# Presidio Property Trust, Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Presidio Property Trust, Inc.](/companies/sqft.md) (CIK 1080657)
- Form: 10-Q
- Filed: 2024-08-14
- Accepted by EDGAR: Aug 14, 2024, 18:41 ET
- Period: 2024-06-30
- Accession: 0001437749-24-026730
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1080657/000143774924026730/sqft20240630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1080657/000143774924026730/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $1.5m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $3.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $81.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $160.6k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | −$11.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | −$17.1m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | −$1.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | −$1.47 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | −$1.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2024-01-01 to 2024-06-30 | $0 | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2024-01-01 to 2024-06-30 | $7.6k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-06-30 | $150.5m | us-gaap:Assets |
| Total liabilities | at 2024-06-30 | $105.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $34.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,989 characters.

*The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our 2024 Annual Report.*

We may refer to the three months ended June 30, 2024, and June 30, 2023, as the "2024 Quarter" and the "2023 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" and/or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and also of which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-Q and our 2024 Annual Report on Form 10-K/A for the year ended December 31, 2023, filed with the SEC on April 16, 2024, respectively. 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 the use of third-party providers and joint venture partners; the ability to control our operating expenses; the economic health of our tenants; the supply of competing properties; shifts away from brick and mortar stores to e-commerce; the availability and terms of financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; terrorist attacks or actions and/or risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions; weather conditions, natural disasters and pandemics; ability to maintain key personnel; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2024 Annual Report. 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.

### OVERVIEW

The Company operates as an internally managed, diversified REIT, with primary holdings in office, industrial, retail, and triple-net leased model home properties. In October 2017, we changed our name from "NetREIT, Inc." to "Presidio Property Trust, Inc." The Company acquires, owns, and manages a geographically diversified portfolio of real estate assets including, office, industrial, retail and model home residential properties leased to homebuilders located in the United States. As of June 30, 2024, the Company owned or had an equity interest in:

- Eight office buildings and one industrial property ("Office/Industrial Properties"), which total approximately 758,175 rentable square feet;
- Three retail shopping centers ("Retail Properties"), which total approximately 65,242 rentable square feet; and
- 80 model home residential properties ("Model Homes" or "Model Home Properties"), totaling approximately 241,309 square feet, leased back on a triple-net basis to homebuilders that are owned by five affiliated limited partnerships and one wholly-owned corporation, all of which we control.

We own five commercial properties located in Colorado, four in North Dakota, one in Southern California, one in Texas and one in Maryland. Our model home properties are located in three states. While geographical clustering of real estate enables us to reduce our operating costs through economies of scale by servicing several properties with less staff, it makes us susceptible to changing market conditions in these discrete geographic areas. 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 expenses 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, including office, industrial, retail and model home properties to reduce the adverse effect of a single under-performing segment and/or tenant. We further mitigate risk at the tenant level through our credit review process, which varies by tenant class. For example, our commercial and industrial tenants tend to be corporations or individually 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.

In September 2023, the Board of Directors established a Special Committee of the Board (the "Special Committee") to explore potential strategic alternatives focusing on maximizing stockholder value. The Special Committee is comprised solely of independent directors and is charged with exploring potential strategic alternatives, including, without limitation, a business combination involving the Company, a sale of all or part of the Company's assets, joint venture arrangements and/or restructurings, and determining whether a strategic transaction is in the best interests of the Company. There can be no assurance that the strategic alternatives exploration process will result in any transaction being pursued or consummated. There is no formal timetable for the Special Committee's completion of its exploration of potential strategic alternatives, and the Company does not intend to disclose any developments with respect to the Special Committee's activities unless and until the Company determines that further disclosure is appropriate or required by law or regulation. Additionally, management is working to increase the number of model home properties in the portfolio with new acquisitions, joint ventures, and other options to raise equity, as commercial properties continue to have elevated real estate prices and compressing capitalization rates have made it challenging to acquire properties that fit our portfolio needs. Management will continue to evaluate potential acquisitions or possible sales in an effort to maximize our real estate portfolio.

For additional information regarding our Common Stock activity, see Footnote 11. Stockholders' Equity in Item 1. Financial Statements.

For details regarding our sponsorship of a special purpose acquisition company, Murphy Canyon Acquisition Corp. ("Murphy Canyon" or the "SPAC"), see Note 9, Investment in Conduit Pharmaceuticals, in the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report.

