10-Q 1 sqft20220930_10q.htm FORM 10-Q sqft20220930_10q.htm
0001080657 Presidio Property Trust, Inc. false --12-31 Q3 2022 13,225,000 10.2 6,400,000 0.01 0.01 1,000,000 1,000,000 916,061 916,061 916,061 916,061 25.00 25.00 0.01 0.01 100,000,000 100,000,000 11,655,583 11,655,583 11,599,720 11,599,720 2 2 5 2 5 5 5 1 5 0.10 10 1 5 1 6 8 3 0 3 10 73,357,122 67,268,004 94,828,477 89,422,132 687,097 562,300 94,141,380 88,859,832 3 0.75 2 66.67 1 5 5 0 2 5 3 10 1 6 3 6 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. Includes lease intangibles and the land purchase option related to property acquisitions. This property was sold during the nine months ended September 30, 2022. Interest rate is subject to possible reset on August 5, 2023. Interest rate is subject to possible reset on September 1, 2023. Property held for sale as of September 30, 2022. There were three model homes included as real estate assets held for sale. The mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022. The Company paid this note in full on May 11, 2022 with available cash on hand. Our model homes have stand-alone mortgage notes at interest rates ranging from 2.50% to 5.34% per annum as of September 30, 2022. Interest rates as of September 30, 2022. 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 61.3% of NetREIT Palm Self-Storage LP. Genesis Plaza is owned by two tenants-in-common, each of which owns 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%. This property is held for sale as of September 30, 2022. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________

FORM 10-Q

___________________________________________________________

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period from _____ to _____

001-34049

(Commission file No.)

___________________________________________________________

 

PRESIDIO PROPERTY TRUST, INC.

(Exact name of registrant as specified in its charter)

___________________________________________________________

   

Maryland

 

33-0841255

(State or other jurisdiction
of incorporation or organization

 

(I.R.S. employer
identification no.)

4995 Murphy Canyon Road, Suite 300, San Diego, CA 92123

(Address of principal executive offices)

 

(760) 471-8536

(Registrant’s telephone number, including area code)

Title of each class of registered securities  Trading Symbol(s) Name of each exchange on which registered
Series A Common Stock, SQFT 

The Nasdaq Stock Market LLC

$0.01 par value per share    
     
9.375% Series D Cumulative Redeemable Perpetual Preferred Stock, SQFTP The Nasdaq Stock Market LLC
$0.01 par value per share    
     
Series A Common Stock Purchase Warrants to  SQFTW The Nasdaq Stock Market LLC
Purchase Shares of Common Stock    
     

________________________________________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐

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)    Yes ☒    No ☐

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

Non-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    No ☒

At November 10, 2022, registrant had issued and outstanding 12,233,146 shares of its Series A Common Stock, $0.01 par value per share.

 

 

 

 
Index

Page

   

Part I. FINANCIAL INFORMATION:

5

Item 1. FINANCIAL STATEMENTS:

5

Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021

5

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

6

Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)

9

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3. Quantitative and Qualitative Disclosures about Market Risk

40

Item 4. Controls and Procedures

41

Part II. OTHER INFORMATION

41

Item 1. Legal Proceedings

41

Item 1A. Risk Factors

41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3. Defaults Upon Senior Securities

42

Item 4. Mine Safety Disclosures

42

Item 5. Other Information

42

Item 6. Exhibits

42

Signatures

44

 

 

 

 

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:

 

 

inherent risks associated with real estate investments and with the real estate industry;

 

 

significant competition may decrease or prevent increases in our properties' occupancy and rental rates and may reduce the value of our properties;

 

 

a decrease in demand for commercial space and/or an increase in operating costs;

 

 

failure by any major tenant (or a substantial number of tenants) to make rental payments to us because of a deterioration of their financial condition, an early termination of their lease, a non-renewal of their lease or a renewal of their lease on terms less favorable to us;

 

 

challenging economic conditions facing us and our tenants may have a material adverse effect on our financial condition and results of operations;

 

 

our failure to generate sufficient cash to service and/or retire our debt obligations in a timely manner;

 

 

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;

 

 

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);

 

 

 

 

decrease in supply and/or demand for single family homes, inability to acquire additional model homes and increased competition to buy such properties;

 

 

terrorist attacks or actions and/or risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions;

 

 

failure to continue to qualify as a REIT;

 

 

adverse results of any legal proceedings;

 

 

changes in laws, rules and regulations affecting our business; and

 

 

the other risks and uncertainties discussed in Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 30, 2022.

