# Presidio Property Trust, Inc.: Form 10-Q for the period ended Sep 30, 2020 - Company: [Presidio Property Trust, Inc.](/companies/sqft.md) (CIK 1080657) - Form: 10-Q - Filed: 2020-11-05 - Accepted by EDGAR: Nov 5, 2020, 21:13 ET - Period: 2020-09-30 - Accession: 0001437749-20-022782 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1080657/000143774920022782/sqft20200903_10q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1080657/000143774920022782/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2020-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2020-07-01 to 2020-09-30 | $5.7m | us-gaap:Revenues | | Revenue | 9 months, 2020-01-01 to 2020-09-30 | $18.8m | us-gaap:Revenues | | Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $2.1m | us-gaap:InterestExpense | | Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $7.0m | us-gaap:InterestExpense | | Income tax | 3 months, 2020-07-01 to 2020-09-30 | $122.6k | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 9 months, 2020-01-01 to 2020-09-30 | $257.6k | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2020-07-01 to 2020-09-30 | −$1.7m | us-gaap:NetIncomeLoss | | Net income | 9 months, 2020-01-01 to 2020-09-30 | −$4.8m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | −$0.20 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | −$0.54 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | −$0.20 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | −$0.54 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 8,922,525 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 8,900,547 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $2.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $0 | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $18.0k | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2020-09-30 | $191.8m | us-gaap:Assets | | Total liabilities | at 2020-09-30 | $139.5m | us-gaap:Liabilities | | Shareholders' equity | at 2020-09-30 | $35.6m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 40,079 characters. *The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020.* We may refer to the three months ended September 30, 2020 and September 30, 2019 as the “2020 Quarter” and the “2019 Quarter,” respectively. ### Forward-Looking Statements This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the most significant factors is the potential adverse effect of the COVID-19 virus and ensuing economic turmoil on the financial condition, results of operations, cash flows and performance of Presidio, particularly our ability to collect rent, on the financial condition, results of operations, cash flows and performance of our tenants, and on the global economy and financial markets. The extent to which COVID-19 impacts the Company and its tenants will depend on current and future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 13, 2020, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to the risks associated with the ownership of real estate in general and our real estate assets in particular; the economic health of the metro regions where we conduct business; the risk of failure to enter into/and or complete contemplated acquisitions and dispositions, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition of our portfolio; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers and joint venture partners; the ability to control our operating expenses; the economic health of our tenants; the supply of competing properties; shifts away from brick and mortar stores to e-commerce; the availability and terms of financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; terrorist attacks or actions and/or cyber-attacks; weather conditions, natural disasters and pandemics; ability to maintain key personnel; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws 19 affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2019 Annual Report on Form 10-K filed on March 13, 2020, and subsequent Quarterly Reports on Form 10-Q. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise. ### Outlook On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic caused state and local governments within our areas of business operations to institute quarantines, “shelter-in-place” mandates, including rules and restrictions on travel and the types of businesses that may continue to operate. While certain areas begin to re-open, others have seen an increase in the number of cases reported, prompting local government to enforce further restrictions. We continue to monitor our operations and government recommendations. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law to provide widespread emergency relief for the economy and to provide aid to corporations. The CARES Act includes several significant provisions related to taxes, refundable payroll tax credits and deferment of social security payments. We continue to evaluate the relief options for us and our tenants available under the CARES Act, as well as other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the relief options contain restrictions on future business activities, including ability to repurchase shares and pay dividends, that require careful evaluation and consideration. We will continue to assess these options, and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the effects of the pandemic continue to evolve. The effects of the COVID-19 pandemic did not significantly impact our operating results during the first three quarters of 2020. We continue to monitor and communicate with our tenants to assess their needs and ability to pay rent. We have negotiated lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which have included or may include rent deferral, temporary rent abatement, or reduced rental rates and/or lease extension periods, however no new negotiations were initiated during the third quarter of 2020. While these amendments have affected our short term cash flows, we do not believe they represent a change in the valuation of our assets for the