### SIGNIFICANT TRANSACTIONS IN 2024 AND 2023

### Acquisitions during the six months ended June 30, 2024

- The Company acquired 12 model homes for approximately $5.7 million. The purchase price was paid through cash payments of approximately $1.7 million and mortgage notes of approximately $4.0 million.

### Acquisitions during the six months ended June 30, 2023

- The Company acquired 23 model homes for approximately $12.9 million. These acquisitions were paid for with approximately $3.9 million in cash payments and approximately $9.0 million in mortgage loans. There were no other commercial properties acquired during this period.

### Dispositions during the six months ended June 30, 2024

- The Company sold 42 model homes for approximately $20.1 million and recognized a gain of approximately $2.8 million.

### Dispositions during the six months ended June 30, 2023

- The Company sold 10 model homes for approximately $4.6 million and recognized a gain of approximately $1.5 million.

### CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies as previously disclosed in our 2024 Annual Report.

### MANAGEMENT EVALUATION OF RESULTS OF OPERATIONS

Management’s evaluation of operating results includes an assessment of our ability to generate the cash flow necessary to pay operating expenses, general and administrative expenses, debt service and to fund distributions to our stockholders. As a result, management’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Management’s evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets.

In addition, management evaluates the results of the operations of our portfolio and individual properties with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties are regularly evaluated for potential added value appreciation and cashflow and, if lacking such potential, are sold with the equity reinvested in new acquisitions or otherwise allocated in a manner we believe is accretive to our stockholders. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.

### RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED June 30, 2024 and 2023

***Revenues.*** Total revenues were approximately $4.6 million for the three months ended June 30, 2024, compared to approximately $4.5 million for the same period in 2023. As of June 30, 2024, we had approximately $130.9 million in net real estate assets including, 80 model homes, compared to approximately $138.9 million in net real estate assets including, 105 model homes at June 30, 2023. The average number of model homes held during the six months ended June 30, 2024 and 2023 was 84 and 101, respectively. The change in revenue is directly related to the average real estate assets held during the period, new commercial real estate leases, and model home transaction fees earned by the Company during the current period.

***Rental Operating Costs.*** Rental operating costs increased 6.7%, totaling approximately $1.5 million for the three months ended June 30, 2024, compared to approximately $1.4 million for the same period in 2023. Rental operating costs as a percentage of total revenue was 32.5% and 30.8% for the three months ended June 30, 2024 and 2023, respectively. As of June 30, 2024 our model home assets made up 29.7% of our total real estate assets, which is down from 32.9% as of June 30, 2023. Model home rental operating costs are relatively low for model home assets as they are leased on a triple net basis. Additionally, for the three months ended June 30, 2024, our gross revenue from model home assets represented approximately 25.2% of our total revenue, compared to 22.6% for the three months ended June 30, 2023. This percentage is expected to decrease in 2024 as a large number of model homes were sold during the three and six months ended June 30, 2024. There were no acquisitions or sales of retail, office or industrial properties during the three months ended June 30, 2024; however, management may explore selling some of our commercial real estate assets over the next 12 months, which could reduce future rental income.

***General and Administrative Expenses.*** General & Administrative (“G&A”) expenses for the three months ended June 30, 2024 and 2023 totaled approximately $2.2 million and $1.8 million, respectively. G&A expenses as a percentage of total revenue was 48.0% and 39.9% for the three months ended June 30, 2024 and 2023, respectively. G&A expenses increased by approximately $0.4 million mainly related to the 2024 annual meeting and settlement with Zuma Capital Management LLC ("Zuma Capital") and certain individuals and entities affiliated or associated with Zuma Capital. This included additional consulting fees, higher proxy solicitation fees and legal fees.

***Depreciation and Amortization.*** Depreciation and amortization expense was approximately $1.4 million for the three months ended June 30, 2024, compared to approximately $1.4 million for the same period in 2023.