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Presidio Property Trust, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

  

September 30,

  

December 31,

 
  2022  2021 
  

(Unaudited)

     

ASSETS

        

Real estate assets and lease intangibles:

        

Land

 $18,223,947  $21,136,379 

Buildings and improvements

  116,206,836   119,224,375 

Tenant improvements

  12,911,091   12,752,518 

Lease intangibles

  4,110,139   4,110,139 

Real estate assets and lease intangibles held for investment, cost

  151,452,013   157,223,411 

Accumulated depreciation and amortization

  (31,321,223)  (30,589,969)

Real estate assets and lease intangibles held for investment, net

  120,130,790   126,633,442 

Real estate assets held for sale, net

  6,656,116   11,431,494 

Real estate assets, net

  126,786,906   138,064,936 

Cash, cash equivalents and restricted cash

  18,569,075   14,702,089 

Deferred leasing costs, net

  1,244,753   1,348,234 

Goodwill

  2,423,000   2,423,000 

Other assets, net

  3,892,377   4,658,504 

Investments held in Trust (see Notes 2 & 9)

  135,706,687    

TOTAL ASSETS

 $288,622,798  $161,196,763 

LIABILITIES AND EQUITY

        

Liabilities:

        

Mortgage notes payable, net

 $89,115,802  $87,324,319 

Mortgage notes payable related to properties held for sale, net

  5,025,578   1,535,513 

Mortgage notes payable, total net

  94,141,380   88,859,832 

Accounts payable and accrued liabilities

  4,441,731   4,569,537 

Accounts payable and accrued liabilities of SPAC (see Notes 2 & 9)

  4,944,878   15,499 

Accrued real estate taxes

  1,493,634   1,940,913 

Dividends payable preferred stock

  178,916   179,685 

Lease liability, net

  54,218   75,547 

Below-market leases, net

  31,963   73,130 

Total liabilities

  105,286,720   95,714,143 

Commitments and contingencies (Note 2 & 9)

          

SPAC Class A common stock subject to possible redemption; 13,225,000 shares (at $10.20 per share), net of issuance cost of approximately $6,400,000

  129,246,639    

Equity:

        

Series D Preferred Stock, $0.01 par value per share; 1,000,000 shares authorized; 916,061 shares issued and outstanding (liquidation preference $25.00 per share) as of September 30, 2022 and December 31, 2021, respectively

  9,161   9,200 

Series A Common Stock, $0.01 par value per share, shares authorized: 100,000,000; 11,655,583 shares and 11,599,720 shares were issued and outstanding at September 30, 2022 and December 31, 2021, respectively

  116,556   115,997 

Additional paid-in capital

  182,235,077   186,492,012 

Dividends and accumulated losses

  (137,304,308)  (130,947,434)

Total stockholders' equity before noncontrolling interest

  45,056,486   55,669,775 

Noncontrolling interest

  9,032,953   9,812,845 

Total equity

  54,089,439   65,482,620 

TOTAL LIABILITIES AND EQUITY

 $288,622,798  $161,196,763 

 

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,

 
   

2022

   

2021

   

2022

   

2021

 

Revenues:

                               

Rental income

  $ 4,243,887     $ 4,185,212     $ 12,884,280     $ 14,216,234  

Fees and other income

    148,088       190,967       401,697       675,283  

Total revenue

    4,391,975       4,376,179       13,285,977       14,891,517  

Costs and expenses:

                               

Rental operating costs

    1,434,225       1,414,518       4,365,781       4,739,256  

General and administrative

    1,509,139       1,479,261       4,306,835       4,361,297  

Depreciation and amortization

    1,318,164       1,306,874       3,973,582       4,104,018  

Impairment of real estate assets

                      300,000  

Total costs and expenses

    4,261,528       4,200,653       12,646,198       13,504,571  

Other income (expense):

                               

Interest expense - mortgage notes

    (1,382,120 )     (1,030,883 )     (3,485,693 )     (3,542,940 )

Interest expense - note payable

                      (279,373 )

Interest and other (expense), net

    590,586       (13,886 )     757,318       (67,329 )

Gain on sales of real estate, net

    1,307,258       627,322       4,057,527       2,060,336  

Gain on extinguishment of government debt

                      10,000  

Income tax expense

    (294,996 )     (182,607 )     (819,520 )     (471,506 )

Total other income (expense), net

    220,728       (600,054 )     509,632       (2,290,812 )

Net income (loss)

    351,175       (424,528 )     1,149,411       (903,866 )

Less: Income attributable to noncontrolling interests

    (1,114,928 )     (427,303 )     (3,032,806 )     (1,759,608 )

Net loss attributable to Presidio Property Trust, Inc. stockholders

  $ (763,753 )   $ (851,831 )   $ (1,883,395 )   $ (2,663,474 )

Less: Preferred Stock Series D dividends

    (538,286 )     (539,056 )     (1,616,397 )     (634,892 )

Less: Series A Warrant dividend

                (2,456,512 )      

Net loss attributable to Presidio Property Trust, Inc. common stockholders

  $ (1,302,039 )   $ (1,390,887 )   $ (5,956,304 )   $ (3,298,366 )
                                 

Net loss per share attributable to Presidio Property Trust, Inc. common stockholders:

                               

Basic & Diluted

  $ (0.11 )   $ (0.13 )   $ (0.51 )   $ (0.33 )
                                 

Weighted average number of common shares outstanding - basic & diluted

    11,780,090       10,833,847       11,784,500       9,955,046  

 

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, 2022 and 2021

(Unaudited)

 

                                   

Additional

   

Dividends and

   

Total

   

Non-

         
   

Preferred Stock Series D

   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

   

controlling

   

Total

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Losses

   

Equity

   

Interests

   

Equity

 

Balance, December 31, 2021

    920,000     $ 9,200       11,599,720     $ 115,997     $ 186,492,012     $ (130,947,434 )   $ 55,669,775     $ 9,812,845     $ 65,482,620  

Net income

                                  (828,486 )     (828,486 )     1,208,676       380,190  

Vesting of restricted stock

                196,250       1,963       762,423             764,386             764,386  

Dividends paid to Series A Common Stockholders

                                  (1,298,252 )     (1,298,252 )           (1,298,252 )

Dividends to Series D Preferred Stockholders

                                  (539,056 )     (539,056 )           (539,056 )

Remeasurement of SPAC Class A common stock subject to possible redemption

                            (4,023,113 )           (4,023,113 )           (4,023,113 )

Distributions in excess of contributions received

                                              (258,410 )     (258,410 )

Balance, March 31, 2022

    920,000     $ 9,200       11,795,970     $ 117,960     $ 183,231,322     $ (133,613,228 )   $ 49,745,254     $ 10,763,111     $ 60,508,365  

Net income

                                  (291,156 )     (291,156 )     709,202       418,046  

Vesting of restricted stock

                8,198       82       27,955             28,037             28,037  

Dividends paid to Series A Common Stockholders

                                  (1,311,202 )     (1,311,202 )           (1,311,202 )

Dividends to Series D Preferred Stockholders

                                  (539,056 )     (539,056 )           (539,056 )

SPAC remeasurement of Class A shares

                            (101,767 )           (101,767 )           (101,767 )

Repurchase of Series A Common Stock, at cost

                (10,411 )     (104 )     (30,625 )           (30,729 )           (30,729 )

Distributions in excess of contributions received

                                              (2,355,942 )     (2,355,942 )

Balance, June 30, 2022

    920,000     $ 9,200       11,793,757     $ 117,938     $ 183,126,885     $ (135,754,642 )   $ 47,499,381     $ 9,116,371     $ 56,615,752  

Net income

                                  (763,753 )     (763,753 )     1,114,928       351,175  

Vesting of restricted stock

                13,020       130       47,914             48,044             48,044  

Dividends paid to Series A Common Stockholders

                                  (247,627 )     (247,627 )           (247,627 )

Dividends to Series D Preferred Stockholders

                                  (538,286 )     (538,286 )           (538,286 )

SPAC remeasurement of Class A shares

                            (609,920 )           (609,920 )           (609,920 )

Repurchase of Series A Common Stock, at cost

                (151,194 )     (1,512 )     (245,455 )           (246,967 )           (246,967 )

Repurchase of Series D Preferred Stock, at cost

    (3,939 )     (39 )                 (84,347 )           (84,386 )           (84,386 )

Distributions in excess of contributions received

                                              (1,198,346 )     (1,198,346 )

Balance, September 30, 2022

    916,061     $ 9,161       11,655,583     $ 116,556     $ 182,235,077     $ (137,304,308 )   $ 45,056,486     $ 9,032,953     $ 54,089,439  

 

 

 

 

Presidio Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (continued)

For the Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

 

                                   

Additional

   

Dividends and

   

Total

   

Non-

         
   

Preferred Stock Series D

   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders’

   

controlling

   

Total

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Losses

   

Equity

   

Interests

   

Equity

 

Balance, December 31, 2020

        $       9,508,363     $ 95,038     $ 156,463,146     $ (121,674,505 )   $ 34,883,679     $ 15,238,902     $ 50,122,581  

Net loss

                                  (2,661,682 )     (2,661,682 )     406,608       (2,255,074 )

Dividends paid to Series A Common Stockholders

                                  (998,795 )     (998,795 )           (998,795 )

Distributions in excess of contributions received

                                              (2,034,212 )     (2,034,212 )

Balance, March 31, 2021

        $       9,508,363     $ 95,038     $ 156,463,146     $ (125,334,982 )   $ 31,223,202     $ 13,611,298     $ 44,834,500  

Net income

                                  850,039       850,039       925,697       1,775,736  

Dividends paid to Series A Common Stockholders

                                  (1,009,389 )     (1,009,389 )           (1,009,389 )

Dividends to Series D Preferred Stockholders

                                  (95,836 )     (95,836 )           (95,836 )

Issuance of preferred stock Series D, net of issuance costs

    920,000       9,200                   20,480,603             20,489,803             20,489,803  

Distributions in excess of contributions received

                                              (744,884 )     (744,884 )

Balance, June 30, 2021

    920,000     $ 9,200       9,508,363     $ 95,038     $ 176,943,749     $ (125,590,168 )   $ 51,457,819     $ 13,792,111     $ 65,249,930  

Net Loss

                                  (851,831 )     (851,831 )     427,303       (424,528 )

Dividends paid to Series A Common Stockholders

                                  (1,226,485 )     (1,226,485 )           (1,226,485 )

Dividends to Series D Preferred Stockholders

                                  (539,056 )     (539,056 )           (539,056 )

Issuance of Common Stock, net of issuance costs, including warrants

                2,000,000       20,000       8,851,879             8,871,879             8,871,879  

Distributions in excess of contributions received

                                              (2,845,873 )     (2,845,873 )

Repurchase of Common Stock

                (18,133 )     (136 )     (68,260 )           (68,396 )           (68,396 )

Balance, September 30, 2021

    920,000     $ 9,200       11,490,230     $ 114,902     $ 185,727,368     $ (128,207,540 )   $ 57,643,930     $ 11,373,541     $ 69,017,471  

 

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,

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net income (loss)

  $ 1,149,411     $ (903,866 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

               

Depreciation and amortization

    3,973,582       4,104,018  

Stock compensation

    861,837       867,903  

Bad debt expense

    11,116       52  

Gain on sale of real estate assets, net

    (4,057,527 )     (2,060,336 )

Gain on extinguishment of government debt

          (10,000 )

Net change in fair value marketable securities

    70,183       37,673  

Net change in fair value SPAC Trust Account

    (811,687 )      

Impairment of real estate assets

          300,000  

Amortization of financing costs

    180,250       431,806  

Amortization of above-market leases

          42,064  

Amortization of below-market leases

    (41,167 )     (46,481 )

Straight-line rent adjustment

    (148,181 )     (215,655 )

Changes in operating assets and liabilities:

               

Other assets

    585,984       633,354  

Accounts payable and accrued liabilities

    561,780       (1,014,848 )

Accrued real estate taxes

    (447,279 )     (1,040,680 )

Net cash provided operating activities

    1,888,302       1,125,004  

Cash flows from investing activities:

               

Real estate acquisitions

    (8,087,250 )     (7,758,066 )

Additions to buildings and tenant improvements

    (1,939,712 )     (1,122,051 )

Investment in marketable securities

    (1,243,672 )     (2,682,192 )

Proceeds from sale of marketable securities

    1,787,695       1,032,297  

Investment of SPAC IPO proceeds into Trust Account

    (134,895,000 )      

Additions to deferred leasing costs

    (53,377 )     (97,932 )

Proceeds from sales of real estate, net

    20,603,179       47,906,909  

Net cash (used in) provided by investing activities

    (123,828,137 )     37,278,965  

Cash flows from financing activities:

               

Proceeds from mortgage notes payable, net of issuance costs

    14,992,425       8,003,807  

Repayment of mortgage notes payable

    (9,586,079 )     (41,862,782 )

Repayment of note payable

          (7,675,598 )

Payment of deferred offering costs

    (3,201,266 )     (572,458 )

Distributions to noncontrolling interests, net

    (3,812,698 )     (5,624,969 )

Proceeds from initial public offering of SPAC

    132,859,920        

SPAC offering non-controlling interest adjustment

    (609,920 )      

Issuance of Series A Common Stock, net of offering costs

          8,871,879  

Issuance of Series D Preferred Stock, net of offering costs

          20,489,803  

Repurchase of Series A Common Stock, at cost

    (277,696 )     (68,396 )

Repurchase of Series D Preferred Stock, at cost

    (84,386 )      

Dividends paid to Series D Preferred Stockholders

    (1,616,398 )     (455,207 )

Dividends paid to Series A Common Stockholders

    (2,857,081 )     (3,234,669 )

Net cash provided by (used in) financing activities

    125,806,821       (22,128,590 )

