % 696,321 6.4 % North Dakota 4 396,800 48.3 % 3,103,594 28.7 % Texas 1 10,500 1.3 % 329,385 3.0 % Total 12 821,104 100.0 % $ 10,827,033 100.0 %
The following tables show a list of our Model Home properties by geographic region as of March 31, 2022:
Current Approximate No. of Aggregate Approximate % Base Annual of Aggregate Geographic Region Properties Square Feet of Square Feet Rent % Annual Rent Midwest 1 3,663 1.4 % $ 57,420 2.2 % Northeast 2 6,153 2.4 % 80,844 3.2 % Southwest 82 250,328 96.2 % 2,416,092 94.6 % Total 85 260,144 100 % $ 2,554,356 100 %
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LIQUIDITY AND CAPITAL RESOURCES
Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, financial aid from government programs instituted as a result of COVID-19, and the sale of equity or debt securities. Management believes that the number of recent real estate sales and resulting cash generated may not be indicative of our future strategic plans. We intend to grow our portfolio with the recent capital raised from the sale of our Series D Preferred Stock in June 2021 and our Series A Common Stock in July 2021 as well are the sale of our commercial property World Plaza in March 2022. Our cash and restricted cash at March 31, 2022 was approximately $22.5 million. Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders, and may seek a revolving line of credit to provide short-term liquidity. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.
Our short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on our mortgage notes payables during 2022, total approximately $ 9,737,270, of which $ 6,508,834 is related to model home properties. Management expects certain model home and commercial properties will be sold, and that the underlying mortgage notes will be paid off with sales proceeds, while other mortgage notes will be refinanced as the Company has done in the past. Additional principal payments will be made with cash flows from ongoing operations. On March 11, 2022, the Company completed the sale our property World Plaza, located in San Bernardino, CA, for $10 million to an unrelated third party. This property was not encumbered by any debt and net cash proceeds will be used for future cash needs.
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. During September 2021, the Company was able to purchase 18,133 shares at an average price of $3.73692 per share, plus commission of $0.035 per share, for a total cost of $68,396. During December 2021, the Company was able to purchase 11,588 shares at an average price of $3.6097 per share, plus commission of $0.035 per share, for a total cost of $42,234.78. These shares will be treated as unissued in accordance with Maryland law and shown as a reduction of stockholders' equity at cost. While we will continue to pursue value creating investments, the Board believes there is significant embedded value in our assets that is yet to be realized by the market. Therefore, returning capital to shareholders through a repurchase program is an attractive use of capital currently.
There can be no assurance that the Company will refinance loans, take out additional financing or capital will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the . . .
May 16, 2022
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