***Asset Impairments.*** We review the carrying value of each of our real estate properties regularly to determine if circumstances indicate an impairment in the carrying value of these investments exists. During the three months ended June 30, 2024, we recognized a non-cash impairment charge of approximately $0.1 million related to three model homes. The new impairment charges for the three model homes reflects the estimated sales prices for these specific model homes in July and August 2024 as a result of an abnormally short hold period, less than two years, on model homes purchased in 2022. The builder changed their product style in the neighborhoods where these model homes are located, in Texas, after we had purchased the homes. We do not believe these losses are indicative of our overall model home portfolio. During the three months ended June 30, 2024, we sold 15 model homes for approximately $7.4 million and the Company recognized a net gain of approximately $0.8 million. We expect to record a net gain on model home sales in the third quarter of 2024 as well. The Company did not recognize a non-cash impairment to our real estate assets during the three months ended June 30, 2023.

***Interest Expense - mortgage notes.*** Interest expense, including amortization of deferred finance charges was approximately $1.5 million for the three months ended June 30, 2024, compared to approximately $1.3 million for the same period in 2023. The weighted average interest rate on our outstanding debt was 5.38% and 4.83% as of June 30, 2024 and 2023, respectively. Mortgage notes payable totaled approximately $102.0 million and $104.2 million as of June 30, 2024 and 2023, respectively.

***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. During the three months ended June 30, 2024, we sold 15 model homes for approximately $7.4 million, net of selling costs, and the Company recognized a net gain of approximately$0.8 million. We expect to record a net gain on model home sales in the third quarter of 2024 as well. During the three months ended June 30, 2023, we sold seven model homes for approximately $3.1 million, net of selling costs, and the Company recognized a net gain of approximately $1.1 million.

***Income allocated to non-controlling interests.*** Income allocated to non-controlling interests for the three months ended June 30, 2024 and 2023 totaled approximately $0.5 million and $1.1 million, respectively.

***Loss on Conduit remeasurement.*** On April 22, 2024, the Company entered into a lockup agreement with Conduit pursuant to which the Company agreed not to transfer or sell 2,700,000 of its 4,015,250 shares of Conduit common stock for a period of one year. In consideration for entering into the lockup agreement Conduit issued the Company a warrant ("Private CDT Warrants") to purchase 540,000 shares of common stock at an exercise price of $3.12 per share, the warrant has a two year term and is exercisable one year after the date of issue. The Private CDT Warrants meet the ASC 321 scope exception for derivative instruments and are accounted for as a derivative under ASC 815. As such, the Private CDT Warrants were recorded at fair value on the date of issuance and subsequently measured at fair value each period, with changes in fair value reported in gain or loss on Conduit Pharmaceuticals marketable securities. As of April 22, 2024, the Private CDT Warrants were valued at $891,000 based on a Level 3 fair value measurement. As of June 30, 2024, the Private CDT Warrants fair value was adjusted to $156,600, and is included in the total Investment in Conduit Pharmaceuticals marketable securities on the June 30, 2024 condensed and condensed consolidated balance sheet. Our investments in Conduit's common stock (3,990,319 shares of CDT) and public common stock warrants (709,000 warrants of CDTTW) presented on the condensed consolidated balance sheets were measured at fair value using Level 1 market prices, taking into account the adoption of ASU 2022-03 *Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,* and totaled approximately $4.3 million as of June 30, 2024. The combined value of our Investment in Conduit Pharmaceuticals marketable securities, including the Private CDT Warrants, totaled $4.4 million as of June 30, 2024. In connection with these fair market value adjustments during the three months ended June 30, 2024, we recorded a net loss on our investment in Conduit of approximately $10.0 million.

### RESULTS OF OPERATIONS FOR THE six MONTHS ENDED June 30, 2024 and 2023

***Revenues.*** Total revenues were approximately $9.4 million for the six months ended June 30, 2024, compared to approximately $8.7 million for the same period in 2023. As of June 30, 2024, we had approximately $130.9 million in net real estate assets including, 80 model homes, compared to approximately $138.9 million in net real estate assets including, 105 model homes at June 30, 2023. The average number of model homes held during the six months ended June 30, 2024 and 2023 was 95 and 99, respectively. The change in revenue is directly related to the average real estate assets held during the period, new commercial real estate leases, and model home transaction fees earned by the Company during the current period. Below is additional revenue and asset information for real estate segments as of June 30, 2024.

| Segment | % of Gross Revenue For the Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Office/Industrial | 63.2% | 67.6% |
| Retail | 11.0% | 10.8% |
| Model Home | 25.8% | 21.6% |

| Segment (1) | % of Total Real Estate Assets as of June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Office/Industrial | 58.7% | 53.7% |
| Retail | 12.1% | 11.0% |
| Model Home | 29.2% | 35.2% |

(1) Includes lease intangibles and the land purchase option related to property acquisitions.