Net increase in cash equivalents and restricted cash

    3,866,986       16,275,379  

Cash, cash equivalents and restricted cash - beginning of period

    14,702,089       11,540,917  

Cash, cash equivalents and restricted cash - end of period

  $ 18,569,075     $ 27,816,296  

Supplemental disclosure of cash flow information:

               

Interest paid-mortgage notes payable

  $ 3,038,713     $ 3,407,689  

Interest paid-notes payable

  $     $ 103,861  

Non-cash financing activities:

               

Dividends payable - Preferred Stock Series D

  $ 178,916     $ 179,685  

 

See Notes to Condensed Consolidated Financial Statements

 

 

Presidio Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2022

 

1. ORGANIZATION

 

Organization. Presidio Property Trust, Inc. (“we”, “our”, “us” or the “Company”) is an internally-managed real estate investment trust (“REIT”), with holdings in office, industrial, retail and model home properties. We were incorporated in the State of California on September 28, 1999, and in August 2010, we reincorporated as a Maryland corporation. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” Through Presidio Property Trust, Inc., its subsidiaries, and its partnerships, we own 12 commercial properties in fee interest, two of which we own as a partial interest in various affiliates, in which we serve as general partner, member and/or manager, and a special purpose acquisition company as noted below.

 

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 two limited partnerships (NetREIT Palm Self-Storage LP and NetREIT Casa Grande LP), both of which, at  September 30, 2022, had ownership interests in an entity that owns income producing real estate.  The Company refers to these entities collectively as the "NetREIT Partnerships".
     
  The Company is the general and limited partner in five limited partnerships that purchase model homes and lease them back to homebuilders (Dubose Model Home Investors #202, LP, Dubose Model Home Investors #203, LP, Dubose Model Home Investors #204, LP, Dubose Model Home Investors #205, LP, and Dubose Model Home Investors #206, LP). The Company refers to these entities collectively as the “Model Home Partnerships”.

 

The Company has determined that the limited partnerships in which it owns less than 100% should be included in the Company’s consolidated financial statements as the Company directs their activities and has control of such limited partnerships.

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (the “Code”), for federal income tax purposes. To maintain our qualification as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels, and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to maintain our qualification as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. We are subject to certain state and local income taxes.

 

We, together with one of our entities, have elected to treat our subsidiaries as a taxable REIT subsidiary (a “TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes. The Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries have been assessed any significant interest or penalties for tax positions by any tax jurisdictions.

 

Reverse Stock Split. On July 29, 2020, we amended our charter to effect a one-for-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.

 

10

 

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 $200,000,000. On July 12, 2021, we entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of 1,000,000 shares of our Series A Common Stock, warrants (“Common Stock Warrants”) to purchase up to 2,000,000 shares of Series A Common Stock and pre-funded warrants (“Pre-Funded Warrants”) to purchase up to 1,000,000 shares of Series A Common Stock. The shares of Series A Common Stock, Pre-Funded Warrants and shares of Series A Common Stock issuable upon exercise of the Pre-Funded Warrants were issued pursuant to a prospectus supplement to the Form S-3 Registration Statement, with the Common Stock Warrants issued in a concurrent private placement.  Each share of Series A Common Stock and accompanying Series A Common Stock Warrants were sold together at a combined offering price of $5.00, and each share of Common Stock and accompanying Pre-Funded Warrants 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 (the “Placement Agent Warrants”) 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.  The Company registered for resale Series A Common Stock issuable upon exercise of Common Stock Warrants and Placement Agent Warrants issued in the July 2021 offering pursuant to a registration statement on Form S-11 that was declared effective by the SEC on September 14, 2021. 

 

The Company evaluated the accounting guidance in ASC 480 - Distinguishing Liabilities from Equity and ASC 815 - Derivatives and Hedging 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, 2022, none of the Common Stock Warrants and Placement Agent Warrants have been exercised.

 

Warrant Dividend.  In January 2022, we distributed five-year listed warrants (the “Series A Warrants”) to holders of our Series A Common Stock.  The Series A Warrants and the shares of Series A Common Stock issuable upon the exercise of the Series A Warrants were registered on a registration statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held Series A Common Stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired Series A Common Stock in the market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022.  The Series A Warrants give the holder the right to purchase one share of common stock at $7.00 per share, for a period of five years. Should warrantholders not exercise the Series A Warrants during that holding period, the Series A Warrants will automatically convert to 1/10 of a common share at expiration, rounded down to the nearest number of whole shares.  On the first day of trading SFQTW closed at $0.17 per warrant with 14,450,069 warrants in the public market.

 

Preferred Stock Series D.  On June 15, 2021, the Company completed its secondary offering of 800,000 shares of our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock ("Series D Preferred Stock") for cash consideration of $25.00 per share to a syndicate of underwriters led by The Benchmark Company, LLC, 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 on June 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 Company has used these proceeds for general corporate and working capital purposes, including acquiring additional properties.  