properties affected and have not significantly effected our results of operations. Given the longevity of this pandemic, the COVID-19 outbreak may materially affect our financial condition and results of operations going forward, including, but not limited to, real estate rental revenues, credit losses, leasing activity, and potentially the valuation of our real estate assets. We expect that we may have additional rent deferrals, abatements and credit losses from our commercial tenants during the remainder of 2020 which may have a material impact on our real estate rental revenue and cash collections. We also expect that the effects of the COVID-19 pandemic will impact our ability to lease up available commercial space. Our business operations and activities in many regions may be subject to future quarantines, "shelter-in-place" rules, and various other restrictions for the foreseeable future. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time. For more information, see Part II - Item 1A. Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q. ### OVERVIEW The Company operates as an internally managed, diversified REIT, with holdings in office, industrial, retail, and model home properties. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” The Company acquires, owns and manages a geographically diversified portfolio of real estate assets including office, industrial, retail and model home residential properties leased to homebuilders located in the United States. As of September 30, 2020, the Company owned or had an equity interest in: - Ten office buildings and one industrial property (“Office/Industrial Properties”), which totals approximately 998,016 rentable square feet; - Four retail shopping centers (“Retail Properties”), which total approximately 131,722 rentable square feet; and - 128 Model Homes (“Model Homes” or “Model Home Properties”) leased back on a triple-net basis to homebuilders that are owned by six affiliated limited partnerships and one wholly-owned corporation. The Company’s office, industrial and retail properties are located primarily in Colorado, with four properties located in North Dakota and three in California. While geographical clustering of real estate enables us to reduce our operating costs through economies of scale by servicing a number of properties with less staff, it makes us susceptible to changing market conditions in 20 these discrete geographic areas, including those that have developed as a result of COVID-19. We do not develop properties but acquire properties that are stabilized or that we anticipate will be stabilized within two or three years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1 of such year or has been operating for three years. Most of our office and retail properties are leased to a variety of tenants ranging from small businesses to large public companies, many of which are not investment grade. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense or pay increases in operating expenses over specific base years. Most of our office leases are for terms of three to five years with annual rental increases. Our model homes are typically leased back for two to three years to the home builder on a triple net lease. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property. We seek to diversify our portfolio by commercial real estate segments to reduce the adverse effect of a single under-performing segment, geographic market and/or tenant. We further supplement this at the tenant level through our credit review process, which varies by tenant class. For example, our commercial and industrial tenants tend to be corporations or individual owned businesses. In these cases, we typically obtain financial records, including financial statements and tax returns (depending on the circumstance), and run credit reports for any prospective tenant to support our decision to enter into a rental arrangement. We also typically obtain security deposits from these commercial tenants. Our Model Home commercial tenants are well-known homebuilders with established credit histories. These tenants are subjected to financial review and analysis prior to us entering into a sales-leaseback transaction. ***Initial Public Offering***. On October 6, 2020, we completed an initial public offering, or IPO, selling 500,000 shares of Series A Common Stock at $5.00 per share. Proceeds from our initial public offering net of underwriting discounts and commissions were $2.3 million after deducting approximately $0.2 million in underwriting discounts and before giving effect to $775,000 in other expenses relating to the IPO. We intend to use the net proceeds of this offering for general corporate and working capital purposes, including to potentially acquire additional properties and reduce outstanding indebtedness. ***Reverse Stock Split.*** On July 29, 2020, we amended our charter to effect a one-for-two reverse stock split of every outstanding share of our Series A Common Stock. The financial statements and accompanying footnotes have been retroactively restated to reflect the reverse stock split. ### SIGNIFICANT TRANSACTIONS IN 2020 AND 2019 *Acquisitions -* During the nine months ended September 30, 2020, the Company acquired 25 model homes for approximately $9.0 million and leased them back to the homebuilders. The purchase price was paid through cash payments of approximately $2.7 million and mortgage notes of approximately $6.3 million. During the nine months ended September 30, 2019, the Company acquired 18 model homes for approximately $6.1 million. The purchase price was paid through cash payments of approximately $1.8 million and mortgage notes of approximately $4.3 million. *Dispositions -* We review our portfolio of investment properties for value appreciation potential on an ongoing basis and dispose of any properties that no longer satisfy our requirements in this regard. The proceeds from any such property sale, after repayment of any associated mortgage, are