***Rental Operating Costs.*** Rental operating costs were relatively flat at $3.1 million for the six months ended June 30, 2024, compared to approximately $3.0 million for the same period in 2023. Rental operating costs as a percentage of total revenue was 32.6% and 34.3% for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, our model home assets made up 29.7% of our total real estate assets, which is down from 32.9% as of June 30, 2023. Model home rental operating costs are relatively low for model home assets as they are leased on a triple net basis. Additionally, for the six months ended June 30, 2024, our gross revenue from model home assets represented approximately 25.9% of our total revenue, compared to 21.6% for the six months ended June 30, 2023. This percentage is expected to decrease in 2024 as a large number of model homes were sold during the six months ended June 30, 2024. There were no acquisitions or sales of retail, office or industrial properties during the six months ended June 30, 2024; however, management may explore selling some of our commercial real estate assets over the next 12 months, which could reduce future rental income.

***General and Administrative Expenses.*** G&A expenses for the six months ended June 30, 2024 and 2023 totaled approximately $4.3 million and $3.8 million, respectively. G&A expenses as a percentage of total revenue was 45.7% and 43.6% for the six months ended June 30, 2024 and 2023, respectively. G&A expenses increased by approximately $0.5 million mainly related to the 2024 annual meeting and settlement with Zuma Capital and certain individuals and entities affiliated or associated with Zuma Capital. This included additional consulting fees, higher proxy solicitation fees and legal fees, which increased by an aggregate of approximately $0.6 million in 2024 as compared to 2023. Additionally, stock compensation and bonus accruals increased during the six months ended June 30, 2024 by approximately $0.5 million as compared to the same period in 2023 related to De-SPAC success bonuses to current and former employees. This was slightly offset by the reduction in salaries and employees cost by approximately $0.2 million in 2024 as compared to 2023, and the approximately $0.2 million reduction of D&O insurance related to the SPAC in 2023 that was not consolidated during 2024.

***Depreciation and Amortization.*** Depreciation and amortization expense was approximately $2.7 million for the six months ended June 30, 2024 and 2023.

***Asset Impairments.*** We review the carrying value of each of our real estate properties regularly to determine if circumstances indicate an impairment in the carrying value of these investments exists. During the six months ended June 30, 2024, we recognized a non-cash impairment charge of approximately $0.2 million related to model homes. The new impairment charges for the model homes reflects the estimated and actual sales prices for these specific model homes that were sold after the end of each quarter. This was the result of an abnormally short hold period, less than two years, on model homes purchased in 2022. The builder changed their product style in the neighborhoods where these model homes are located, in Texas, after we had purchased the homes. We do not believe these losses are indicative of our overall model home portfolio. During the six months ended June 30, 2024, we sold 42 model homes for approximately $20.1 million and the Company recognized a net gain of approximately $2.8 million. We expect to record a net gain on model home sales in the third quarter of 2024 as well. The Company did not recognize a non-cash impairment to our real estate assets during the six months ended June 30, 2023.

***Interest Expense - mortgage notes.*** Interest expense, including amortization of deferred finance charges was approximately $3.0 million for the six months ended June 30, 2024, compared to approximately $2.2 million for the same period in 2023. The weighted average interest rate on our outstanding debt was 5.38% and 4.83% as of June 30, 2024 and 2023, respectively. Mortgage notes payable totaled approximately $102.0 million and $104.2 million as of June 30, 2024 and 2023, respectively.

***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. S ee "Significant Transactions in 2024 and 2023 " above for further detail.

***Income allocated to non-controlling interests.*** Income allocated to non-controlling interests for the six months ended June 30, 2024 and 2023 totaled approximately $2.0 million and $1.5 million, respectively. This was directly related to the gain on sales of model homes held by our five affiliated limited partnerships.

***Loss on Conduit remeasurement.*** On April 22, 2024, the Company entered into a lockup agreement with Conduit pursuant to which the Company agreed not to transfer or sell 2,700,000 of its 4,015,250 shares of Conduit common stock for a period of one year. In consideration Conduit issued the Company Private CDT Warrants to purchase 540,000 shares of common stock at an exercise price of $3.12 per share, the warrant has a two year term and is exercisable one year after the date of issue. The Private CDT Warrants meet the ASC 321 scope exception for derivative instruments and are accounted for as a derivative under ASC 815. As such, the Private CDT Warrants were recorded at fair value on the date of issuance and subsequently measured at fair value each period, with changes in fair value reported in gain or loss on Conduit Pharmaceuticals marketable securities. As of April 22, 2024, the Private CDT Warrants were valued at $891,000 based on a Level 3 fair value measurement. As of June 30, 2024, the Private CDT Warrants fair value was adjusted to $156,600, and is included in the total Investment in Conduit Pharmaceuticals marketable securities on the June 30, 2024 condensed consolidated balance sheet. Our investments in Conduit's common stock (3,990,319 shares of CDT) and public common stock warrants (709,000 warrants of CDTTW) presented on the condensed consolidated balance sheets were measured at fair value using Level 1 market prices, taking into account the adoption of ASU 2022-03 *Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,* and totaled approximately $4.3 million as of June 30, 2024. The combined value of our Investment in Conduit Pharmaceuticals marketable securities, including the Private CDT Warrants, totaled $4.4 million as of June 30, 2024. Our investments in Conduit's common stock and public common stock warrants presented on the condensed consolidated balance sheet were measured at fair value using Level 1 market prices as of December 31, 2023, and totaled approximately $18.3 million. In connection with these fair market value adjustments during the six months ended June 30, 2024, we recorded a net loss on our investment in Conduit of approximately $13.9 million.

### Geographic Diversification Tables

The following tables show a list of commercial properties owned by the Company grouped by state and geographic region as of June 30, 2024:

| State | No. of Properties | Aggregate Square Feet | Approximate % of Square Feet | Current Base Annual Rent | Approximate % of Aggregate Annual Rent |
| --- | ---: | ---: | ---: | ---: | ---: |
| California | 1 | 57,807 | 7.0% | $1,504,401 | 13.0% |
| Colorado | 5 | 324,245 | 39.4% | 5,468,689 | 47.1% |
| Maryland | 1 | 31,752 | 3.9% | 724,453 | 6.2% |
| North Dakota | 4 | 399,113 | 48.4% | 3,560,600 | 30.7% |
| Texas | 1 | 10,500 | 1.3% | 342,692 | 3.0% |
| Total | 12 | 823,417 | 100.0% | $11,600,835 | 100.0% |

The following tables show a list of our Model Home properties by geographic region as of June 30, 2024:

| Geographic Region | No. of Properties | Aggregate Square Feet | Approximate % of Square Feet | Current Base Annual Rent | Approximate of Aggregate % Annual Rent |
| --- | ---: | ---: | ---: | ---: | ---: |
| Southeast | 4 | 9,875 | 4.1% | $170,256 | 5.1% |
| Southwest | 76 | 231,434 | 95.9% | 3,181,860 | 94.9% |
| Total | 80 | 241,309 | 100.0% | $3,352,116 | 100.0% |

36

### LIQUIDITY AND CAPITAL RESOURCES

### Overview

Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings from our model home lines of credit, the sale of our investment in Conduit Pharma, and the sale of our equity or issuance of debt securities or bonds. Our cash and restricted cash at June 30, 2024 was approximately $8.5 million. Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking model home 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.

Our short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on our mortgage notes payables during 2024 total approximately $12.5 million, of which approximately $2.9 million is related to model home properties. During the next 12 months, our four commercial property loans, Dakota Center, Research Parkway, Arapahoe Service Center and Union Town Center, have mortgage loans with maturity dates, totaling approximately $25.8 million. The loan on the Dakota Center matured on July 6, 2024. Management has been in negotiations with the special servicer of the loan in modifying and/or extending the loan or possibly selling the building. As of August 12, 2024, the Company and the lender have not yet agreed to the final outcome. The lender is expected to visit the property at the end of August.