 

Liquidity. The Company's anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, and the sale of equity or debt securities.  Future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. The Company is also seeking investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders and may seek a revolving line of credit to provide short-term liquidity. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.

 

11

 

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 2022, total approximately $2.5 million, of which $2.2 million is related to model home properties.  Management expects certain model home properties can be sold, and that the underlying mortgage notes will be paid off with sales proceeds while other mortgage notes can be refinanced, as the Company has historically been able to do in the past.  Additional principal payments will be made with cash flows from ongoing operations.  The mortgage note payable for 300 N.P. was an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022.  The Company paid this note in full on May 11, 2022 with available cash on hand.  Additionally, the Company has committed to provide additional funds, or obtain financing, if needed to a special purpose acquisition company, or "SPAC", for which we serve as the financial sponsor (as described below in Note 2. Significant Account Policies).

 

As the Company continues its operations, it may re-finance or seek additional financing.  However, there can be no assurance that any such re-financing or additional financing will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans and/or certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. Management believes that the combination of working capital on hand and the ability to refinance commercial and model home mortgages will fund operations through at least the next twelve months from the date of the issuance of these unaudited interim financial statements.

 

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2021. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2022.

 

Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared by the Company's management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and footnote disclosures required for annual consolidated financial statements have been condensed or excluded pursuant to rules and regulations of the SEC. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of our financial position, results of our operations, and cash flows as of, and for the three and nine months ended September 30, 2022 and 2021, respectively. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements included in the Form 10-K filed with the SEC on March 30, 2022. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 due to real estate market fluctuations, available mortgage lending rates and other factors, such as the effects of COVID-19 and its possible influence on our future results.

 

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Presidio Property Trust and its subsidiaries, NetREIT Advisors, LLC and Dubose Advisors LLC (collectively, the “Advisors”), and NetREIT Dubose Model Home REIT, Inc. The consolidated financial statements also include the results of the NetREIT Partnerships and the Model Home Partnerships.  As used herein, references to the “Company” include references to Presidio Property Trust, its subsidiaries, and the partnerships. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements also include the accounts of (a) Murphy Canyon Acquisition Corp. ("Murphy Canyon"), which is a SPAC, for which we serve as the financial sponsor (as described below), and which is deemed to be controlled by us as a result of our 23.5% equity ownership stake, the overlap of three of our executive officers as executive officers of Murphy Canyon, and significant influence that we currently exercise over the funding and acquisition of new operations for an initial business combination ("IBC"). (see Note 2, Variable Interest Entity). All intercompany balances have been eliminated in consolidation.

 

The Company classifies the noncontrolling interests in the NetREIT Partnerships as part of consolidated net income (loss) in 2022 and 2021 and has included the accumulated amount of noncontrolling interests as part of equity since inception in February 2010. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interest will be remeasured, with the gain or loss reported in the statement of operations. Management has evaluated the noncontrolling interests and determined that they do not contain any redemption features.

 

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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 $14,000 and $41,000 for the three and nine months ended September 30, 2022, respectively.  Amortization of above and below-market rents resulted in a net decrease in rental income of approximately $4,000 and $6,000 for the three and nine months ended September 30, 2021, respectively.  

 

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 ten years. The amount allocated to acquire 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 $50,000 and $152,000, for the three and nine months ended September 30, 2022, respectively.  Amortization expenses related to these assets was approximately $68,000 and $275,000 for the three and nine months ended September 30, 2021, respectively.

 

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 one to five 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, 2022 and  December 31, 2021, the Company had net deferred leasing costs of approximately $1.2 million and $1.4 million, respectively. Total amortization expense for the three and nine months ended September 30, 2022 was approximately $94,000 and $283,000, respectively.  Total amortization expense for the three and nine months ended September 30, 2021 was approximately $85,000 and $257,000, respectively.

 

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Cash Equivalents and Restricted Cash. At September 30, 2022 and December 31, 2021, we had approximately $18.6 million and $14.7 million in cash, cash equivalents and restricted cash, respectively, of which approximately $4.9 million and $4.7 million represented restricted cash, respectively.  The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have an original maturity of three months or less at the date of purchase to be cash equivalents. Items classified as cash equivalents include money market funds. Cash balances in individual banks may exceed the federally insured limit of $250,000 by the Federal Deposit Insurance Corporation (the "FDIC"). No losses have been experienced related to such accounts. At September 30, 2022 and  December 31, 2021, the Company had approximately $10.7 million and $7.3 million, respectively, in deposits in financial institutions that exceeded the federally insurable limits. Restricted cash consists of funds held in escrow for Company lenders for properties held as collateral by the lenders. The funds in escrow are for payment of property taxes, insurance, leasing costs and capital expenditures. 

 

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, 2022, one commercial property met the criteria to be classified as held for sale and three model homes were classified as held for sale.

 

Deferred Offering Costs. Deferred offering costs represent legal, accounting and other direct costs related to our offerings. As of September 30, 2022 and December 31, 2021, we have incurred approximately $117,000 and $135,000, at the end of each period.  These costs are related to our offering of common and preferred stock in connection with the sponsorship, through our wholly-owned subsidiary Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”), of a special purpose acquisition company (“SPAC”) initial public offering as of December 31, 2021.  As of September 30, 2022, these costs are related to the preparation of a registration statement.  These costs were deferred and recorded as an asset at September 30, 2022 and December 31, 2021.  

 

Impairments of Real Estate Assets. We regularly review for impairment on a property-by-property basis. Impairment is recognized on a property held for use when the expected undiscounted cash flows for a property are less than the carrying amount at which time the property is written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows, including, but not limited to, revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used to estimate the future recoverability of carrying value requires significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.

 

Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be material.

 

Fair Value Measurements.  Certain assets and liabilities are required to be carried at fair value, or if long-lived assets are deemed to be impaired, to be adjusted to reflect this condition. The guidance requires disclosure of fair values calculated under each level of inputs within the following hierarchy:

 

 

Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

 

 

Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

 

Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

 

When available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement.

 

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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, 2022 and December 31, 2021, our marketable securities presented on the balance sheet were measured at fair value using Level 1 market prices and totaled approximately $0.8 million and $1.5 million, respectively, with a cost basis of approximately $1.0 million and $1.6 million, respectively.  There were no financial liabilities measured at fair value as of September 30, 2022 and December 31, 2021.

 

Earnings per share (EPS). The EPS on common stock has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings Per Share.  The guidance requires the classification of the Company’s unvested restricted stock, which contain rights to receive non-forfeitable dividends, as participating securities requiring the two-class method of computing net income per share of common stock.  In accordance with the two-class method, earnings per share have been computed by dividing the net income less net income attributable to unvested restricted shares by the weighted average number of shares of common stock outstanding less unvested restricted shares. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock and potentially dilutive securities outstanding in accordance with the treasury stock method.

 

Dilutive common stock equivalents include the dilutive effect of in-the-money stock equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common stock shares are considered anti-dilutive and thus are excluded from the calculation. Securities that are excluded from the calculation of weighted average dilutive common stock, because their inclusion would have been antidilutive, are:

 

  

For the Three Months Ended September 30,

  

For the Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Common Stock Warrants

  2,000,000   2,000,000   2,000,000   2,000,000 

Placement Agent Warrants

  80,000   80,000   80,000   80,000 

Series A Warrants

  14,450,069      14,450,069    

Unvested Common Stock Grants

  577,563   401,167   577,563   401,167 
                 

Total potentially dilutive shares

  17,107,632   2,481,167   17,107,632   2,481,167 

 

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Variable Interest Entity. We determine whether an entity is a Variable Interest Entity ("VIE") and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. Our determination of whether an entity in which we hold a direct or indirect variable interest is a VIE is based on several factors, including whether we participated in the design of the entity and the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.

 

We analyze any investments in VIEs to determine if we are the primary beneficiary. In evaluating whether we are the primary beneficiary, we evaluate our direct and indirect economic interests in the entity. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in the VIE. Determining which reporting entity, if any, has a controlling financial interest in a VIE is primarily a qualitative approach focused on identifying which reporting entity has both: (i) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.

 

We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance, including, but not limited to, the ability to direct operating decisions and activities. In addition, we consider the rights of other investors to participate in those decisions. We determine whether we are the primary beneficiary of a VIE at the time we become involved with a variable interest entity and reconsider that conclusion continually.  We consolidate any VIE of which we are the primary beneficiary.

 

The Company is involved in the formation of an entity considered to be a VIE. The Company evaluates the consolidation of this entity as required pursuant to ASC Topic 810 relating to the consolidation of such VIE. The Company’s determination of whether it is the primary beneficiary of the VIE is based in part on an assessment of whether or not the Company and its related parties have the power to direct activities of the VIE and are exposed to the majority of the risks and rewards of the entity.  

 

Following the completion of the Murphy Canyon IPO, we determined that Murphy Canyon is a VIE in which we have a variable interest because we participated in its formation and design, manage the significant activities, and Murphy Canyon does not have enough equity at risk to finance its activities without additional subordinated financial support. We have also determined that Murphy Canyon's public stockholders do not have substantive rights, and their equity interest constitutes temporary equity, outside of permanent equity, in accordance with ASC 480-10-S99-3A. As such, we have concluded that we are currently the primary beneficiary of Murphy Canyon as a VIE, as we have the right to receive benefits or the obligation to absorb losses of the entity, as well as the power to direct a majority of the activities that significantly impact Murphy Canyon's economic performance. Since we are the primary beneficiary, Murphy Canyon is consolidated into our condensed consolidated financial statements.  See Note 9 Commitments and Contingencies for additional details regarding Murphy Canyon.

 

Shares Subject to Possible Redemption.  The Company accounts for common stock issued by the SPAC (which is consolidated in our condensed consolidated financial statements), that is subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Under ASC 480, shares of common stock subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable shares of common stock (including shares of common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, shares of common stock are classified as shareholders’ equity. 

 

All of the Public Shares of Murphy Canyon SPAC (Class A Common Shares) contain a redemption feature which allows for the redemption of such Public Shares in connection with the SPAC's liquidation, if there is a stockholder vote or tender offer in connection with the SPAC's initial business combination and in connection with certain amendments to the SPAC's amended and restated certificate of incorporation. In accordance with SEC and its guidance on redeemable equity instruments, which has been codified in ASC 480-10-S99, redemption provisions not solely within the control of a company require common stock subject to redemption to be classified outside of permanent equity.  Accordingly, as of  September 30, 2022, the Public Shares are presented as temporary equity, outside the shareholder's equity section of the Company's  September 30, 2022 balance sheet.

 

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Given that the Public Shares were issued with other freestanding instruments (i.e., public warrants which were classified as permanent equity as described below), the proceeds and initial carrying value of Class A common stock classified as temporary equity was allocated in accordance with ASC 470-20. The Murphy Canyon Class A common stock is subject to ASC 480-10-S99. In addition, because it is probable that the equity instrument will become redeemable, we have the option to either (i) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument or (ii) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. We have elected to recognize the accretion resulting from changes in redemption value immediately during the three months ended March 31, 2022. See Note 9 Commitments and Contingencies for additional details regarding Murphy Canyon.

 

Warrant Instruments SPAC. Murphy Canyon accounts for warrants in accordance with the guidance contained in ASC 480 and FASB ASC 815, “Derivatives and Hedging”. Under ASC 815-40 and ASC 840 warrants that meet the criteria for equity treatment are recorded in stockholder’s equity. The warrants are subject to re-evaluation of the proper classification and accounting treatment at each reporting period. If the warrants no longer meet the criteria for equity treatment, they will be recorded as a liability and remeasured each period with changes recorded in the statement of operations. The warrants meet the criteria for classification as equity because they are not exercisable until after the SPAC business combination is completed, at which point the common shares are no longer redeemable and because they are indexed to Murphy Canyon's common stock and meet the other criteria for equity classification.   See Note 9 Commitments and Contingencies for additional details regarding Murphy Canyon.

 

Subsequent Events. We evaluate subsequent events up until the date the condensed consolidated financial statements are issued.

 

Recently Issued and Adopted Accounting Pronouncements.  In June 2017, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, amendedin February 2020 with ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842). ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. While ASU 2016-13 was effective for periods beginning after December 15, 2019, the issuance of ASU 2020-02 has allowed for the delay in adoption for certain smaller public companies and is now effective for fiscal periods beginning after December 15, 2022. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company is continuing to evaluate the impact of this guidance on its financial statements and does not believe it will have a material impact on the financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas.  The amendments in ASU No. 2020-06 are effective for public business entities that meet the definition of a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after  December 15, 2020, including interim periods within those fiscal years.  The Company has adopted this guidance with no impact on our financial statements.

 

 

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3. RECENT REAL ESTATE TRANSACTIONS

 

Acquisitions during the nine months ended September 30, 2022

 

 

The Company acquired 15 model homes for approximately $8.1 million. The purchase price was paid through cash payments of approximately $2.5 million and mortgage notes of approximately $5.6 million.

 

Acquisitions during the nine months ended September 30, 2021

 

 

The Company acquired six model homes for approximately $2.9 million.  These acquisitions were paid for with approximately $0.9 million in cash payments and approximately $2.0 million in mortgage loans.  There were no other commercial properties acquired during this period.

 

  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 Code 1986, as amended (the "Internal Revenue Code").  The building is 100% occupied under a 15-year triple net lease.

 

Dispositions during the nine months ended September 30, 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 sold 25 model homes for approximately $13.5 million and recognized a gain of approximately $4.3 million.

 

Dispositions during the nine months ended September 30, 2021: