PRESIDIO PROPERTY TRUST, INC. 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 endedDecember 31, 2020 filed with theSecurities and Exchange Commission ("SEC") onMarch 30, 2021 .
We may refer to the three months ended
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 endedDecember 31, 2020 , filed with theSEC onMarch 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 theSEC , including our 2020 Annual Report on Form 10-K filed onMarch 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 OnMarch 11, 2020 , theWorld Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and onMarch 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. OnMarch 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. 27
--------------------------------------------------------------------------------
Table of Contents
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 tenantswho 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 inJune 2021 and our Series A common stock inJuly 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 endedDecember 31, 2020 filed with theSEC onMarch 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. InOctober 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 inthe United States . As ofSeptember 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 ("
121,000 rentable square feet; and
• 85 model home residential properties ("Model Homes " or "Model HomeProperties"), 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.
28--------------------------------------------------------------------------------
Table of Contents
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. OnOctober 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.
OnJune 15, 2021 , the Company completed its secondary offering of 800,000 shares of our Series D Preferred Stock for cash consideration of$25.00 per share to a syndicate of underwriters led by Benchmark, as representative, resulting in approximately$18.1 million in net proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company. The Company granted the underwriters a 45-day option to purchase up to an additional 120,000 shares of Series D Preferred Stock to cover over-allotments, which they exercised onJune 17, 2021 , resulting in approximately$2.7 million in net proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company. In total, the Company issued 920,000 shares of Series D Preferred Stock with net proceeds of approximately$20.5 million , after deducting the underwriting discounts and commissions and the offering expenses paid by the Company and deferred offering costs. The Series D Preferred Stock is listed and trades onThe Nasdaq Capital market under the symbol SQFTP. The Company intends to use these proceeds for general corporate and working capital purposes, including to potentially acquire additional properties. Below are some of the key terms of the Series D 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. In addition, the affirmative vote of the holders of at least two-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. 29
--------------------------------------------------------------------------------
Table of Contents 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 afterJune 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 toJune 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
For additional information regarding our Common Stock activity, see Footnote 10. Stockholders' Equity in Item 1. Financial Statements.
SIGNIFICANT TRANSACTIONS IN 2021 AND 2020
During the nine months ended
•
million and the Company recognized a loss of approximately
• Garden Gateway, which was sold onFebruary 19, 2021 for approximately$11.2 million and the Company recognized a loss of approximately$1.4 million .
• Highland Court, which was sold on
million and the Company recognized a loss of approximately
•
$8.125 million and the Company recognized a gain of approximately$2.5 million .
During the nine months ended
OnAugust 17, 2021 , the Company, through its 61.3% owned subsidiariesNetREIT Palm Self Storage, LP andNetREIT Highland LLC , acquired a single story newly constructed 10,500 square foot building inHouston, 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 endedSeptember 30, 2021 , the Company acquired six model homes for approximately$2.9 million . The purchase price was paid through cash payments of approximately$0.9 million and mortgage notes of approximately$2.0 million .
During the nine months ended
30
--------------------------------------------------------------------------------
Table of Contents
During the nine months ended
• Centennial Tech Center, which was sold on
$15.0 million and the Company recognized a loss of approximately$0.9 million .
•
million and the Company recognized a gain of approximately
During the nine months endedSeptember 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
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 andJuly 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
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
Revenues. Total revenues were$4.4 million for the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and 2020, respectively. The overall decrease in rental operating costs for the three months endedSeptember 30, 2021 as compared to 2020 is primarily related to the sale of four commercial properties during the nine months endedSeptember 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. 31
--------------------------------------------------------------------------------
Table of Contents
General and Administrative Expenses. General & Administrative ("G&A") expenses
for the three months ended September 30, 2021 and 2020 totaled
approximately $1.5 million and $1.4 million , respectively. These expenses
increased by approximately $0.1 million for the three months ended September 30,
2021 compared to the same period in 2020 primarily due to the increase in stock
compensation, which had an increase of approximately $0.1 million . In
connection with the Company becoming publicly traded in October 2020 , the
Company plans to continue rewarding its employees through stock-based
compensation at a greater rate than historically. G&A expenses as a percentage
of total revenue was 33.8% and 24.1% for three months ended September 30, 2021
and 2020, respectively. The increase in percentage is primarily due to a net
decrease in rental income related tothe sale of properties noted above, while
G&A remained relatively flat.
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
RESULTS OF OPERATIONS FOR THE Nine MONTHS ENDED
Revenues. Total revenues were$14.9 million for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and 2020, respectively. The overall decrease in rental operating costs for the nine months endedSeptember 30, 2021 as compared to 2020 is primarily related to the sale of four commercial properties during the nine months endedSeptember 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. 32
--------------------------------------------------------------------------------
Table of Contents
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
Geographic Diversification Tables
The following tables show a list of commercial properties owned by the Company
grouped by state and geographic region as of
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 %
33--------------------------------------------------------------------------------
Table of Contents
The following tables show a list of our Model Home properties by geographic
region as of
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 inJune 2021 and our Series A common stock inJuly 2021 . Our cash and restricted cash atSeptember 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. OnSeptember 17, 2021 , the Board of Directors authorized a stock repurchase program of up to$10 million outstanding shares of our Series A Common Stock. DuringSeptember 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 . These shares will be treated as unissued in accordance withMaryland 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 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. 34
--------------------------------------------------------------------------------
Table of Contents
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 endedSeptember 30, 2021 and for the year endedDecember 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.
Cash Equivalents and Restricted Cash
AtSeptember 30, 2021 andDecember 31, 2020 , we had approximately$27.8 million and$11.5 million in cash equivalents, respectively, including$3.8 million and$4.2 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash, cash in our operating accounts and cash held in bank accounts at third-party institutions. During 2021 and 2020, we did not experience any loss or lack of access to our cash or cash equivalents. Approximately$0.7 million of our cash balance is intended for capital expenditures on existing properties (net of deposits held in reserve accounts by our lenders) over the next three months of 2021. We intend to use the remainder of our existing cash and cash equivalents for asset/property acquisitions, reduction of principal debt, general corporate purposes, common stock repurchases (if market conditions are met), or dividends to our stockholders. 35
--------------------------------------------------------------------------------
Table of Contents Secured Debt As ofSeptember 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 ofSeptember 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 inHouston, TX , which is eliminated in consolidation. As ofSeptember 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 76Model Homes . These loans generally have a term at issuance of three to five years. As ofSeptember 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
Operating Activities: Net cash provided by operating activities for the nine months endedSeptember 30, 2021 totaled approximately$1.1 million , as compared to cash provided by operating activities of$2.9 million for the nine months endedSeptember 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 endedSeptember 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 andModel 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 endedSeptember 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 endedSeptember 30, 2021 :
• Net increase in dividends paid to stockholders of
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
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 .
36--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
OnJuly 12, 2021 , the Company entered into a securities purchase agreement with a singleU.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 duringAugust 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 inAugust 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 atSeptember 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 atSeptember 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.
© Edgar Online, source