Management has begun discussions with various lenders to either restructure, extend or refinance the other three loans. Additionally, management may consider selling these properties if we are unsuccessful in extending the maturity dates or are unable to raise additional funds to pay these non-recourse loans in full. Only the loan on Research Parkway, for $1.6 million has recourse to the Company. Management expects certain model homes will be sold, and that the underlying mortgage notes will be paid off with sales proceeds, while other mortgage notes will be refinanced as the Company has done in the past. Additional principal payments will be made with cash flows from ongoing operations. On December 31, 2022, the lease for our largest tenant at that time, Halliburton, expired. Halliburton was located in our Shea Center II property in Colorado and did not renew the lease. We placed approximately $1.1 million in a reserve account with our lender to cover future mortgage payments, if necessary, in connection with Halliburton's vacant space, none of which has been used as of December 31, 2023. This reserve amount is included in "Cash, cash equivalents and restricted cash" on the condensed consolidated balance sheet. Our management team is working to fill the 45,535 square foot space and has leased approximately 20% of the space to a tenant during 2023 and has reviewed various third party proposals for the remaining 80%. As of June 30, 2024, management is pursuing a third party tenant who fits into our long-term plans, however, there is no guarantee we will be successful in signing this new tenant.

While we will continue to pursue value creating investments, the Board of Directors believes there is significant embedded value in our assets that is yet to be realized by the market. Therefore, returning capital to stockholders through a repurchase program is an attractive use of capital currently. On September 15, 2022, the Board of Directors authorized a stock repurchase program of up to $6.0 million of outstanding shares of our Series A Common Stock and up to $4.0 million of our Series D Preferred Stock, which expired in September 2023. In November 2023, the Board of Directors authorized a stock repurchase program of up to $6.0 million of outstanding shares of our Series A Common Stock and up to $4.0 million of our Series D Preferred Stock which shall expire in November 2024. During the year ended December 31, 2023, the Company repurchased 23,041 shares of our Series D Preferred Stock at an average price of approximately $16.06 per share, including a commission of $0.035 per share, and no shares of our Series A Common Stock, for a total cost of $0.4 million for the Series D Preferred Stock. During the six months ended June 30, 2024 we repurchased 10,446 shares of our Series A Common Stock, for a total cost of $7,613, with an average price of approximately $0.73 per share. There were no repurchases of Series D Preferred Stock during the six months ended June 30, 2024. Any repurchased shares are treated as authorized and unissued in accordance with Maryland law and shown as a reduction of stockholders’ equity at cost.

There can be no assurance that the Company will refinance loans, take out additional financing or capital will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans, reduce certain discretionary spending or even sell properties, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. We believe that cash on hand, cash flow from our existing portfolio, distributions from joint ventures in Model Home Partnerships and property sales during 2024 will be sufficient to fund our operating costs, planned capital expenditures and required dividends for at least the next twelve months. If our cash flow from operating activities is not sufficient to fund our short-term liquidity needs, we plan to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness, from real estate sales, issuance of debt instruments, additional investors, or we may reduce or suspend the rate of dividends to our stockholders.

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 while seeking to reinvest 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, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives.

For the three and six months ended June 30, 2024, the Company has not declared a cash dividend for the Series A Common stockholders. For the three and six months ended June 30, 2023, the Company declared and paid approximately $0.3 million and $0.6 million in a cash dividend, respectively. For the three and six months ended June 30, 2024, the Company declared and paid approximately $0.5 million and $1.1 million in monthly cash dividends, respectively for the Series D Preferred stockholders. For the three and six months ended June 30, 2023, the Company declared and paid approximately $0.5 million and $1.1 million in monthly cash dividends, respectively.

The Company intends to pay dividends to our common stockholders on a quarterly basis, cash permitting, and on a monthly basis to holders of our Series D Preferred Stock going forward, but there can be no guarantee the Board of Directors will approve any future dividends. The Company is still considering how much it may declare during 2024 on the Series A Common Stock, as there was no cash dividend declared or paid during the six months ended June 30, 2024. The following is a summary of distributions declared per share of our Series A Common Stock and for our Series D Preferred Stock for the six months ended June 30, 2024 and 2023.

#### Series A Common Stock:

| Quarter Ended | 2024 Distributions Declared | 2023 Distributions Declared |
| --- | ---: | ---: |
| March 31 | $- | $0.022 |
| June 30 | - | 0.023 |
| Total | $- | $0.045 |

#### Series D Preferred Stock:

| Month | 2024 Distributions Declared | 2023 Distributions Declared |
| --- | ---: | ---: |
| January | $0.19531 | $0.19531 |
| February | 0.19531 | 0.19531 |
| March | 0.19531 | 0.19531 |
| April | 0.19531 | 0.19531 |
| May | 0.19531 | 0.19531 |
| June | 0.19531 | 0.19531 |
| Total | $1.17186 | $1.17186 |

38

Our long-term liquidity needs include the 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 while seeking to reinvest 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 June 30, 2024, and December 31, 2023, we had approximately $8.5 million and $6.5 million in cash equivalents, respectively, including $3.2 million and $3.7 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash, cash in our operating accounts, short-term bonds and cash held in bank accounts at third-party institutions. During 2024 and 2023, we did not experience any loss or lack of access to our cash or cash equivalents. Approximately $1.5 million to 2.0 million of our cash balance is intended for capital expenditures on existing properties, net of any construction financing (some of which is held in deposits reserve accounts by our lenders) during the rest of the year. We intend to use the remainder of our existing cash and cash equivalents for asset/property acquisitions, reduction of principal debt, general corporate purposes, common stock repurchases (if market conditions are met), or dividends to our stockholders.

### Secured Debt

As of June 30, 2024, all our commercial properties, except 300 N.P. which has no debt, had fixed-rate mortgage notes payable in the aggregate principal amount of $75.7 million, collateralized by a total of 11 commercial properties with loan terms at issuance ranging from 5 to 10 years. The weighted-average interest rate on these mortgage notes payable as of June 30, 2024, was approximately 4.97%, and our debt to estimated market value for our commercial properties was approximately 61.4%. During the next 12 months four of our commercial property loans, totaling approximately $25.8 million, will mature, with an estimated combined loan to value of approximately 61% as of June 30, 2024.

As of June 30, 2024, the Company had fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of $26.3 million, excluding loans eliminated through consolidation, collateralized by a total of 79 Model Homes. These loans generally have a term at issuance of three to five years. As of June 30, 2024, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans are approximately $332,588 and 6.58%, respectively. Our debt to estimated market value on all our model home properties is approximately 56.0%, excluding any loans eliminated through consolidation. We have been able to refinance maturing mortgages to extend maturity dates and we have not experienced any notable difficulties financing our acquisitions. The Company anticipates that any new mortgages used to acquire commercial properties or model homes in the near future will be at rates higher than our currently weighted average interest rate. As of June 30, 2024, we had issued one promissory note to our majority owned subsidiary, Dubose Model Home Investors 202 LP, for the refinancing of one model home property in Texas, for approximately $0.3 million with an interest rate of 5.55% per annum and maturity date of August 15, 2024. This note payable and note receivable, including interest expense and interest income related to this promissory note, is eliminated through consolidation on our financial statements.

### Cash Flow for the six months ended June 30, 2024, and June 30, 2023

*Operating Activities:* Net cash used in operating activities for the six months ended June 30, 2024, totaled approximately $1.9 million, as compared to cash used in operating activities of $1.6 million for the six months ended June 30, 2023. The change in net cash used in operating activities is mainly due to changes in net income, which fluctuates due to new leases, leasing renewals, tenant move outs and model home sales and acquisitions, as well as changes in non-cash addbacks or subtractions such as straight-line rent.

*Investing Activities:* Net cash provided by investing activities for the six months ended June 30, 2024, was approximately $13.2 million compared to approximately $105.3 million used in investing activities during the same period in 2023. The change from each period was primarily related to the gross cash withdrawal of approximately $114.1 million during the first quarter of 2023 for SPAC redemptions. There were no similar transactions during the six months ended June 30, 2024. Proceeds from the sale of real estate assets total approximately $20.1 million, net of selling costs, while cash used in real estate acquisition and capital improvement totaled approximately $7.0 million, for the six months ended June 30, 2024.