available for investing in properties that we believe will have a much greater likelihood of future price appreciation, for the payment of other debt and for general corporate purposes. We disposed of the following properties during the nine months ended September 30, 2020: - Centennial Tech Center, which was sold on February 5, 2020 for approximately $15.0 million and the Company recognized a loss of approximately $913,000; - Union Terrace, which was sold on March 13, 2020 for approximately $11.3 million and the Company recognized a gain of approximately $688,000; - The Company disposed of 33 model homes for approximately $12.6 million and recognized a gain of approximately $894,000. We disposed of the following properties during the nine months ended September 30, 2019: - On January 15, 2019, the Company sold the Morena Office Center for approximately $5.6 million and the Company recognized a gain of approximately $700,000; - Nightingale land was sold on May 8, 2019 for approximately $875,000 and the Company recognized a loss of approximately $93,000; - On July 1, 2019, NetREIT Genesis, LLC sold a 43% tenants-in-common interest in Genesis Plaza (“TIC Interest”) for $5.6 million to a newly formed entity, NetREIT Genesis II, LLC, in which NetREIT Casa Grande LP is the sole member. NetREIT Casa Grande LP owned and sold Morena Office Center on January 15, 2019. The sale of the TIC Interest was structured as a 1031 exchange and included $2.9 million in cash and assumption of debt. The Company remains a guarantor of the debt and NetREIT Genesis, LLC and NetREIT Genesis II, LLC are jointly and severally liable for the debt securing Genesis Plaza, the financial terms and conditions of which remain materially unchanged; - The Presidio office building, which was sold on July 31, 2019 for approximately $12.3 million and the Company recognized a gain of approximately $4.5 million; - The Company disposed of 35 model homes for approximately $12.4 million and recognized a gain of approximately $1.0 million. 21 ### CRITICAL ACCOUNTING POLICIES There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 13, 2020. ### MANAGEMENT EVALUATION OF RESULTS OF OPERATIONS Management’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service and to fund distributions to our stockholders. As a result, management’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Management’s evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets. In addition, management evaluates the results of the operations of our portfolio and individual properties with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties are regularly evaluated for potential added value appreciation and cashflow and, if lacking such potential, are sold with the equity reinvested in new acquisitions or otherwise allocated in a manner accretive to the shareholders. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments. ### RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED September 30, 2020 and 2019 The discussion that follows is based on our consolidated results of operations for the 2020 Quarter and 2019 Quarter. Although the COVID-19 pandemic did not significantly impact our operating results for the 2020 Quarter, we expect that the effects of the COVID-19 pandemic may significantly adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed under “Risk Factors.” ***Revenues.*** Total revenue was $5.7 million for the three months ended September 30, 2020 compared to $7.0 million for the same period in 2019, a decrease of $1.3 million or 19%, which is primarily due to a net decrease in rental income related to the sale of three properties in 2019 and two properties during the first quarter of 2020. The decrease in rental income is also attributed to COVID-19 related tenant workouts, which included rent abatements and deferrals that are being recognized over the remaining lease term. ***Rental Operating Costs.*** Rental operating costs decreased by $0.4 million to $2.1 million for the three months ended September 30, 2020, compared to $2.5 million for the same period in 2019. Rental operating costs as a percentage of total revenue also increased to 37.2% as compared to 36.2% for the three months ended September 30, 2020 and 2019, respectively, primarily due to COVID-19 related costs incurred. The overall decrease in rental operating costs for the three months ended September 30, 2020 as compared to 2019 is due to the sale of three properties in 2019 and two properties during the quarter ended September 30, 2020, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs. ***General and Administrative Expenses.*** General & Administrative (“G&A”) expenses decreased by $0.1 million for the three months ended September 30, 2020 compared to the same period in 2019. G&A expenses as a percentage of total revenue was 24.1% and 20.7% for three months ended September 30, 2020 and 2019, respectively, primarily due to payroll related costs. The decrease in G&A expenses overall for the three months ended September 30, 2020 as compared to 2019 is mainly due to a decrease in stock compensation expense. ***Depreciation and Amortization.*** Depreciation and amortization expense was $1.6 million for the three months ended September 30, 2020, compared to $1.8 million for the same period in 2019, representing a decrease of $0.1 million or 6%. The decrease in depreciation and amortization expense in 2020 compared to the same period in 2019 is primarily due to the sale of three properties in 2019 and two properties during the three months ended September 30, 2020, and the classification of three additional commercial properties as held for sale subsequent to September 30, 2019, upon which the Company ceased depreciation. ***Asset Impairments.*** We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. The Company did not recognize any impairment in the Condensed Consolidated Statements of Operations during the three months ended September 30, 2020. Management considered the impact of COVID-19 on all remaining assets as of September 30, 2020 and determined that there was not sufficient data to indicate an impairment had occurred as of that date. 22 ***Interest Expense - Series B Preferred Stock.*** The Series B Preferred Stock issued in August 2014 included a mandatory redemption provision and therefore, was treated as a liability for financial reporting purposes. The interest paid and accrued and the amortization of the deferred offering costs are considered interest expense. The Series B Preferred Stock was redeemed during 2019 and was no longer outstanding as of September 30, 2019. Interest expense, including amortization of the deferred offering costs, totaled $0.9 million for the three months ended September 30, 2019. ***Interest Expense - mortgage notes.*** Interest expense, including amortization of deferred finance charges was $1.4 million for the three months ended September 30, 2020 compared to $1.7 million for the same period in 2019, a decrease of $0.3 million or 17%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2020 compared to 2019 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 3.9% and 4.7% as of September 30, 2020 and 2019, respectively. ***Interest expense - note payable.*** On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to the Company ("Polar Note"). The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and Original Issue Discount ("OID") of $1.4 million, totaled $0.7 million for the three months ended September 30, 2020. ***Gain on Sale of Real Estate Assets, net.*** The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See "Significant Transactions in 2020 and 2019" above for further detail. ***Income allocated to non-controlling interests.*** Income allocated to non-controlling interests for the three months ended September 30, 2020 and 2019 totaled approximately $0.4 million. ### RESULTS OF OPERATIONS FOR THE nine months ended September 30, 2020 and 2019 ***Revenues.*** Total revenue was $18.8 million for the nine months ended September 30, 2020 compared to $21.3 million for the same period in 2019, a decrease of $2.5 million or 12%. The decrease in revenue for the six months period is primarily due to a decrease in rental income related to the sale of three properties during 2019 and two properties during the first quarter of 2020 as well as COVID-19 related tenant workouts, which included rent abatements and deferrals. ***Rental Operating Costs.*** Rental operating costs decreased $1.3 million, to $6.5 million for the nine months ended September 30, 2020 from $7.8 million for the nine months ended September 30, 2019. Rental operating costs as a percentage of total revenue decreased to 34.5% from 36.7% for the nine months ended September 30, 2020 and 2019, respectively. Rental operating costs as a percentage of total revenue decreased for the nine months ended September 30, 2020 as compared to 2019 due to the sale of three properties in 2019 and two properties during the nine months ended September 30, 2020, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs. ***General and Administrative Expenses.*** G&A expenses decreased by $0.6 million, or 13%, to $4.0 million for the nine months ended September 30, 2020 compared to $4.6 million for the same period in 2019. G&A expenses as a percentage of total revenue was 21.2% and 21.7% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in G&A expense is due to a decrease in stock compensation expense. ***Depreciation and Amortization.*** Depreciation and amortization expense totaled $4.8 million for the nine months ended September 30, 2020, compared to $5.7 million for the same period in 2019, a decrease of $0.9 million or 16%. The decrease in depreciation and amortization during the nine months ended September 30, 2020 when compared to the same period in 2019 is primarily due to the sale of three properties in 2019 and two properties during the nine months ended September 30, 2020, and the classification of three additional commercial properties as held for sale subsequent to September 30, 2019, upon which the Company ceased depreciation. 23 ***Asset Impairments.*** We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. During the second quarter of 2020, the Company entered into lease renewal negotiations with a significant tenant at our Waterman Plaza retail property at a lower market rental rate than the rental rate being charged. The Company obtained a broker opinion of value that considered the lower market rental rates and subsequently determined there was a material change to undiscounted cash flows on the property as of June 30, 2020. Therefore, the Company recorded an $845,000 non-cash impairment in the Condensed Consolidated Statements of Operations during the second quarter of 2020, and during the third quarter of 2020, the parties executed an amendment to renew the lease. Management considered the impact of COVID-19 on all remaining assets as of September 30, 2020 and determined that no other impairments had occurred as of that date. ***Interest Expense-Series B preferred stock.*** The Series B Preferred Stock issued in August 2014 included a mandatory redemption provision and therefore, was treated as a liability for financial reporting purposes. The interest paid and accrued and the amortization of the deferred offering costs are considered interest expense. The Series B Preferred Stock was redeemed during 2019 and was no longer outstanding as of September 30, 2019. Interest expense, including amortization of the deferred offering costs, totaled $2.2 million for the nine months ended September 30, 2019. ***Interest Expense-mortgage notes.*** Interest expense, including amortization of deferred finance charges was $4.6 million for the nine months ended September 30, 2020 compared to $5.5 million for the same period in 2019, a decrease of $0.9 million or 16%. The decrease in interest relates to the decreased number of commercial properties owned in 2019 compared to 2019 and the related debt. The weighted average interest rate on our outstanding debt was 3.9% and 4.7% as of September 30, 2020 and 2019, respectively. ***Interest expense - note payable.