Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 2020
1. ORGANIZATION
Organization. Presidio Property Trust, Inc. (“we”, “our”, “us” or the “Company”) is an internally managed diversified real estate investment trust (“REIT”), with holdings in office, industrial, retail, and model home properties. NetREIT was incorporated in California on January 28, 1999, and was merged into NetREIT, Inc., a Maryland corporation, on August 4, 2010. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” The Company’s portfolio includes the following properties:
•Ten office buildings and one industrial property (“Office/Industrial Properties”) which total approximately 998,016 rentable square feet;
•Four retail shopping centers (“Retail Properties”) which total approximately 131,722 rentable square feet; and
•138 model home residential properties (“Model Homes”) leased back on a triple-net basis to homebuilders that are owned by five affiliated limited partnerships and one wholly-owned corporation (“Model Home Properties”).
The Company or one of its affiliates operates the following partnerships during the periods covered by these condensed consolidated financial statements:
•The Company is the sole general partner and a limited partner in two limited partnerships (NetREIT Palm Self-Storage LP and NetREIT Casa Grande LP), all with ownership interests in entities that own real estate income producing properties.
•The Company is the general and/or limited partner in five limited partnerships that purchase Model Homes and lease them back to homebuilders (Dubose Model Home Investors #202, LP, Dubose Model Home Investors #203, LP, Dubose Model Home Investors #204, LP, Dubose Model Home Investors #205, LP and NetREIT Dubose Model Home REIT, LP). The Company refers to these entities collectively as the “Model Home Partnerships”.
The Company has determined that the limited partnerships in which it owns less than 100% should be included in the Company’s consolidated financial statements as the Company directs their activities and has control of such limited partnerships.
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (“Code”), for federal income tax purposes. To maintain our qualification as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to maintain our qualification as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. We are subject to certain state and local income taxes.
We, together with one of our entities, have elected to treat our subsidiaries as a taxable REIT subsidiary (a “TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes.
The Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries have been assessed any significant interest or penalties for tax positions by any major tax jurisdictions.
Liquidity. On September 17, 2019 the Company executed a Promissory Note (“Note”) pursuant to which Polar Multi-Strategy Master Fund (“Polar”), executed a loan in the principal amount of $14.0 million to the Company. The Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. The final payment due at maturity, October 1, 2020 (or March 31, 2021, if extended pursuant to the Note), includes payment of the outstanding principal and accrued and unpaid interest. The Company used the proceeds of the Note from Polar to redeem all of the outstanding shares of the Series B Preferred Stock.
For the nine months remaining in 2020 and the year ending December 31, 2021, we have $20.2 million and $23.4 million of mortgage notes payable maturing, respectively, related to our properties. Certain 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 year ending December 31, 2020, we have $9.9 million of mortgage notes payable maturing related to the model homes properties and $10.3 million of mortgage notes payable maturing related to the commercial properties.
2. SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2020.
Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared by the Company's management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statement and the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and footnote disclosures required for annual consolidated financial statements have been condensed or excluded pursuant to rules and regulations of the SEC. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of our financial position, results of our operations, and cash flows as of and for the three months ended March 31, 2020 and 2019, respectively. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements included in the Form 10-K filed with the SEC on March 13, 2020. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020 due to seasonal variations and other factors, such as the effects of the novel coronavirus (“COVID-19”) and its possible influence on our future results.
Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries and entities the Company controls or of which it is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allocation of purchase price paid for property acquisitions among land, building and intangible assets acquired including their useful lives; valuation of long-lived assets, and the allowance for doubtful accounts, which is based on an evaluation of the tenants’ ability to pay. Actual results may differ from those estimates.
Cash Equivalents and Restricted Cash. At March 31, 2020 and December 31, 2019, we had approximately $6.1 million and $5.7 million in cash equivalents, respectively, and $2.9 million and $4.7 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash and cash in our operating accounts and are held in bank accounts at third party institutions. Restricted cash consists of funds used for property taxes, insurance, capital expenditures and leasing commissions.
Real Estate Held for Sale. Real estate held for sale during the current period is classified as “real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. Mortgage notes payable related to the real estate held for sale during the current period are classified as “mortgage notes payable related to real estate held for sale, net” for all prior periods presented in the accompanying condensed consolidated financial statements. As of March 31, 2020, three properties meet the criteria to be classified as held for sale, which are World Plaza, Garden Gateway and one of the four buildings at Executive Office Park.
Impairments of Real Estate Asset. We review for impairment on a property by property basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows including revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used to estimate the future recoverability of carrying value requires
significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.
Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be material.
Despite certain economic triggering events that occurred in late March due to the impact of COVID-19, the Company determined that no impairment existed as of March 31, 2020, as there were no significant changes to undiscounted cash flows as of March 31, 2020. Therefore, no impairment charge was recorded during the three months ended March 31, 2020.
Fair Value Measurements. Under GAAP, we are required to measure certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.
When available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
Subsequent Events. We evaluate subsequent events up until the date the consolidated financial statements are issued.
Correction of Previously Issued Financial Information. We have corrected certain information in the current quarter related to the subsequent event disclosure surrounding the sale of Centennial Technology Center as well certain information related to our Segments footnote as reported 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. These corrections were disclosure based in nature and had no impact on our previously reported financial statements as of December 31, 2019.
Recently Issued and Adopted Accounting Pronouncements. In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform which provides optional expedients and exceptions in order to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to contracts, hedging relationships and other transactions by allowing companies to modify contracts that previously contained LIBOR rates without evaluating whether the modification constituted a new contract. The expedients and exceptions provided by the
amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, and are used on a prospective basis upon adoption. The Company adopted this guidance as of March 2020 noting no impact to the financial statements.
In March 2017, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, amended in February 2020 with ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842). ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. While ASU 2016-13 was effective for periods beginning after December 15, 2019, the issuance of ASU 2020-02 has allowed for the delay in adoption for certain smaller public companies, and is now effective for fiscal periods beginning after December 15, 2022. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company is continuing to evaluate the impact of this guidance on its financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective for public companies in fiscal years beginning after December 15, 2019 with early adoption permitted. The Company adopted this guidance as of January 1, 2020 and noted no impact on its consolidated financial statements.
3. RECENT REAL ESTATE TRANSACTIONS
During the three months ended March 31, 2020, the Company disposed of the following properties:
•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.
During the three months ended March 31, 2020, the Company acquired 10 model homes for approximately $3.6 million. The purchase price was paid through cash payments of approximately $1.1 million and mortgage notes of approximately $2.5 million.
During the three months ended March 31, 2020, the Company disposed of 8 model homes for approximately $2.8 million and recognized a gain of approximately $215,000.
During the three months ended March 31, 2019, the Company disposed of the following property:
•Morena Office Center, which was sold on January 15, 2019 for approximately $5.6 million and the Company recognized a gain of approximately $700,000.
During the three months ended March 31, 2019, the Company disposed of 15 model homes for approximately $5.8 million and recognized a gain of approximately $514,000.
4. REAL ESTATE ASSETS
A summary of the properties owned by the Company as of March 31, 2020 is as follows:
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Property Name
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Date
Acquired
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Location
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Real estate
assets, net
(in thousands)
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Garden Gateway Plaza (1)
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March 2007
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Colorado Springs, Colorado
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$
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11,440
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World Plaza (1)
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September 2007
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San Bernardino, California
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8,334
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Executive Office Park (2)
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July 2008
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Colorado Springs, Colorado
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7,654
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Waterman Plaza
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August 2008
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San Bernardino, California
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4,867
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Genesis Plaza
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August 2010
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San Diego, California
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8,721
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Dakota Center
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May 2011
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Fargo, North Dakota
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8,772
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Grand Pacific Center
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March 2014
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Bismarck, North Dakota
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5,885
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Arapahoe Center
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December 2014
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Centennial, Colorado
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9,619
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Union Town Center
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December 2014
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Colorado Springs, Colorado
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9,552
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West Fargo Industrial
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August 2015
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West Fargo, North Dakota
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7,188
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300 N.P.
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August 2015
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Fargo, North Dakota
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3,371
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Research Parkway
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August 2015
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Colorado Springs, Colorado
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2,492
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One Park Center
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August 2015
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Westminster, Colorado
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8,898
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Highland Court
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August 2015
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Centennial, Colorado
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11,260
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Shea Center II
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December 2015
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Highlands Ranch, Colorado
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21,706
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Presidio Property Trust, Inc. properties
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129,759
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Model Home properties
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2014-2020
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AZ, FL, IL, PA, TX, WI
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49,433
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Total real estate assets and lease intangibles, net
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$
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179,192
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(1)Properties held for sale as of March 31, 2020.
(2)One of four buildings in the property is held for sale as of March 31, 2020.
Geographic Diversification Tables
The following tables show a list of commercial properties owned by the Company grouped by state and geographic region as of March 31, 2020:
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State
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No. of
Properties
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Aggregate
Square
Feet
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Approximate %
of Square Feet
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Current
Base Annual
Rent
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Approximate %
of Aggregate
Annual Rent
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California
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3
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134,787
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11.9
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%
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$
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2,369,118
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15.8
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%
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Colorado
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8
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597,912
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52.9
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%
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9,115,780
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60.7
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%
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North Dakota
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4
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397,039
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35.2
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%
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3,528,918
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23.5
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%
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Total
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15
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1,129,738
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100.0
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%
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$
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15,013,816
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100.0
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%
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The following tables show a list of our Model Home properties by geographic region as of March 31, 2020:
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Geographic Region
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No. of
Properties
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Aggregate
Square Feet
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Approximate %
of Square Feet
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Current
Base Annual
Rent
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Approximate
of Aggregate
% Annual Rent
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Southwest
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111
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323,635
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82.9
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%
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$
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3,301,032
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79.7
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%
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Southeast
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20
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45,727
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11.7
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%
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551,088
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13.3
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%
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Midwest
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2
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6,602
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1.7
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%
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99,276
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2.4
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%
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East
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2
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5,255
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1.3
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%
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70,716
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1.7
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%
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Northeast
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3
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9,271
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2.4
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%
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121,020
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2.9
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%
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Total
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138
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390,490
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100.0
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%
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$
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4,143,132
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100.0
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%
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5. LEASE INTANGIBLES
The following table summarizes the net value of other intangible assets acquired and the accumulated amortization for each class of intangible asset:
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|
March 31, 2020
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December 31, 2019
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Lease
Intangibles
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Accumulated
Amortization
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Lease
Intangibles, net
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Lease
Intangibles
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Accumulated
Amortization
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|
Lease
Intangibles, net
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In-place leases
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$
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3,186,889
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$
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(2,592,558)
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$
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594,331
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$
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4,360,027
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|
$
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(3,283,027)
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$
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1,077,000
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Leasing costs
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1,800,922
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|
|
(1,455,228)
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345,694
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2,937,976
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(2,002,711)
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935,265
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Above-market leases
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333,485
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(253,410)
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80,075
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333,485
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(240,739)
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92,746
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$
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5,321,296
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$
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(4,301,196)
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$
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1,020,100
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$
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7,631,488
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$
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(5,526,477)
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$
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2,105,011
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As of March 31, 2020 there were no gross lease intangible assets included in real estate assets held for sale. As of December 31, 2019, there was $2.3 million gross lease intangible assets included in real estate assets held for sale, with $1.4 million of accumulated amortization related to the lease intangible assets netted against real estate assets held for sale.
The net value of acquired intangible liabilities was $267,337 and $310,000 relating to below-market leases as of March 31, 2020 and December 31, 2019, respectively.
Future aggregate approximate amortization expense for the Company's lease intangible assets is as follows:
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Nine months remaining in 2020
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$
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397,753
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Years ending December 31:
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2021
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372,484
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2022
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202,479
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2023
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17,663
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2024
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17,663
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Thereafter
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12,058
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Total
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$
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1,020,100
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The weighted average remaining amortization period of the intangible assets as of March 31, 2020 is 1.9 years.
6. OTHER ASSETS
Other assets consist of the following:
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|
|
March 31,
2020
|
|
December 31,
2019
|
Deferred rent receivable
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$
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2,019,632
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|
$
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2,680,886
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|
Prepaid expenses, deposits and other
|
488,280
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|
601,897
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|
Accounts receivable, net
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860,388
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1,336,122
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Right-of-use assets, net
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121,969
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561,375
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Other intangibles, net
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192,707
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212,932
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Notes receivable
|
316,374
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|
316,374
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Total other assets
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$
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3,999,350
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$
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5,709,586
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7. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
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Mortgage note property
|
|
Notes
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|
Principal as of
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Loan
Type
|
|
Interest
Rate (1)
|
|
Maturity
|
|
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|
|
March 31,
|
|
December 31,
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2020
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2019
|
|
|
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|
|
Garden Gateway Plaza
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|
(3)
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|
$
|
6,019,844
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$
|
6,071,315
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Fixed
|
|
5.00
|
%
|
|
8/5/2021
|
World Plaza
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|
(3)(4)
|
|
4,953,556
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|
|
4,979,383
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Variable
|
|
4.41
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%
|
|
7/5/2020
|
West Fargo Industrial
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|
|
|
4,196,788
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|
|
4,216,565
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Fixed
|
|
4.79
|
%
|
|
9/6/2020
|
Waterman Plaza
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|
|
|
3,254,223
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|
|
3,274,097
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|
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Fixed
|
|
5.78
|
%
|
|
4/29/2021
|
300 N.P.
|
|
|
|
2,302,197
|
|
|
2,311,738
|
|
|
Fixed
|
|
4.95
|
%
|
|
6/11/2022
|
Highland Court
|
|
|
|
6,387,511
|
|
|
6,424,366
|
|
|
Fixed
|
|
3.82
|
%
|
|
9/1/2022
|
Dakota Center
|
|
|
|
10,059,135
|
|
|
10,111,693
|
|
|
Fixed
|
|
4.74
|
%
|
|
7/6/2024
|
Union Terrace
|
|
(2)
|
|
|
—
|
|
|
6,240,396
|
|
|
Fixed
|
|
4.50
|
%
|
|
9/5/2024
|
Centennial Tech Center
|
|
(2)
|
|
|
—
|
|
|
9,561,654
|
|
|
Fixed
|
|
4.43
|
%
|
|
1/5/2024
|
Research Parkway
|
|
|
|
1,800,281
|
|
|
1,813,305
|
|
|
Fixed
|
|
3.94
|
%
|
|
1/5/2025
|
Arapahoe Service Center
|
|
|
|
8,047,511
|
|
|
8,085,727
|
|
|
Fixed
|
|
4.34
|
%
|
|
1/5/2025
|
Union Town Center
|
|
|
|
8,416,833
|
|
|
8,440,000
|
|
|
Fixed
|
|
4.28
|
%
|
|
1/5/2025
|
Executive Office Park
|
|
(3)
|
|
4,811,730
|
|
|
4,839,576
|
|
|
Fixed
|
|
4.83
|
%
|
|
6/1/2027
|
Genesis Plaza
|
|
|
|
6,352,694
|
|
|
6,378,110
|
|
|
Fixed
|
|
4.71
|
%
|
|
9/6/2025
|
One Park Centre
|
|
|
|
6,461,980
|
|
|
6,487,532
|
|
|
Fixed
|
|
4.77
|
%
|
|
9/5/2025
|
Shea Center II
|
|
|
|
17,727,500
|
|
|
17,727,500
|
|
|
Fixed
|
|
4.92
|
%
|
|
1/5/2026
|
Grand Pacific Center
|
|
(5)
|
|
|
3,823,965
|
|
|
3,851,962
|
|
|
Fixed
|
|
4.02
|
%
|
|
8/1/2037
|
Subtotal, Presidio Property Trust, Inc. Properties
|
|
|
|
94,615,748
|
|
|
110,814,919
|
|
|
|
|
|
|
|
Model Home mortgage notes
|
|
|
|
33,386,972
|
|
|
32,644,129
|
|
|
Fixed
|
|
(6)
|
|
|
2019-2023
|
Mortgage Notes Payable
|
|
|
|
$
|
128,002,720
|
|
|
$
|
143,459,048
|
|
|
|
|
|
|
|
Unamortized loan costs
|
|
|
|
(879,175)
|
|
|
(1,066,056)
|
|
|
|
|
|
|
|
Mortgage Notes Payable, net
|
|
|
|
$
|
127,123,545
|
|
|
$
|
142,392,992
|
|
|
|
|
|
|
|
(1)Interest rates as of March 31, 2020.
(2)Centennial Tech Center and Union Terrace were sold on February 5, 2020 and March 13, 2020, respectively.
(3)Properties held for sale as of March 31, 2020. Only one of four buildings at Executive Office Park were classified as held for sale.
(4)Interest on this loan is ABR plus 0.75% and LIBOR plus 2.75%. For the three months ended March 31, 2020, the weighted average interest rate was 4.41%.
(5)Interest rate is subject to reset on September 1, 2023. Each model home has a stand-alone mortgage note at interest rates ranging from 3.44% to 5.63% per annum at March 31, 2020.
The Company is in compliance with all material conditions and covenants of its mortgage notes payable.
Scheduled principal payments of mortgage notes payable were as follows as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presidio Property
Trust, Inc.
Notes Payable
|
|
Model
Homes
Notes Payable
|
|
Total Principal
Payments
|
Nine months remaining in 2020
|
$
|
10,312,547
|
|
|
$
|
9,903,239
|
|
|
$
|
20,215,786
|
|
Years ending December 31:
|
|
|
|
|
|
2021
|
10,472,745
|
|
|
12,949,485
|
|
|
$
|
23,422,230
|
|
2022
|
9,710,259
|
|
|
8,345,200
|
|
|
$
|
18,055,459
|
|
2023
|
1,422,043
|
|
|
2,189,048
|
|
|
$
|
3,611,091
|
|
2024
|
10,365,425
|
|
|
—
|
|
|
$
|
10,365,425
|
|
Thereafter
|
52,332,729
|
|
|
—
|
|
|
$
|
52,332,729
|
|
Total
|
$
|
94,615,748
|
|
|
$
|
33,386,972
|
|
|
$
|
128,002,720
|
|
8. 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. The final payment due at maturity, October 1, 2020 (or March 31, 2021, if extended pursuant to the Polar Note), includes payment of the outstanding principal and accrued and unpaid interest. The Company may repay the Polar Note at any time, subject to the payment of an Optional Redemption Fee (as defined in the Polar Note), if applicable. Such fee is not applicable to repayments made from the proceeds of property sales.
The principal balance of the Polar Note as of March 31, 2020 consists of cash received, less cash repayments from property sales of $7.4 million and Original Issue Discount ("OID") of $1.4 million. The OID has been recorded on the accompanying consolidated balance sheets as a direct deduction from the principal of the Note and is recognized as interest expense over the term of the Note commencing on September 17, 2019 through October 1, 2020. The unrecognized OID totaled approximately $675,000 as of March 31, 2020. The accretion of the OID recognized during the three months ended March 31, 2020 was $338,000.
The Company incurred approximately $1.1 million in legal and underwriting costs related to the transaction. These costs have been recorded as debt issuance costs on the accompanying condensed consolidated balance sheets as a direct deduction from the principal of the Note and are being amortized over the term of the Note. Amortization expense totaling approximately $280,000 was included in interest expenses for the three months ended March 31, 2020, in the accompanying condensed consolidated statements of operations. The unamortized debt issuance costs totaled $0.5 million as of March 31, 2020.
Under the terms of the Polar Note, the Company is subject to certain financial covenants including maintaining a debt to property fair value ratio of no greater than 75%. As of March 31, 2020, the Company is in compliance with such covenants.
9. COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.
Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties.
The Company believes that it is in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which the Company would incur significant environmental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such non-compliance, liability, claim or expenditure will not arise in the future.
The Company is involved from time to time in lawsuits and other disputes which arise in the ordinary course of business. As of March 31, 2020, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s financial position or results of operations.
10. SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK
During the year ended December 31, 2019, the Company redeemed all of its remaining 16,900 shares of its Series B Preferred Stock for $16.9 million. As of March 31, 2020 and December 31, 2019, no Series B Preferred Stock remained outstanding. Amortization expense totaling approximately $61,000 was included in interest expense for the three months ended March 31, 2019 in the accompanying condensed consolidated statements of operations. The unamortized deferred costs totaled zero as of March 31, 2020 and December 31, 2019, respectively.
11. STOCKHOLDERS' EQUITY
Preferred Stock. The Company is authorized to issue up to 1,000,000 shares of preferred stock (the “Preferred Stock”). The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of the Preferred Stock, to determine the designation of any such series, and to determine or alter the rights granted to or imposed upon any wholly unissued series of preferred stock including the dividend rights, dividend rate, conversion rights, voting rights, redemption rights (including sinking fund provisions), redemption price, and liquidation preference.
Common Stock. The Company is authorized to issue up to 100,000,000 shares of Series A Common Stock, 9,000,000 shares of Series C Common Stock (collectively, "Common Stock") $0.01 par value and 1,000 shares of Series B Common Stock $0.01 par value (“Series B Common Stock”). The Common Stock and the Series B Common Stock have identical rights, preferences, terms and conditions except that the holders of Series B Common Stock are not entitled to receive any portion of Company assets in the event of Company liquidation. There have been no Series B or Series C Common Stock issued. Each share of Common Stock and Series B Common Stock entitles the holder to one vote. The Common Stock and Series B Common Stock are not subject to redemption and do not have any preference, conversion, exchange or preemptive rights. The articles of incorporation contain a restriction on ownership of the common stock that prevents one person from owning more than 9.8% of the outstanding shares of common stock.
Cash Dividends. During the three months ended March 31, 2020 the Company paid no cash dividend. During the three months ended March 31, 2019 the Company paid a cash dividend of approximately $1.1 million or $0.06 per share.
Dividend Reinvestment Plan. The Company had adopted a distribution reinvestment plan (“Plan) that allowed stockholders to receive dividends and other distributions otherwise distributable to them invested in additional shares of the Company’s common stock. The Company registered 3,000,000 shares of common stock pursuant to the Plan. The purchase price per share used in the past was 95% of the price the Company sold its shares or $9.50 per share. No sales commission or dealer manager fee were paid on shares sold through the Plan. The Company may amend, suspend or terminate the Plan at any time. Any such amendment, suspension or termination will be effective upon a designated dividend record date and notice of such amendment, suspension or termination will be sent to all participants at least thirty (30) days prior to such record date.The Plan became effective on January 23, 2012 and was suspended on December 7, 2018. As of March 31, 2020, approximately $17.4 million or approximately 1,834,147 shares of common stock have been issued under the Plan. No shares were issued under the Plan during the three months ended March 31, 2020.
Stock-Based Compensation. The Company recognizes noncash compensation expense ratably over the vesting period, and accordingly, we recognized $157,000 and $433,000 in noncash compensation expense for the three-month periods ended March 31, 2020 and 2019, respectively, which is included in general and administrative expense on the condensed consolidated statements of operations.
12. RELATED PARTY TRANSACTIONS
The Company leases a portion of its corporate headquarters in San Diego, California to entities 100% owned by the Company’s Chairman and Chief Executive Officer. Rental income recorded for the three months ended March 31, 2020 and 2019 totaled $2,700 and $1,000, respectively.
13. SEGMENTS
The Company’s reportable segments consist of three types of commercial real estate properties for which the Company’s decision-makers internally evaluate operating performance and financial results: Office/Industrial Properties, Model Home Properties and Retail Properties. The Company also has certain corporate-level activities including accounting, finance, legal administration and management information systems which are not considered separate operating segments. The accounting policies of the reportable segments are the same as those described in Note 2. There is no inter segment activity.
The Company evaluates the performance of its segments based upon net operating income (“NOI”), which is a non-GAAP supplemental financial measure. The Company defines NOI for its segments as operating revenues (rental income, tenant reimbursements and other operating income) less property and related expenses (property operating expenses, real estate taxes, insurance, asset management fees, impairments and provision for bad debt). NOI excludes certain items that are not considered to be controllable in connection with the management of an asset such as non-property income and expenses, depreciation and amortization, real estate acquisition fees and expenses and corporate general and administrative expenses. The Company uses NOI to evaluate the operating performance of the Company’s real estate investments and to make decisions about resource allocations.
The following tables reconcile the Company’s segment activity to its results of operations and financial position as of and for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Office/Industrial Properties:
|
|
|
|
|
|
|
|
Rental, fees and other income
|
|
|
|
|
$
|
4,984,942
|
|
|
$
|
5,454,153
|
|
Property and related expenses
|
|
|
|
|
(2,015,624)
|
|
|
(2,504,787)
|
|
Net operating income, as defined
|
|
|
|
|
2,969,318
|
|
|
2,949,366
|
|
Model Home Properties:
|
|
|
|
|
|
|
|
Rental, fees and other income
|
|
|
|
|
1,116,730
|
|
|
1,081,684
|
|
Property and related expenses
|
|
|
|
|
(46,260)
|
|
|
(50,422)
|
|
Net operating income, as defined
|
|
|
|
|
1,070,470
|
|
|
1,031,262
|
|
Retail Properties:
|
|
|
|
|
|
|
|
Rental, fees and other income
|
|
|
|
|
927,479
|
|
|
643,427
|
|
Property and related expenses
|
|
|
|
|
(319,208)
|
|
|
(208,341)
|
|
Net operating income, as defined
|
|
|
|
|
608,271
|
|
|
435,086
|
|
Reconciliation to net loss:
|
|
|
|
|
|
|
|
Total net operating income, as defined, for reportable segments
|
|
|
|
|
4,648,059
|
|
|
4,415,714
|
|
General and administrative expenses
|
|
|
|
|
(1,351,345)
|
|
|
(1,760,703)
|
|
Depreciation and amortization
|
|
|
|
|
(1,574,526)
|
|
|
(2,210,081)
|
|
Interest expense
|
|
|
|
|
(2,553,846)
|
|
|
(2,545,203)
|
|
Other income (expense)
|
|
|
|
|
(6,995)
|
|
|
5,524
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
(83,631)
|
|
|
(81,430)
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
|
|
|
|
(9,835)
|
|
|
1,214,242
|
|
Net loss
|
|
|
|
|
$
|
(932,119)
|
|
|
$
|
(961,937)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets by Reportable Segment:
|
|
March 31,
2020
|
|
December 31,
2019
|
Office/Industrial Properties:
|
|
|
|
|
Land, buildings and improvements, net (1)
|
|
$
|
104,424,683
|
|
|
$
|
126,421,648
|
|
Total assets (2)
|
|
$
|
105,759,056
|
|
|
$
|
131,180,612
|
|
Model Home Properties:
|
|
|
|
|
Land, buildings and improvements, net (1)
|
|
$
|
49,433,519
|
|
|
$
|
48,466,371
|
|
Total assets (2)
|
|
$
|
48,298,760
|
|
|
$
|
51,389,400
|
|
Retail Properties:
|
|
|
|
|
Land, buildings and improvements, net (1)
|
|
$
|
25,244,792
|
|
|
$
|
25,318,601
|
|
Total assets (2)
|
|
$
|
26,704,009
|
|
|
$
|
26,588,254
|
|
Reconciliation to Total Assets:
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
180,761,825
|
|
|
$
|
209,158,266
|
|
Other unallocated assets:
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
1,730,789
|
|
|
1,591,041
|
|
Other assets, net
|
|
13,849,674
|
|
|
10,035,101
|
|
Total Assets
|
|
$
|
196,342,288
|
|
|
$
|
220,784,408
|
|
(1)Includes lease intangibles and the land purchase option related to property acquisitions.
(2)Includes land, buildings and improvements, cash, cash equivalents, and restricted cash, current receivables, deferred rent receivables and deferred leasing costs and other related intangible assets, all shown on a net basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures by Reportable Segment
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
Office/Industrial Properties:
|
|
|
|
|
Capital expenditures and tenant improvements
|
|
$
|
881,497
|
|
|
$
|
2,696,422
|
|
Model Home Properties:
|
|
|
|
|
Acquisition of operating properties
|
|
3,573,743
|
|
|
—
|
|
Retail Properties:
|
|
|
|
|
Capital expenditures and tenant improvements
|
|
8,176
|
|
|
—
|
|
Totals:
|
|
|
|
|
Acquisition of operating properties, net
|
|
3,573,743
|
|
|
—
|
|
Capital expenditures and tenant improvements
|
|
889,673
|
|
|
2,696,422
|
|
Total real estate investments
|
|
$
|
4,463,416
|
|
|
$
|
2,696,422
|
|
14. SUBSEQUENT EVENTS
On April 22, 2020, the Company received an Economic Injury Disaster Loan of $10,000 from the Small Business Administration which will provide economic relief during the COVID-19 pandemic. This loan advance is not required to be repaid, has no stipulations on use, and has been recorded as fees and other income in the Condensed Consolidated Statements of Operations during the second quarter of 2020. We intend to use the funds for general corporate purposes.
On April 30, 2020, the Company received a Paycheck Protection Program loan of $462,000 from the Small Business Administration which will provide additional economic relief during the COVID-19 pandemic. The loan will be fully forgiven should the funds be used for payroll related costs, mortgage interest, rent and utilities, as long as our employee headcount remains consistent with our baseline period over an eight week period following the date the loan was received, otherwise the loan will be repaid over two years following a six month deferral. The loan has been recorded in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets during the second quarter of 2020. We intend to use the funds primarily to cover payroll related costs.