We currently project that we could spend up to $1.5 million to $2.0 million (some of which is held in deposits reserve accounts by our lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio during the rest of the year. 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 six months ended June 30, 2024, was $9.3 million compared to $111.5 million provided by financing activities for the same period in 2023 and was primarily due to the following activities for the six months ended June 30, 2024:

- Proceeds from mortgage notes payable, net of issuance costs totaled approximately $10.7 million.
- Proceeds from the issuance of Series D Preferred Stock, net of offering costs, totaled approximately $1.2 million.
- Repayment of mortgage notes payable totaled approximately $17.1 million for the six months ended June 30, 2024.
- Distributions to noncontrolling interest of approximately $2.6 million for the six months ended June 30, 2024.
- Dividends paid to Series D Preferred Stockholders of approximately $1.1 million for the six months ended June 30, 2024.

### Off-Balance Sheet Arrangements

On July 12, 2021, the Company entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of 1,000,000 shares of its Series A Common Stock, Common Stock Warrants to purchase up to 2,000,000 shares of Series A Common Stock and Pre-Funded Warrants to purchase up to 1,000,000 shares of Series A Common Stock. Each share of Common Stock and accompanying Common Stock Warrants were sold together at a combined offering price of $5.00, and each share of Common Stock and accompanying Pre-Funded Warrant were sold together at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal exercise price of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, exercisable upon issuance and will expire five years from the date of issuance.

In connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to 80,000 shares of Series A Common Stock, representing 4.0% of the Series A Common Stock and shares of Series A Common Stock issuable upon exercise of the Pre-Funded Warrants. The Placement Agent Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants with an exercise price of $6.25 and will expire five years from the date of issuance.

#### Common Stock Warrants:

If all the potential Common Stock Warrants outstanding at June 30, 2024, were exercised at the price of $5.00 per share, gross proceeds to us would be approximately $10.0 million and we would as a result issue an additional 2,000,000 shares of common stock.

#### Placement Agent Warrants:

If all the potential Placement Agent Warrants outstanding at June 30, 2024, were exercised at the price of $6.25 per share, gross proceeds to us would be approximately $0.5 million and we would as a result issue an additional 80,000 shares of common stock.

January 14, 2022, was the record date with respect to the distribution of five-year listed warrants (the “Series A Warrants”). The Series A Warrants and the shares of 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 shares of common stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired shares of common stock in the market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants give the holder the right to purchase one share of common stock at $7.00 per share, for a period of five years. Should warrant holders not exercise the Series A Warrants during that holding period, the Series A Warrants will automatically convert to 1/10 of a common share at expiration, rounded down to the nearest number of whole shares.

#### Series A Warrants:

If all the potential Series A Warrants outstanding at June 30, 2024, were exercised at the price of $7.00 per share, gross proceeds to us would be approximately $101.2 million and we would as a result issue an additional 14,450,069 shares of common stock.

### Inflation

Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index (typically subject to ceilings), or increases in the clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.

However, our use of net lease agreements tends to reduce our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Inflation and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue.

## Controls and procedures

As filed, 4,646 characters.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports 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 management, including our Chief Executive Officer and Chief Financial 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 and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In connection with the preparation and audit of the financial statements as of and for the fiscal year ended December 31, 2023, a material weakness was identified in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. This material weakness primarily relates to a non-recuring significant transaction for income tax provision under ASC 740, *Income Taxes*, and comprises the following:

- We lack a formal review and approval process in connection with the annual income tax provision, specifically related to REIT and non-REIT subsidiaries and the ownership of Conduit shares received by the Company in the de-SPAC transaction on September 22, 2023.
- We did not design adequate internal controls under an appropriate financial reporting framework, including monitoring controls and certain entity level controls with regards to the income tax provision.

If this material weakness is not remediated, it could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. We are implementing measures designed to improve our internal control over financial reporting to remediate this material weakness, although they have not been fully remediated as of the date of this filing.

The material weakness will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively. We commenced the remediation plan and will be documenting and implementing such plan, followed with testing such controls over time. We cannot predict the success of such efforts or the outcome of its assessment of the remediation efforts. Our efforts may not remediate this material weakness in our internal control over financial reporting, or additional material weaknesses may be identified in the future. A failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and could cause us to fail to meet our reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our common stock.

### Changes in Internal Control over Financial Reporting

We are adding controls around the calculation and preparation of income tax provisions and expenses, we are engaging with third party experts, and will continually identify and monitor the taxable status of each subsidiary for annual reporting. There were no additional changes in our internal control over financial reporting that occurred during the quarter June 30, 2024 that have materially affected, or are 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.

Filed Aug 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-026730. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.