*** On September 17, 2019, the Company executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to the Company ("Polar Note"). The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and amortization of the Original Issue Discount ("OID") of $1.4 million, totaled $2.4 million for the nine months ended September 30, 2020 and $0.2 million for the nine months ended September 30, 2019. ***Gain on Sale of Real Estate Assets, net.*** The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See "Significant Transactions in 2020 and 2019" above for further detail. ***Income allocated to non-controlling interests.*** Income allocated to non-controlling interests for the nine months ended September 30, 2020 was approximately $0.9 million compared to the income allocated during the nine months ended September 30, 2019 of approximately $1.4 million. The decrease is related to the sale of 33 Model Home Properties during the nine months ended September 30, 2020 compared to 35 Model Home Properties during the nine months ended September 30, 2019, for which the decrease is primarily attributable to homes were sold at a higher gain in 2019. ### LIQUIDITY AND CAPITAL RESOURCES ### Overview As the local and global economies have weakened as a result of COVID-19, ensuring adequate liquidity is critical. We believe we have access to adequate resources to meet the needs of our existing operations and working capital, to the extent we are not funded by cash provided by operating activities. However, we expect the COVID-19 pandemic may adversely impact our future operating cash flows due to the inability of some of our tenants to pay their rent on time or at all. We have negotiated lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which included rent deferral, temporary rent abatement, or reduced rental rates and/or lease extensions and has affected our short-term liquidity. The COVID-19 pandemic may also make financing more difficult for us to obtain, as well as for prospective buyers of our properties to obtain, resulting in difficulty in selling assets within our expected timeframe, or for our expected sales price. Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, financial aid from government programs instituted as a result of COVID-19, and the sale of equity or debt securities. Our cash and restricted cash at September 30, 2020 was $10.0 million, which included our available liquidity of cash and cash equivalents of $6.8 million. Liquidity events have primarily included: - Economic Injury Disaster Loan of $10,000 on April 22, 2020 - Paycheck Protection Program loan of $462,000 on April 30, 2020 - Economic Injury Disaster Loan of $150,000 on August 17, 2020 - Proceeds from our initial public offering net of underwriting discounts and commissions of $2.3 million (before fees and expenses) on October 6, 2020. 24 Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking investments that are likely to produce income and achieve long term gains in order to pay dividends to our stockholders. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. We currently do not have a revolving line of credit but have been working to obtain such a line of credit. Our short-term liquidity needs include paying down the remaining balance of the Polar Note, paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. For the three months remaining in 2020 and the year ending December 31, 2021, we have $1.1 million and $11.3 million of mortgage notes payable due, respectively, related to the Model Home Properties. Certain Model Home Properties will be sold and the underlying mortgage notes will be paid off with sales proceeds while other mortgage notes will be refinanced. For the three months remaining in 2020 and the year ending December 31, 2021, we have $468,000 and $16.4 million of mortgage notes payments due, respectively, related to the commercial properties. We plan to sell certain commercial properties or refinance a significant portion of the mortgage notes payable in the event the commercial property securing the respective mortgage note is not sold on or before maturity. We believe that the cash flow from our existing portfolio, distributions from joint ventures in Model Home partnerships and property sales during 2020 will be sufficient to fund our near-term operating costs, capital expenditures and future dividends that may be paid to stockholders. If our cash flow from operating activities is not sufficient to fund our short-term liquidity needs, we plan to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness, from real estate sales, issuance of debt instruments, additional investors, or we will reduce the rate of dividends to the stockholders. During the nine months ended September 30, 2020, we did not pay any cash dividends to our common stockholders, but intend to pay dividends to our stockholders on a quarterly basis going forward. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. We are continually reviewing our existing portfolio to determine which properties have met our short- and long-term goals and reinvesting the proceeds in properties with better potential to increase performance. We expect to obtain additional cash in connection with refinancing of maturing mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. If we are unable to arrange a line of credit, borrow on properties, issue debt instruments, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives. ### Cash Equivalents and Restricted Cash At September 30, 2020 and December 31, 2019, we had approximately $6.8 million and $5.7 million in cash equivalents, respectively, and $3.2 million and $4.7 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash, cash in our operating accounts and cash held in bank accounts at third party institutions. During 2020 and 2019, we did not experience any loss or lack of access to our cash or cash equivalents. Approximately $1.7 million of our cash balance is intended for capital expenditures on existing properties (net of deposits held in reserve accounts by our lenders). We intend to use the remainder of our existing cash and cash equivalents for reduction of principal debt, general corporate purposes and/or dividends to our stockholders. ### Secured Debt As of September 30, 2020, the Company had one variable-rate mortgage note payable on a commercial property with a principal amount of $5.8 million and fixed-rate mortgage notes payable in the aggregate principal amount of $89.1 million, collateralized by a total of 15 commercial properties with loan terms at issuance ranging from 3 to 22 years. The weighted-average interest rate on these mortgage notes payable as of September 30, 2020 was approximately 4.4%, and our debt to estimated market value of these properties was approximately 59.9%. As of September 30, 2020, the Company had 119 fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of $29.5 million, collateralized by a total of 119 Model Homes. These loans generally have a term at issuance of three to five years. As of September 30, 2020, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans are approximately $250,000 and 3.6%, respectively. Our debt to estimated market value on these properties is approximately 73.3%. The Company has guaranteed between 25% - 100% of these mortgage loans. We have been able to refinance maturing mortgages to extend maturity dates and we have not experienced any notable difficulties financing our acquisitions. 25 ### Cash Flows for the nine months ended September 30, 2020 and September 30, 2019 *Operating Activities:* Net cash provided by operating activities for the nine months ended September 30, 2020 increased by approximately $0.5 million to approximately $2.9 million from $2.4 million for the nine months ended September 30, 2019. The increase in net cash provided by operating activities is due to a $0.2 million increase in working capital which fluctuates based on timing of receipt and payment, as well as an increase in non-cash addbacks such as straight-line rent. *Investing Activities:* Net cash provided by investing activities during the nine months ended September 30, 2020 was approximately $22.2 million compared to approximately $17.3 million during the same period in 2019. The increase primarily related to the mix of gross proceeds from the sale of office buildings and Model Homes year over year, as well as a decrease in capital expenditures due to timing of capital expenditures during the COVID-19 pandemic. We currently project that we could spend up to $1.7 million (net of deposits held in reserve accounts by lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio on an annual basis. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions. *Financing Activities:* Net cash used in financing activities during the nine months ended September 30, 2020 was $25.4 million compared to $18.3 million for the same period in 2019 and was primarily due to the following activities for the nine months ended September 30, 2020: - Net increase in repayment of mortgage notes payable of $11.7 million; - Net increase in repayment of the Polar note payable of $5.2 million; offset by - Net increase in proceeds from mortgage notes of $2.7 million; - Net decrease in dividends paid to stockholders of $2.2 million; and - Redemption of mandatorily redeemable preferred stock of $16.9 million during the nine months ended September 30, 2019. ### Off-Balance Sheet Arrangements As of September 30, 2020, we had one letter of credit outstanding for $0.2 million, to satisfy mortgage lender requirements. ### Inflation Substantially all of our office leases provide for real estate tax and operating expense escalations. In addition, most of the leases provide for fixed annual rent increases. We believe that inflationary increases may be at least partially offset by these contractual rent increases and expense escalations. ## Controls and procedures As filed, 2,057 characters. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act report is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. ### Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Furthermore, we do not believe that these controls have been impacted by COVID-19 related circumstances, including remote work arrangements with our employees. ## Risk factors As filed, 8,787 characters. *The following supplements and updates the risk factors in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. If any of the risks discussed below or in our Annual Report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations (individually and collectively referred to in the following risk factor as “Financial Performance”) could be materially and adversely affected. Some statements in this Quarterly Report on Form 10-Q, including statements in the following risk factors, constitute forward-looking statements. Please refer to the introductory section of this Quarterly Report on Form 10-Q, preceding Part I, "Financial Information," entitled “Cautionary Note Regarding Forward-Looking Statements.”* ### Risks Related to COVID-19 The current outbreak of the novel coronavirus (COVID-19), and the resulting volatility it has created, has disrupted our business and we expect that the COVID-19 pandemic, may significantly and adversely impact our business, financial condition and results of operations going forward, and that other potential pandemics or outbreaks, could materially adversely affect our business, financial condition, results of operations and cash flows in the future. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets, and could potentially create widespread business continuity issues of an unknown magnitude and duration. Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States (including the states and cities that comprise the San Diego, California; Denver and Colorado Springs, Colorado; Fargo and Bismarck, North Dakota; and other metro regions, where we own and operate properties) have also instituted quarantines, "shelter in place" mandates, including rules and restrictions on travel and the types of businesses that 27 may continue to operate. As a result, the COVID-19 pandemic is negatively impacting almost every industry, both inside and outside these metro regions, directly or indirectly and has created business continuity issues. For instance, a number of our commercial tenants have announced temporary closures of their offices or stores and requested temporary rent deferral or rent abatement during this pandemic. In addition, jurisdictions where we own and operate properties have implemented, or may implement, rent freezes, eviction freezes, or other similar restrictions. The full extent of the impacts on our business over the long term are largely uncertain and dependent on a number of factors beyond our control. As a result of the effects of the COVID-19 pandemic, we have been impacted by and may further be impacted by one or more of the following: - a decrease in real estate rental revenue (our primary source of operating cash flow), as a result of temporary rent deferrals, rent abatement and/or rent reductions, rent freezes or declines impacting new and renewal rental rates on properties, longer lease-up periods for both anticipated and unanticipated vacancies (in part, due to “shelter-in-place” mandates), lower revenue recognized as a result of waiving late fees, as well as our tenants’ ability and willingness to pay rent, and our ability to continue to collect rents, on a timely basis or at all; - a complete or partial closure of one or more of our properties resulting from government or tenant action (as of October 20, 2020, many of our commercial properties were reopened, however certain tenants were still operating on a limited basis pursuant to local government orders); - reductions in demand for commercial space and the inability to provide physical tours of our commercial spaces may result in our inability to renew leases, re-lease space as leases expire, or lease vacant space, particularly without concessions, or a decline in rental rates on new leases; - the inability of one or more major tenants to pay rent, or the bankruptcy or insolvency of one or more major tenants, may be increased due to a downturn in its business or a weakening of its financial condition as a result of shelter-in-place orders, phased re-opening of its business, or other pandemic related causes; - the inability to decrease certain fixed expenses at our properties despite decreased operations at such properties; - the inability of our third-party service providers to adequately perform their property management and/or leasing activities at our properties due to decreased on-site staff; - the effect of existing and future orders by governmental authorities in any of our markets, which might require homebuilders to cease operations for an uncertain or indefinite period of time, which could significantly affect new home orders and deliveries, and negatively impact their home sales revenue and ability to perform on their lease obligations to the Company in such markets; - difficulty accessing capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions, which may affect our access to capital and our commercial tenants' ability to fund their business operations and meet their obligations to us; - the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of debt agreements; - a decline in the market value of real estate may result in the carrying value of certain real estate assets exceeding their fair value, which may require us to recognize an impairment to those assets; - future delays in the supply of products or services may negatively impact our ability to complete the renovations and lease-up of our buildings on schedule or for their original estimated cost; - a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow or change the complexion of our portfolio of properties; - our insurance may not cover loss of revenue or other expenses resulting from the pandemic and related shelter-in-place rules; - unanticipated costs and operating expenses and decreased anticipated revenue related to compliance with regulations, such as additional expenses related to staff working remotely, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at each of our properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services; 28 - the potential for one or more members of our senior management team to become sick with COVID-19 and the loss of such services could adversely affect our business; - the increased vulnerability to cyber-attacks or cyber intrusions while employees are working remotely has the potential to disrupt our operations or cause material harm to our financial condition; and - complying with REIT requirements during a period of reduced cash flow could cause us to liquidate otherwise attractive investments or borrow funds on unfavorable conditions. The significance, extent and duration of the impact of COVID-19 remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19, the extent and effectiveness of the containment measures taken, and the response of the overall economy, the financial markets and the population, once the current containment measures are lifted. The rapid development and volatility of this situation precludes us from making any prediction as to the ultimate adverse impact of COVID-19. As a result, we cannot provide an estimate of the overall impact of the COVID-19 pandemic on our business or when, or if, we (or our tenants) will be able to resume fully normal operations. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results and cash flows. The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K, any of which could have a material effect on us. Filed Nov 5, 2020. Source: SEC EDGAR, the filing index for accession 0001437749-20-022782. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.