| Table of Contents |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM
___________________________________________________________
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period from _____ to _____
(Commission file No.)
___________________________________________________________
PRESIDIO PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________
| | | |
| (State or other jurisdiction | (I.R.S. employer |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
| Title of each class of registered securities | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| $0.01 par value per share | ||||
| The | ||||
| $0.01 par value per share | ||||
| The | ||||
| Purchase Shares of Common Stock | ||||
________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| | ☒ | Smaller reporting company | | |||||||||||
| Emerging Growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At November 10, 2022, registrant had issued and outstanding
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this report and in our other filings with the Securities and Exchange Commission (the “SEC”). Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, financial condition, liquidity, capital resources, cash flows, results of operations and other financial and operating information. Forward-looking statements included in this report include, but are not limited to, statements regarding purchases and sales of properties, plans for financing and refinancing our properties, the adequacy of our capital resources, changes to the markets in which we operate, our business plans and strategies, and our payment of dividends. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Important factors that may cause actual results to differ from projections include, but are not limited to:
| • |
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 | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Tenant improvements | ||||||||
| Lease intangibles | ||||||||
| Real estate assets and lease intangibles held for investment, cost | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Real estate assets and lease intangibles held for investment, net | ||||||||
| Real estate assets held for sale, net | ||||||||
| Real estate assets, net | ||||||||
| Cash, cash equivalents and restricted cash | ||||||||
| Deferred leasing costs, net | ||||||||
| Goodwill | ||||||||
| Other assets, net | ||||||||
| Investments held in Trust (see Notes 2 & 9) | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Mortgage notes payable, net | $ | $ | ||||||
| Mortgage notes payable related to properties held for sale, net | ||||||||
| Mortgage notes payable, total net | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Accounts payable and accrued liabilities of SPAC (see Notes 2 & 9) | ||||||||
| Accrued real estate taxes | ||||||||
| Dividends payable preferred stock | ||||||||
| Lease liability, net | ||||||||
| Below-market leases, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 2 & 9) | ||||||||
| SPAC Class A common stock subject to possible redemption; shares (at $ per share), net of issuance cost of approximately $ | ||||||||
| Equity: | ||||||||
| Series D Preferred Stock, $ par value per share; shares authorized; shares issued and outstanding (liquidation preference $ per share) as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Series A Common Stock, $ par value per share, shares authorized: ; shares and shares were issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Dividends and accumulated losses | ( | ) | ( | ) | ||||
| Total stockholders' equity before noncontrolling interest | ||||||||
| Noncontrolling interest | ||||||||
| Total equity | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Rental income |
$ | $ | $ | $ | ||||||||||||
| Fees and other income |
||||||||||||||||
| Total revenue |
||||||||||||||||
| Costs and expenses: |
||||||||||||||||
| Rental operating costs |
||||||||||||||||
| General and administrative |
||||||||||||||||
| Depreciation and amortization |
||||||||||||||||
| Impairment of real estate assets |
||||||||||||||||
| Total costs and expenses |
||||||||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense - mortgage notes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest expense - note payable |
( |
) | ||||||||||||||
| Interest and other (expense), net |
( |
) | ( |
) | ||||||||||||
| Gain on sales of real estate, net |
||||||||||||||||
| Gain on extinguishment of government debt |
||||||||||||||||
| Income tax expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total other income (expense), net |
( |
) | ( |
) | ||||||||||||
| Net income (loss) |
( |
) | ( |
) | ||||||||||||
| Less: Income attributable to noncontrolling interests |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss attributable to Presidio Property Trust, Inc. stockholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Less: Preferred Stock Series D dividends |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Less: Series A Warrant dividend |
( |
) | ||||||||||||||
| Net loss attributable to Presidio Property Trust, Inc. common stockholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per share attributable to Presidio Property Trust, Inc. common stockholders: |
||||||||||||||||
| Basic & Diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average number of common shares outstanding - basic & diluted |
||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Three 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 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Vesting of restricted stock |
||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends to Series D Preferred Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Remeasurement of SPAC Class A common stock subject to possible redemption |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Vesting of restricted stock |
||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends to Series D Preferred Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| SPAC remeasurement of Class A shares |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Repurchase of Series A Common Stock, at cost |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Vesting of restricted stock |
||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends to Series D Preferred Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| SPAC remeasurement of Class A shares |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Repurchase of Series A Common Stock, at cost |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Repurchase of Series D Preferred Stock, at cost |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance, September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
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 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income |
— | — | ||||||||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends to Series D Preferred Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of preferred stock Series D, net of issuance costs |
||||||||||||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net Loss |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends paid to Series A Common Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Dividends to Series D Preferred Stockholders |
— | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of Common Stock, net of issuance costs, including warrants |
||||||||||||||||||||||||||||||||||||
| Distributions in excess of contributions received |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Repurchase of Common Stock |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance, September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
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) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Stock compensation |
||||||||
| Bad debt expense |
||||||||
| Gain on sale of real estate assets, net |
( |
) | ( |
) | ||||
| Gain on extinguishment of government debt |
( |
) | ||||||
| Net change in fair value marketable securities |
||||||||
| Net change in fair value SPAC Trust Account |
( |
) | ||||||
| Impairment of real estate assets |
||||||||
| Amortization of financing costs |
||||||||
| Amortization of above-market leases |
||||||||
| Amortization of below-market leases |
( |
) | ( |
) | ||||
| Straight-line rent adjustment |
( |
) | ( |
) | ||||
| Changes in operating assets and liabilities: |
||||||||
| Other assets |
||||||||
| Accounts payable and accrued liabilities |
( |
) | ||||||
| Accrued real estate taxes |
( |
) | ( |
) | ||||
| Net cash provided operating activities |
||||||||
| Cash flows from investing activities: |
||||||||
| Real estate acquisitions |
( |
) | ( |
) | ||||
| Additions to buildings and tenant improvements |
( |
) | ( |
) | ||||
| Investment in marketable securities |
( |
) | ( |
) | ||||
| Proceeds from sale of marketable securities |
||||||||
| Investment of SPAC IPO proceeds into Trust Account |
( |
) | ||||||
| Additions to deferred leasing costs |
( |
) | ( |
) | ||||
| Proceeds from sales of real estate, net |
||||||||
| Net cash (used in) provided by investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
||||||||
| Proceeds from mortgage notes payable, net of issuance costs |
||||||||
| Repayment of mortgage notes payable |
( |
) | ( |
) | ||||
| Repayment of note payable |
( |
) | ||||||
| Payment of deferred offering costs |
( |
) | ( |
) | ||||
| Distributions to noncontrolling interests, net |
( |
) | ( |
) | ||||
| Proceeds from initial public offering of SPAC |
||||||||
| SPAC offering non-controlling interest adjustment |
( |
) | ||||||
| Issuance of Series A Common Stock, net of offering costs |
||||||||
| Issuance of Series D Preferred Stock, net of offering costs |
||||||||
| Repurchase of Series A Common Stock, at cost |
( |
) | ( |
) | ||||
| Repurchase of Series D Preferred Stock, at cost |
( |
) | ||||||
| Dividends paid to Series D Preferred Stockholders |
( |
) | ( |
) | ||||
| Dividends paid to Series A Common Stockholders |
( |
) | ( |
) | ||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| Net increase in cash equivalents and restricted cash |
||||||||
| Cash, cash equivalents and restricted cash - beginning of period |
||||||||
| Cash, cash equivalents and restricted cash - end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Interest paid-mortgage notes payable |
$ | $ | ||||||
| Interest paid-notes payable |
$ | $ | ||||||
| Non-cash financing activities: |
||||||||
| Dividends payable - Preferred Stock Series D |
$ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
Presidio Property Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2022
1. ORGANIZATION
Organization. Presidio Property Trust, Inc. (“we”, “our”, “us” or the “Company”) is an internally-managed real estate investment trust (“REIT”), with holdings in office, industrial, retail and model home properties. We were incorporated in the State of California on September 28, 1999, and in August 2010, we reincorporated as a Maryland corporation. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” Through Presidio Property Trust, Inc., its subsidiaries, and its partnerships, we own
The Company or one of its affiliates operates the following partnerships during the periods covered by these condensed consolidated financial statements:
| • | The Company is the sole general partner and limited partner in limited partnerships (NetREIT Palm Self-Storage LP and NetREIT Casa Grande LP), both of which, at 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 limited partnerships that purchase model homes and lease them back to homebuilders (Dubose Model Home Investors #202, LP, Dubose Model Home Investors #203, LP, Dubose Model Home Investors #204, LP, Dubose Model Home Investors #205, LP, and Dubose Model Home Investors #206, LP). The Company refers to these entities collectively as the “Model Home Partnerships”. |
The Company has determined that the limited partnerships in which it owns less than 100% should be included in the Company’s consolidated financial statements as the Company directs their activities and has control of such limited partnerships.
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (the “Code”), for federal income tax purposes. To maintain our qualification as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels, and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to maintain our qualification as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. We are subject to certain state and local income taxes.
We, together with one of our entities, have elected to treat our subsidiaries as a taxable REIT subsidiary (a “TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes. The Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries have been assessed any significant interest or penalties for tax positions by any tax jurisdictions.
Reverse Stock Split. On July 29, 2020, we amended our charter to effect a one-for- reverse stock split of every outstanding share of our Series A Common Stock. The financial statements and accompanying footnotes have been retroactively restated to reflect the reverse stock split.
Additional Offerings & Warrants. Our Form S-3 Registration Statement was declared effective by the SEC on April 27, 2021. Under this registration statement, we may offer and sell from time to time, in one or more series, subject to limitation that may apply (such as under Rule 415 of the Securities Act of 1933) various securities of the Company for total gross proceeds of up to $
In connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to
The Company evaluated the accounting guidance in ASC 480 - 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,
Warrant Dividend. In January 2022, we distributed -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 share of common stock at $
Preferred Stock Series D. On June 15, 2021, the Company completed its secondary offering of
Liquidity. The Company's anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, and the sale of equity or debt securities. Future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. The Company is also seeking investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders and may seek a revolving line of credit to provide short-term liquidity. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.
Short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on mortgage notes payables, during the last three months of 2022, total approximately $
As the Company continues its operations, it may re-finance or seek additional financing. However, there can be no assurance that any such re-financing or additional financing will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans and/or certain discretionary spending, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. Management believes that the combination of working capital on hand and the ability to refinance commercial and model home mortgages will fund operations through at least the next twelve months from the date of the issuance of these unaudited interim financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2021. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2022.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Presidio Property Trust and its subsidiaries, NetREIT Advisors, LLC and Dubose Advisors LLC (collectively, the “Advisors”), and NetREIT Dubose Model Home REIT, Inc. The consolidated financial statements also include the results of the NetREIT Partnerships and the Model Home Partnerships. As used herein, references to the “Company” include references to Presidio Property Trust, its subsidiaries, and the partnerships. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements also include the accounts of (a) Murphy Canyon Acquisition Corp. ("Murphy Canyon"), which is a SPAC, for which we serve as the financial sponsor (as described below), and which is deemed to be controlled by us as a result of our
The Company classifies the noncontrolling interests in the NetREIT Partnerships as part of consolidated net income (loss) in 2022 and 2021 and has included the accumulated amount of noncontrolling interests as part of equity since inception in February 2010. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interest will be remeasured, with the gain or loss reported in the statement of operations. Management has evaluated the noncontrolling interests and determined that they do not contain any redemption features.
Real Estate Assets and Lease Intangibles. Land, buildings and improvements are recorded at cost, including tenant improvements and lease acquisition costs (including leasing commissions, space planning fees, and legal fees). The Company capitalizes any expenditure that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred. The Company allocates the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land, buildings, tenant improvements, and long-term debt) and identified intangible assets and liabilities (including the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships), in each case based on their respective fair values.
The Company allocates the purchase price to tangible assets of an acquired property based on the estimated fair values of those tangible assets, assuming the property was vacant. Estimates of fair value for land, building and building improvements are based on many factors, including, but not limited to, comparisons to other properties sold in the same geographic area and independent third-party valuations. In estimating the fair values of the tangible assets, intangible assets, and liabilities acquired, the Company also considers information obtained about each property as a result of its pre‑acquisition due diligence, marketing and leasing activities.
The value allocated to acquired lease intangibles is based on management’s evaluation of the specific characteristics of each tenant’s lease. Characteristics considered by management in allocating these values include, but are not limited, to the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease, the tenant’s credit quality, and other factors.
The value attributable to the above-market or below-market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below-market leases are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases. Amortization of above and below-market rents resulted in a net increase in rental income of approximately $
The value of in-place leases and unamortized lease origination costs are amortized to expenses over the remaining term of the respective leases, which range from less than a year to years. The amount allocated to 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 $
Impairments of Real Estate Assets. We regularly review for impairment on a property-by-property basis. Impairment is recognized on a property held for use when the expected undiscounted cash flows for a property are less than the carrying amount at which time the property is written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows, including, but not limited to, revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used to estimate the future recoverability of carrying value requires significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.
Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be material.
Fair Value Measurements. Certain assets and liabilities are required to be carried at fair value, or if long-lived assets are deemed to be impaired, to be adjusted to reflect this condition. The guidance requires disclosure of fair values calculated under each level of inputs within the following hierarchy:
| • | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
| • | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| • | Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
When available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement.
Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. As of 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 $
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 | ||||||||||||||||
| Placement Agent Warrants | ||||||||||||||||
| Series A Warrants | ||||||||||||||||
| Unvested Common Stock Grants | ||||||||||||||||
| Total potentially dilutive shares | ||||||||||||||||
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.
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.
Recently Issued and Adopted Accounting Pronouncements. In June 2017, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, amendedin February 2020 with ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842). ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. While ASU 2016-13 was effective for periods beginning after December 15, 2019, the issuance of ASU 2020-02 has allowed for the delay in adoption for certain smaller public companies and is now effective for fiscal periods beginning after December 15, 2022. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company is continuing to evaluate the impact of this guidance on its financial statements and does not believe it will have a material impact on the financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. The amendments in ASU No. 2020-06 are effective for public business entities that meet the definition of a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company has adopted this guidance with no impact on our financial statements.
3. RECENT REAL ESTATE TRANSACTIONS
Acquisitions during the nine months ended September 30, 2022:
| • |
The Company acquired |
Acquisitions during the nine months ended September 30, 2021:
| • |
The Company acquired model homes for approximately $ |
| • | On August 17, 2021, the Company, through its |
Dispositions during the nine months ended September 30, 2022:
| • |
World Plaza, which was sold on March 11, 2022, for approximately $ |
| • |
The Company sold 25 model homes for approximately $ |
Dispositions during the nine months ended September 30, 2021: