0001080657 Presidio Property Trust, Inc. false --12-31 Q1 2022 13,225,000 10.20 6.4 0.01 0.01 1,000,000 1,000,000 920,000 920,000 920,000 920,000 25.00 25.00 0.01 0.01 100,000,000 100,000,000 11,795,970 11,795,970 11,599,720 11,599,720 2 2 5 2 5 5 5 1 5 0.10 10 1 5 1 4 4 10 72,588,555 67,268,004 93,512,753 89,422,132 673,297 562,300 92,839,456 88,859,832 0.75 2 66.67 1 5 5 0 2 5 3 10 1 7 This property was sold during the three months ended March 31, 2022. Mandolin is owned by NetREIT Palm Self-Storage LP, through its wholly owned subsidiary NetREIT Highland LLC, and the Company is the sole general partner and owns 61.3% of NetREIT Palm Self-Storage LP. Interest rates as of March 31, 2022. This property is held for sale as of March 31, 2022. Genesis Plaza is owned by two tenants-in-common, each of which owns 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%. Includes lease intangibles and the land purchase option related to property acquisitions. Includes land, buildings and improvements, current receivables, deferred rent receivables and deferred leasing costs and other related intangible assets, all shown on a net basis. Includes Model Homes listed as held for sale as of March 31, 2022. Interest rate is subject to reset on September 1, 2023. Property held for sale as of March 31, 2022. There were four model homes included as real estate assets held for sale. Our model homes have stand-alone mortgage note at interest rates ranging from 2.50% to 5.63% per annum as of March 31, 2022. The mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022, and is no longer subject to defeasance or yield maintenance. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________

FORM 10-Q

___________________________________________________________

 

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

For the quarterly period ended March 31, 2022

OR

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

For the period from _____ to _____

001-34049

(Commission file No.)

___________________________________________________________

 

PRESIDIO PROPERTY TRUST, INC.

(Exact name of registrant as specified in its charter)

___________________________________________________________

   

Maryland

 

33-0841255

(State or other jurisdiction
of incorporation or organization

 

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

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

(Address of principal executive offices)

 

(760) 471-8536

(Registrant’s telephone number, including area code)

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

The Nasdaq Stock Market LLC

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

________________________________________________

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging Growth company

   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No ☒

At May 13, 2022, registrant had issued and outstanding 12,364,289 shares of its Series A Common Stock, $0.01 par value per share.

 

 

 

 

 

 
Index

Page

   

Part I. FINANCIAL INFORMATION:

5

Item 1. FINANCIAL STATEMENTS:

5

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

5

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (unaudited)

6

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)

8

Notes to Condensed Consolidated Financial Statements (unaudited)

9

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

28

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

Item 4. Controls and Procedures

37

Part II. OTHER INFORMATION

37

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

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

37

Item 3. Defaults Upon Senior Securities

38

Item 4. Mine Safety Disclosures

38

Item 5. Other Information

38

Item 6. Exhibits

38

Signatures

40

 

 

2

 

 

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this report and in our other filings with the Securities and Exchange Commission (the “SEC”). Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, financial condition, liquidity, capital resources, cash flows, results of operations and other financial and operating information.  Forward-looking statements included in this report include, but are not limited to, statements regarding purchases and sales of properties, plans for financing and refinancing our properties, the adequacy of our capital resources, changes to the markets in which we operate, our business plans and strategies, and our payment of dividends. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Important factors that may cause actual results to differ from projections include, but are not limited to:

 

 

the potential adverse effects of the novel coronavirus ("COVID-19") pandemic and ensuing economic turmoil on our financial condition, results of operations, cash flows and performance, particularly our ability to collect rent, on the financial condition, results of operations, cash flows and performance of our tenants, and on the global economy and financial markets; adverse economic conditions in the real estate market and overall financial market fluctuations (including, without limitation, as a result of the current COVID-19 pandemic);

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

our inability to borrow or raise sufficient capital to maintain and/or expand our real estate investment portfolio;

 

 

adverse changes in the real estate financing markets, including potential increases in interest rates and/or borrowing costs;

 

 

potential losses, including from adverse weather conditions, natural disasters, and title claims, may not be covered by insurance;

 

 

inability to complete acquisitions or dispositions and, even if these transactions are completed, failure to successfully operate acquired properties and/or sell properties without incurring significant defeasance costs;

 

 

our reliance on third-party property managers to manage a substantial number of our properties, brokers and/or agents to lease our properties;

 

 

3

 

 

 

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

 

 

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

 

 

failure to continue to qualify as a REIT;

 

 

adverse results of any legal proceedings;

 

 

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

 

 

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

 

4

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Presidio Property Trust, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

  

March 31,

  

December 31,

 
  2022  2021 
  

(Unaudited)

     

ASSETS

        

Real estate assets and lease intangibles:

        

Land

 $18,065,246  $21,136,379 

Buildings and improvements

  114,976,059   119,224,375 

Tenant improvements

  11,884,924   12,752,518 

Lease intangibles

  4,110,139   4,110,139 

Real estate assets and lease intangibles held for investment, cost

  149,036,368   157,223,411 

Accumulated depreciation and amortization

  (29,468,491)  (30,589,969)

Real estate assets and lease intangibles held for investment, net

  119,567,877   126,633,442 

Real estate assets held for sale, net

  7,282,326   11,431,494 

Real estate assets, net

  126,850,203   138,064,936 

Cash, cash equivalents and restricted cash

  22,494,595   14,702,089 

Deferred leasing costs, net

  1,115,295   1,348,234 

Goodwill

  2,423,000   2,423,000 

Other assets, net

  3,992,267   4,658,504 

Investments held in Trust (see Notes 2 & 11)

  134,905,182    

TOTAL ASSETS

 $291,780,542  $161,196,763 

LIABILITIES AND EQUITY

        

Liabilities:

        

Mortgage notes payable, net

 $88,658,485  $87,324,319 

Mortgage notes payable related to properties held for sale, net

  4,180,971   1,535,513 

Mortgage notes payable, total net

  92,839,456   88,859,832 

Note payable, net

  

    

Accounts payable and accrued liabilities

  3,480,915   4,569,537 

Accounts payable and accrued liabilities of SPAC (see Notes 2 & 11)

  4,703,232   15,499 

Accrued real estate taxes

  1,405,957   1,940,913 

Dividends payable preferred stock

  179,685   179,685 

Lease liability, net

  68,573   75,547 

Below-market leases, net

  59,407   73,130 

Total liabilities

  102,737,225   95,714,143 

Commitments and contingencies (Note 9 & 11)

          

SPAC Class A common stock subject to possible redemption; 13,225,000 shares (at $10.20 per share), net of issuance cost of $6.4 million

  128,534,952    

Equity:

        

Series D Preferred Stock, $0.01 par value per share; 1,000,000 shares authorized; 920,000 shares issued and outstanding (liquidation preference $25.00 per share) as of March 31, 2022 and December 31, 2021, respectively

  9,200   9,200 

Series A Common Stock, $0.01 par value per share, shares authorized: 100,000,000; 11,795,970 shares and 11,599,720 shares were issued and outstanding at March 31, 2022 and December 31, 2021, respectively

  117,960   115,997 

Additional paid-in capital

  183,231,322   186,492,012 

Dividends and accumulated losses

  (133,613,228)  (130,947,434)

Total stockholders' equity before noncontrolling interest

  49,745,254   55,669,775 

Noncontrolling interest

  10,763,111   9,812,845 

Total equity

  60,508,365   65,482,620 

TOTAL LIABILITIES AND EQUITY

 $291,780,542  $161,196,763 

 

See Notes to Condensed Consolidated Financial Statements

5

 

 

Presidio Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

  

For the Three Months Ended March 31,

 
  

2022

  

2021

 

Revenues:

        

Rental income

 $4,452,318  $5,477,223 

Fees and other income

  120,823   191,531 

Total revenue

  4,573,141   5,668,754 

Costs and expenses:

        

Rental operating costs

  1,583,473   1,838,923 

General and administrative

  1,583,691   1,537,265 

Depreciation and amortization

  1,339,225   1,428,934 

Impairment of real estate assets

     300,000 

Total costs and expenses

  4,506,389   5,105,122 

Other income (expense):

        

Interest expense-mortgage notes

  (1,017,713)  (1,305,021)

Interest expense - note payable

     (279,373)

Interest and other (expense), net

  73,605   (32,785)

Gain on sales of real estate, net

  1,522,785   (1,161,328)

Gain on extinguishment of government debt

     10,000 

Income tax expense

  (265,239)  (50,199)

Total other income (expense), net

  313,438   (2,818,706)

Net income (loss)

  380,190   (2,255,074)

Less: Income attributable to noncontrolling interests

  (1,208,676)  (406,608)

Net loss attributable to Presidio Property Trust, Inc. stockholders

 $(828,486) $(2,661,682)

Less: Preferred Stock Series D dividends

  (539,056)   

Less: Series A Warrant dividend

  (2,456,512)   

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

 $(3,824,053) $(2,661,682)
         

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

        

Basic & Diluted

 $(0.32) $(0.28)
         

Weighted average number of common shares outstanding - basic & diluted

  11,773,649   9,508,363 

 

See Notes to Condensed Consolidated Financial Statements

 

6

 

 

Presidio Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended and March 31, 2022 and 2021

(Unaudited)

 

                  

Additional

  

Dividends and

  

Total

  

Non-

     
  

Preferred Stock Series D

  

Common Stock

  

Paid-in

  

Accumulated

  

Stockholders’

  

controlling

  

Total

 
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Losses

  

Equity

  

Interests

  

Equity

 

Balance, December 31, 2021

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

Net income

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

Vesting of restricted stock

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

Dividends paid to Series A Common Stockholders

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

Dividends to Series D Preferred Stockholders

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

Remeasurement of SPAC Class A common stock subject to possible redemption

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

Distributions in excess of contributions received

                       (258,410)  (258,410)

Balance, March 31, 2022

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

 

 

                  

Additional

  

Dividends and

  

Total

  

Non-

     
  

Preferred Stock Series D

  

Common Stock

  

Paid-in

  

Accumulated

  

Stockholders’

  

controlling

  

Total

 
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Losses

  

Equity

  

Interests

  

Equity

 

Balance, December 31, 2020

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

Net loss

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

Dividends paid to Series A Common Stockholders

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

Distributions in excess of contributions received

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

Balance, March 31, 2021

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

 

See Notes to Condensed Consolidated Financial Statements

 

7

 

 

Presidio Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

  

For the Three Months Ended March 31,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net income (loss)

 $380,190  $(2,255,074)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Depreciation and amortization

  1,339,225   1,428,934 

Stock compensation

  280,981   301,547 

Bad debt expense

  13,416    

Loss (Gain) on sale of real estate assets, net

  (1,522,785)  1,161,328 

Gain on extinguishment of government debt

     (10,000)

Net change in fair value marketable securities

  68,962    

Impairment of real estate assets

     300,000 

Amortization of financing costs

  65,018   261,779 

Amortization of above-market leases

     18,027 

Amortization of below-market leases

  (13,723)  (19,037)

Straight-line rent adjustment

  (19,660)  (132,990)

Changes in operating assets and liabilities:

        

Other assets

  295,357   481,459 

Accounts payable and accrued liabilities

  (1,330,285)  (1,980,474)

Accrued real estate taxes

  (534,956)  (1,023,680)

Net cash used in operating activities

  (978,260)  (1,468,181)

Cash flows from investing activities:

        

Real estate acquisitions

  (2,427,890)   

Additions to buildings and tenant improvements

  (319,737)  (100,765)

Investment in marketable securities

  (172,866)   

Proceeds from sale of marketable securities

  755,989    

Investment of SPAC IPO proceeds into Trust Account

  (134,895,000)   

Additions to deferred leasing costs

  (18,352)  (37,585)

Proceeds from sales of real estate, net

  14,763,130   19,047,906 

Net cash provided by (used in) investing activities

  (122,314,726)  18,909,556 

Cash flows from financing activities:

        

Proceeds from mortgage notes payable, net of issuance costs

  7,365,855   6,013,700 

Repayment of mortgage notes payable

  (3,275,234)  (17,231,730)

Repayment of note payable

     (7,675,598)

Payment of deferred offering costs

  (3,159,411)  (70,276)

Distributions to noncontrolling interests, net

  (258,410)  (2,034,212)

Proceeds from initial public offering of SPAC

  132,250,000    

Dividends paid to preferred stockholders

  (539,056)   

Dividends paid to common stockholders

  (1,298,252)  (998,795)

Net cash provided by (used in) financing activities

  131,085,492   (21,996,911)

Net increase (decrease) in cash equivalents and restricted cash

  7,792,506   (4,555,536)

Cash, cash equivalents and restricted cash - beginning of period

  14,702,089   11,540,917 

Cash, cash equivalents and restricted cash - end of period

 $22,494,595  $6,985,381 

Supplemental disclosure of cash flow information:

        

Interest paid-mortgage notes payable

 $951,727  $1,239,193 

Interest paid-notes payable

 $  $103,861 

Non-cash financing activities:

        

Deferred offering cost SPAC, underwriting commission payable

 $4,628,750  $ 

Dividends payable - Preferred Stock Series D

 $179,685  $ 

 

See Notes to Condensed Consolidated Financial Statements

 

8

 

Presidio Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

March 31, 2022

 

1. ORGANIZATION

 

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

 

The Company or one of its affiliates operates the following partnerships during the periods covered by these condensed consolidated financial statements:

 

 The Company is the sole general partner and limited partner in two limited partnerships (NetREIT Palm Self-Storage LP and NetREIT Casa Grande LP), both of which, at March 31, 2022, had ownership interests in an entity that owns income producing real estate.  The Company refers to these entities collectively as the "NetREIT Partnerships".
   
 The Company is the general and limited partner in five limited partnerships that purchase model homes and lease them back to homebuilders (Dubose Model Home Investors #202, LP, Dubose Model Home Investors #203, LP, Dubose Model Home Investors #204, LP, Dubose Model Home Investors #205, LP, and Dubose Model Home Investors #206, LP). The Company refers to these entities collectively as the “Model Home Partnerships”.

 

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

 

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

 

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

 

Reverse Stock Split. On July 29, 2020, we amended our charter to effect a one-for-two reverse stock split of every outstanding share of our Series A Common Stock. The financial statements and accompanying footnotes have been retroactively restated to reflect the reverse stock split.

 

9

 

Additional Offerings & Warrants. Our Form S-3 Registration Statement was declared effective by the SEC on April 27, 2021.  Under this registration statement, we may offer and sell from time to time, in one or more series, subject to limitation that may apply (such as under Rule 415 of the Securities Act of 1933) various securities of the Company for total gross proceeds of up to $200,000,000. On July 12, 2021, we entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of 1,000,000 shares of our Series A Common Stock, warrants (“Common Stock Warrants”) to purchase up to 2,000,000 shares of Series A Common Stock and pre-funded warrants (“Pre-Funded Warrants”) to purchase up to 1,000,000 shares of Series A Common Stock. The shares of Series A Common Stock, Pre-Funded Warrants and shares of Series A Common Stock issuable upon exercise of the Pre-Funded Warrants were issued pursuant to a prospectus supplement to the Form S-3 Registration Statement, with the Common Stock Warrants issued in a concurrent private placement.  Each share of Series A Common Stock and accompanying Series A Common Stock Warrants were sold together at a combined offering price of $5.00, and each share of Common Stock and accompanying Pre-Funded Warrants were sold together at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal exercise price of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, were exercisable upon issuance, and will expire five years from the date of issuance. 

 

In connection with this additional offering, we agreed to issue the Placement Agent Warrants to purchase up to 80,000 shares (the “Placement Agent Warrants”) of Series A Common Stock, representing 4.0% of the Series A Common Stock and shares of Series A Common Stock issuable upon exercise of the Pre-Funded Warrants.  The Placement Agent Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants with an exercise price of $6.25 and will expire five years from the date of issuance.  The Company registered for resale Series A Common Stock issuable upon exercise of Common Stock Warrants and Placement Agent Warrants issued in the July 2021 offering pursuant to a registration statement on Form S-11 that was declared effective by the SEC on September 14, 2021. 

 

The Company evaluated the accounting guidance in ASC 480 and ASC 815 regarding the classification of the Pre-Funded Warrant, Common Stock Warrants, and Placement Agent Warrants as equity or a liability and ultimately determined that it should be classified as permanent equity.  As of March 31, 2022, none of the Common Stock Warrants and Placement Agent Warrants have been exercised.

 

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

Preferred Stock Series D.  On June 15, 2021, the Company completed its secondary offering of 800,000 shares of our 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock ("Series D Preferred Stock") for cash consideration of $25.00 per share to a syndicate of underwriters led by The Benchmark Company, LLC, as representative, resulting in approximately $18.1 million in net proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company. The Company granted the underwriters a 45-day option to purchase up to an additional 120,000 shares of Series D Preferred Stock to cover over-allotments, which they exercised on June 17, 2021, resulting in approximately $2.7 million in net proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company.  In total, the Company issued 920,000 shares of Series D Preferred Stock with net proceeds of approximately $20.5 million, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company and deferred offering costs. The Company has used these proceeds for general corporate and working capital purposes, including acquiring additional properties.  

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

 

10

 

Short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders.  Future principal payments due on mortgage notes payables, during the last nine months of 2022, total approximately $9.7 million, of which $6.5 million is related to model home properties.  Management expects certain model home properties can be sold, and that the underlying mortgage notes will be paid off with sales proceeds while other mortgage notes can be refinanced, as the Company has historically been able to do in the past.  Additional principal payments will be made with cash flows from ongoing operations.  The mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022, and is no longer subject to defeasance or yield maintenance.  The Company paid this note in full on May 11, 2022 with available cash on hand.  Additionally, the Company has committed to provide additional funds, or obtain financing, if need to a special purpose acquisition company, or "SPAC", for which we serve as the financial sponsor (as described below in Note 2. Significant Account Policies).

 

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

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

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

 

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

 

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

 

11

 

Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allocation of purchase price paid for property acquisitions between land, building and intangible assets acquired including their useful lives; valuation of long-lived assets, and the allowance for doubtful accounts, which is based on an evaluation of the tenants’ ability to pay. Actual results may differ from those estimates.

 

Real Estate Assets and Lease Intangibles. Land, buildings and improvements are recorded at cost, including tenant improvements and lease acquisition costs (including leasing commissions, space planning fees, and legal fees). The Company capitalizes any expenditure that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred. The Company allocates the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land, buildings, tenant improvements, and long-term debt) and identified intangible assets and liabilities (including the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships), in each case based on their respective fair values.

 

The Company allocates the purchase price to tangible assets of an acquired property based on the estimated fair values of those tangible assets, assuming the property was vacant. Estimates of fair value for land, building and building improvements are based on many factors including but not limited to comparisons to other properties sold in the same geographic area and independent third-party valuations. In estimating the fair values of the tangible assets, intangible assets, and liabilities acquired, the Company also considers information obtained about each property as a result of its pre‑acquisition due diligence, marketing and leasing activities.

 

The value allocated to acquired lease intangibles is based on management’s evaluation of the specific characteristics of each tenant’s lease. Characteristics considered by management in allocating these values include but are not limited to the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease, the tenant’s credit quality, and other factors.

 

The value attributable to the above-market or below-market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below-market leases are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases. Amortization of above and below-market rents resulted in a net increase in rental income of approximately $13,000 for the three months ended March 31, 2022.  Amortization of above and below-market rents resulted in a net increase in rental income of approximately $1,000 for the three months ended March 31, 2021.  

 

The value of in-place leases and unamortized lease origination costs are amortized to expenses over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquired in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what the Company would have paid to a third-party to secure a new tenant reduced by the expired term of the respective lease. The amount allocated to tenant relationships is the benefit resulting from the likelihood of a tenant renewing its lease. Amortization expense related to these assets was approximately $52,000 and $116,000, respectively, for the three months ended March 31, 2022 and March 31, 2021.

 

Deferred Leasing Costs. Costs incurred in connection with successful property leases are capitalized as deferred leasing costs and amortized to leasing commission expense on a straight-line basis over the terms of the related leases which generally range from one to five years. Deferred leasing costs consist of third-party leasing commissions. Management re-evaluates the remaining useful lives of leasing costs as the creditworthiness of the tenants and economic and market conditions change. If management determines the estimated remaining life of the respective lease has changed, the amortization period is adjusted. At March 31, 2022 and  December 31, 2021, the Company had net deferred leasing costs of approximately $1.1 million and $1.3 million, respectively. Total amortization expense for the three months ended March 31, 2022 was approximately $95,000.  Total amortization expense for the three months ended  March 31, 2021, was approximately $85,000.

 

12

 

Cash Equivalents and Restricted Cash. At March 31, 2022 and December 31, 2021, we had approximately $22.5 million  and $14.7 million in cash, cash equivalents and restricted cash, respectively, of which approximately $4.6 million and $4.7 million represented restricted cash, respectively.  The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have an original maturity of three months or less at the date of purchase to be cash equivalents. Items classified as cash equivalents include money market funds. Cash balances in individual banks may exceed the federally insured limit of $250,000 by the Federal Deposit Insurance Corporation (the "FDIC"). No losses have been experienced related to such accounts. At March 31, 2022 and  December 31, 2021, the Company had approximately $15.2 million and $7.3 million, respectively, in deposits in financial institutions that exceeded the federally insurable limits. Restricted cash consists of funds held in escrow for Company lenders for properties held as collateral by the lenders. The funds in escrow are for payment of property taxes, insurance, leasing costs and capital expenditures.

 

Real Estate Held for Sale. Real estate held for sale during the current period is classified as “real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. Mortgage notes payable related to the real estate held for sale during the current period are classified as “mortgage notes payable related to real estate held for sale, net” for all prior periods presented in the accompanying condensed consolidated financial statements. As of March 31, 2022, one commercial property met the criteria to be classified as held for sale and four model homes were classified as held for sale.

 

Deferred Offering Costs. Deferred offering costs represent legal, accounting and other direct costs related to our offerings. As of March 31, 2022 and December 31, 2021, we have incurred approximately $75,000 and $135,000, at the end of each period.  These costs are related to our offering of common and preferred stock in connection with the sponsorship, through our wholly-owned subsidiary Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”), of a special purpose acquisition company (“SPAC”) initial public offering as of December 31, 2021.  As of March 31, 2022, these costs are related to the preparation of a registration statement.  These costs were deferred and recorded as a long-term asset at March 31, 2022 and December 31, 2021.  

 

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

 

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

 

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

 

 

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

 

 

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

 

 

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

 

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

 

13

 

Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources.  As of March 31, 2022 and December 31, 2021, our marketable securities presented on the balance sheet were measured at fair value using Level 1 market prices and totaled approximately $1.0 million and $1.5 million, respectively, with a cost basis of approximately $1.0 million and $1.6 million, respectively.  There were no financial liabilities measured at fair value as of March 31, 2022 and December 31, 2021.

 

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

 

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

 

  

For the Three Months Ended March 31,

 
  

2022

  

2021

 
         

Common Stock Warrants

  2,000,000    

Placement Agent Warrants

  80,000    

Series A Warrants

  14,450,069    

Unvested Common Stock Grants

  568,319   387,980 
         

Total potentially dilutive shares

  17,098,388   387,980 

 

 

14

 

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

 

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

 

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

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

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

 

15

 

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

 

All of the Public Shares of Murphy Canyon SPAC (Class A Common Shares) contain a redemption feature which allows for the redemption of such Public Shares in connection with our liquidation, if there is a stockholder vote or tender offer in connection with our initial business combination and in connection with certain amendments to our amended and restated certificate of incorporation. In accordance with SEC and its guidance on redeemable equity instruments, which has been codified in ASC 480-10-S99, redemption provisions not solely within the control of a company require common stock subject to redemption to be classified outside of permanent equity.  Accordingly, as of March 31, 2022, the Public Shares are presented as temporary equity, outside the shareholder's equity section of the Company's March 31, 2022 balance sheet.

 

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

 

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

 

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

 

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

 

16

 

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

 

3. RECENT REAL ESTATE TRANSACTIONS

 

Acquisitions during the three months ended March 31, 2022

 

 

The Company acquired four model homes for approximately $2.4 million. The purchase price was paid through cash payments of approximately $0.7 million and mortgage notes of approximately $1.7 million.

 

Acquisitions during the three months ended March 31, 2021

 

 

The Company did not acquire any commercial properties or model homes.

 

Dispositions during the three months ended March 31, 2022:

 

 

World Plaza, which was sold on March 11, 2022, for approximately $10.0 million and the Company recognized a loss of approximately $0.3 million.

 

 

The Company disposed of 11 model homes for approximately $5.6 million and recognized a gain of approximately $1.8 million.

 

Dispositions during the three months ended March 31, 2021:

 

 

Waterman Plaza, which was sold on January 28, 2021, for approximately $3.5 million and the Company recognized a loss of approximately $0.2 million.

 

 

Garden Gateway, which was sold on February 19, 2021, for approximately $11.2 million and the Company recognized a loss of approximately $1.4 million.

 

 

The Company disposed of 12 model homes for approximately $4.9 million and recognized a gain of approximately $0.4 million.

 

 

4. REAL ESTATE ASSETS

 

The Company owns a diverse portfolio of real estate assets. The primary types of properties the Company invests in are office, industrial, retail, and triple-net leased model home properties.  We have 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. As of March 31, 2022, the Company owned or had an equity interest in:

 

 

Eight office buildings and One industrial property (“Office/Industrial Properties”) which total approximately 755,862 rentable square feet;

   
 Three retail shopping centers (“Retail Properties”) which total approximately 65,242 rentable square feet; and
   
 

 85 model home residential properties (“Model Homes” or “Model Home Properties”), totaling approximately 260,144 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.

 

17

 

A summary of the properties owned by the Company as of March 31, 2022 and  December 31, 2021 is as follows:

 

  

Date

   

Real estate assets, net (in thousands)

 

Property Name

 

Acquired

 

Location

 

March 31, 2022

  

December 31, 2021

 

World Plaza (1)

 

September 2007

 

San Bernardino, CA

 $  $9,272,213 

Genesis Plaza (3)

 

August 2010

 

San Diego, CA

  8,190,418   8,310,803 

Dakota Center

 

May 2011

 

Fargo, ND

  8,521,851   8,607,360 

Grand Pacific Center (2)

 

March 2014

 

Bismarck, ND

  5,389,189   5,457,447 

Arapahoe Center

 

December 2014

 

Centennial, CO

  8,767,598   8,821,278 

Union Town Center

 

December 2014

 

Colorado Springs, CO

  9,111,213   9,169,387 

West Fargo Industrial

 

August 2015

 

Fargo, ND

  6,972,701   7,025,325 

300 N.P.

 

August 2015

 

Fargo, ND

  2,964,085   2,929,563 

Research Parkway

 

August 2015

 

Colorado Springs, CO

  2,360,283   2,375,943 

One Park Center

 

August 2015

 

Westminster, CO

  8,033,021   7,992,420 

Shea Center II

 

December 2015

 

Highlands Ranch, CO

  19,992,449   20,246,645 

Mandolin (4)

 August 2021 

Houston, TX

  4,852,768   4,875,696 

Baltimore

 

December 2021

 

Baltimore, MD

  8,829,929   8,891,810 

Presidio Property Trust, Inc. properties

       93,985,505   103,975,890 

Model Home properties (5)

 2016 - 2022 

IL, TX, WI

  32,864,698   34,089,046 

Total real estate assets and lease intangibles, net

      $126,850,203  $138,064,936 

 

(1) This property was sold during the three months ended March 31, 2022.

 

(2) This property is held for sale as of March 31, 2022.

 

(3) Genesis Plaza is owned by two tenants-in-common, each of which owns 57% and 43%, respectively, and we beneficially own an aggregate of 76.4%.

 

(4) Mandolin is owned by NetREIT Palm Self-Storage LP, through its wholly owned subsidiary NetREIT Highland LLC, and the Company is the sole general partner and owns 61.3% of NetREIT Palm Self-Storage LP.

 

(5) Includes Model Homes listed as held for sale as of March 31, 2022.

 

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:

 

  

March 31, 2022

  

December 31, 2021

 
  

Lease Intangibles

  

Accumulated Amortization

  

Lease Intangibles, net

  

Lease Intangibles

  

Accumulated Amortization

  

Lease Intangibles, net

 

In-place leases

 $2,515,264  $(2,387,500) $127,764  $2,515,264  $(2,353,782) $161,482 

Leasing costs

  1,261,390   (1,184,053)  77,337   1,261,390   (1,165,701)  95,689 

Above-market leases

  333,485   (333,485)     333,485   (333,485)   
  $4,110,139  $(3,905,038) $205,101  $4,110,139  $(3,852,968) $257,171 

 

18

At  March 31, 2022 and  December 31, 2021, gross lease intangible assets of $0.0 and $1.1 million, respectively, were included in real estate assets held for sale.  At  March 31, 2022 and  December 31, 2021, accumulated amortization related to the lease intangible assets of $0.0 and $1.1 million, respectively, were included in real estate assets held for sale.

The net value of acquired intangible liabilities was approximately $59,407 and $73,130 relating to below-market leases at  March 31, 2022 and  December 31, 2021, respectively.

 

Future aggregate approximate amortization expense for the Company's lease intangible assets is as follows:

 

2022

 $150,272 

2023

  17,526 

2024

  17,526 

2025

  15,670 

2026

  4,107 

Thereafter

   

Total

 $205,101 

 

 

6. OTHER ASSETS

 

Other assets consist of the following:

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 

Deferred rent receivable

 $1,408,733  $1,660,197 

Prepaid expenses, deposits and other

  862,284   473,554 

Investment in marketable securities

  975,176   1,514,483 

Accounts receivable, net

  219,649   401,927 

Right-of-use assets, net

  67,568   74,643 

Other intangibles, net

  67,483   82,483 

Notes receivable

  316,374   316,374 

Deferred offering costs

  75,000   134,843 

Total other assets

 $3,992,267  $4,658,504 

 

 

Periodically, the Company may sell an option in the marketable securities it holds to unrelated third parties for the right to purchase certain securities held within its investment portfolios (“covered call options”). These option transactions are designed primarily to increase the total return associated with holding the related securities as earning assets by using fee income generated from these options. These transactions are not designated as hedging relationships pursuant to accounting guidance ASC 815 and, accordingly, changes in fair values of these contracts, are reported in other non-interest income.  There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events. When we write a covered call option, we forgo, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retain the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation before the sold option expires, and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.
 

As of March 31, 2022, we owned common shares of 13 different publicly traded REITs and an immaterial amount of covered call options in four of those same REITs.  The gross fair market value on our publicly traded REIT securities was $978,840, with covered call options totaling $3,664.  As of March 31, 2022, the net fair value of our publicly traded REIT securities was $975,176 based on the March 31, 2022 closing prices.  As of December 31, 2021, we owned common shares of 19 different publicly traded REITs and an immaterial amount of covered call options in ten of those same REITs.  The gross fair market value on our publicly traded REIT securities was $1,529,185, with covered call options totaling $14,702.  As of December 31, 2021, the net fair value of our publicly traded REIT securities was $1,514,483 based on the December 31, 2021 closing prices. 

 

19

 
 

7. MORTGAGE NOTES PAYABLE

 

Mortgage notes payable consist of the following:

 

  

Principal as of

          
  

March 31,

  

December 31,

 

Loan

 

Interest

     

Mortgage note property

 

2022

  

2021

 

Type

 

Rate (1)

  

Maturity

 

300 N.P. (2)

  2,222,085   2,232,923 

Fixed

  4.95% 

6/11/2022

 

Dakota Center

  9,618,055   9,677,108 

Fixed

  4.74% 

7/6/2024

 

Research Parkway

  1,691,348   1,705,438 

Fixed

  3.94% 

1/5/2025

 

Arapahoe Service Center

  7,728,270   7,770,887 

Fixed

  4.34% 

1/5/2025

 

Union Town Center

  8,135,901   8,173,568 

Fixed

  4.28% 

1/5/2025

 

One Park Centre

  6,247,917   6,276,849 

Fixed

  4.77% 

9/5/2025

 

Genesis Plaza

  6,139,881   6,168,604 

Fixed

  4.71% 

9/6/2025

 

Shea Center II

  17,426,568   17,494,527 

Fixed

  4.92% 

1/5/2026

 

West Fargo Industrial

  4,119,239   4,148,405 

Fixed

  3.27% 

8/5/2029

 

Baltimore

  5,670,000    

Fixed

  4.67% 

4/6/2032

 

Grand Pacific Center (3) (4)

  3,589,291   3,619,695 

Fixed

  4.02% 

8/1/2037

 

Subtotal, Presidio Property Trust, Inc. Properties

 $72,588,555  $67,268,004          

Model Home mortgage notes (4) (5)

  20,924,198   22,154,128 

Fixed

      2022 - 2024 

Mortgage Notes Payable

 $93,512,753  $89,422,132          

Unamortized loan costs

  (673,297)  (562,300)         

Mortgage Notes Payable, net

 $92,839,456  $88,859,832          

 

(1)

Interest rates as of March 31, 2022.

(2)The mortgage note payable for 300 N.P. is an amortizing loan with a balloon payment of $2.2 million due at maturity, on June 11, 2022, and is no longer subject to defeasance or yield maintenance.  The Company paid this note in full on May 11, 2022 with available cash on hand.  
(3)Interest rate is subject to reset on September 1, 2023.
(4)Property held for sale as of March 31, 2022. There were four model homes included as real estate assets held for sale.
(5)Our model homes have stand-alone mortgage note at interest rates ranging from 2.50% to 5.63% per annum as of  March 31, 2022.
  

 

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, 2022:

 

  

Presidio Property

  

Model

     
  

Trust, Inc.

  

Homes

  

Total Principal

 

Years ending December 31:

 Notes Payable  Notes Payable  Payments 

2022

 $3,228,436  $6,508,834  $9,737,270 

2023

  1,406,466   5,508,458   6,914,924 

2024

  10,379,682   8,906,906   19,286,588 

2025

  28,782,213      28,782,213 

2026

  16,644,086      16,644,086 

Thereafter

  12,147,672      12,147,672 

Total

 $72,588,555  $20,924,198  $93,512,753 

 

 

 

 

8. NOTES PAYABLE

 

On April 22, 2020, the Company received an Economic Injury Disaster Loan of $10,000 from the Small Business Administration ("SBA") to 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 fiscal 2020. On  August 17, 2020, we received an additional Economic Injury Disaster Loan ("EIDL") of $150,000, for which principal and interest payments are deferred for twelve months from the date of issuance, and interest accrues at 3.75% per year. The loan matures on August 17, 2050. We have used the funds for general corporate purposes to alleviate economic injury caused by the COVID-19 pandemic, which economic injury included abating or deferring rent to certain tenants (primarily retail tenants).

 

On September 3, 2021, we issued promissory notes to our majority owned subsidiary Dubose Model Home Investors 202 LP and Dubose Model Home Investors 204 LP for the refinancing of four model home properties in Texas and Wisconsin, for $0.9 million with an interest rate of 3.0% per annum and a maturity date of November 15, 2022.   These notes payable and note receivable, including interest expense and interest income related to this promissory note, are eliminated through consolidation on our financial statements.

 

On August 17, 2021, we issued a promissory note to our majority owned subsidiary NetREIT Highland for the acquisition of the Mandolin property in Houston Texas, for $1.56 million with an interest rate of 4.0% per annum and a maturity date of August 17, 2022.   This note payable and note receivable, including interest expense and interest income related to this promissory note, are eliminated through consolidation on our financial statements.  During April 2022, this loan was refinanced with a loan from a third-party bank totaling $3.7 million, with the proceeds being used to pay back our $1.56 million promissory note.

 

On December 20, 2021, we issued a promissory note to our majority owned subsidiary PPT Baltimore for the acquisition of the Baltimore property in Baltimore, MD, for $5.65 million with an interest rate of 4.5% per annum and a maturity date of December 20, 2022.   This note payable and note receivable, including interest expense and interest income related to this promissory note, are eliminated through consolidation on our financial statements.  During March 2022, this loan was refinanced with a loan from a third-party lender totaling $5.67 million, with the proceeds being used to pay back our $5.65 million promissory note.

 

 

9. COMMITMENTS AND CONTINGENCIES

 

The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.

 

Litigation. From time to time, we may become involved in various lawsuits or legal proceedings which arise in the ordinary course of business. Neither the Company nor any of the Company’s properties are presently subject to any material litigation nor, to the Company’s knowledge, is there any material threatened litigation.

 

Environmental Matters. The Company monitors its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, the Company is not currently aware of any environmental liability with respect to the properties that would have a material effect on the Company’s financial condition, results of operations and cash flow. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that the Company believes would require additional disclosure or recording of a loss contingency.

 

Financial Markets.  The Company monitors concerns over economic recession, the COVID-19 pandemic, interest rate increases, policy priorities of the U.S. presidential administration, trade wars, labor shortages, or inflation may contribute to increased volatility and diminished expectations for the economy and markets. Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability. For example, the conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries. The U.S. government and other governments in jurisdictions have imposed severe economic sanctions and export controls against Russia and Russian interests, have removed Russia from the SWIFT system, and have threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia, is unknown. We have not currently experienced a direct material impact to our Company or operations; however, we will continue to monitor the financial markets for events that could impact our commercial real estate properties.

 

21

 

Sponsorship of Special Purpose Acquisition Company.  On January 7, 2022, we announced our sponsorship, through our wholly-owned subsidiary, Murphy Canyon Acquisition Sponsor, LLC (the “Sponsor”), of a special purpose acquisition company (“SPAC”) initial public offering. The SPAC raised $132,250,000 in capital investment to acquire businesses in the real estate industry, including construction, homebuilding, real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and technologies targeting the real estate space, which we may refer to as “Proptech” businesses. We, through our wholly-owned subsidiary, owned approximately 23.5% of the issued and outstanding stock in the entity upon the initial public offering being declared effective and consummated (excluding the private placement units described below), and that following the completion of its initial business combination that the SPAC will operate as a separately managed, publicly traded entity. The SPAC offered $132,250,000 units, with each unit consisting of one share of common stock and three-quarters of one redeemable warrant.  The warrants were evaluated using the guidance in ASC 480 "Distinguishing Liabilities from Equity" and we concluded that the warrants are indexed to Murphy Canyon's common stock and meets the criteria to classified in stockholders equity.

 

The SPAC's ability to complete a business combination may be extended in additional increments of three months up to a total of six (6) additional months from the closing date of the offering, subject to the payment into the Trust Account by the Sponsor (or its designees or affiliates) of the sum of $1,322,500, representing the sum of $0.10 per share of Common Stock sold to Public Stockholders, and which extension payments, if any, shall be added to the Trust Account.  The Company has committed to provide additional funds if needed to make such a deposit for the extension.

 

The Murphy Canyon IPO, of 13,225,000 units (“Units”) and, with respect to the common stock included in the Units being offered, the (“Public Shares”), closed on February 7, 2022, raising gross proceeds for Murphy Canyon of $132,250,000, including the exercise in full by the underwriters of their over-allotment option. In connection with the IPO, we purchased, through the Sponsor, 754,000 placement units (the “placement units”) at a price of $10.00 per unit, for an aggregate purchase price of $7,540,000.  The Sponsor has agreed to transfer an aggregate of 45,000 placement units (15,000 each) to each of Murphy Canyon’s independent directors.  These proceeds were deposited in a trust account established for the benefit of the Murphy Canyon public shareholders and are included in Investments held in Trust in the accompanying condensed consolidated balance sheet at March 31, 2022In connection with the initial public offering, Murphy Canyon incurred $7,738,161 in issuance costs, including $2,645,000 of underwriting discounts and commission, $4,628,750 of deferred underwriting fees and $464,411 of other offering costs.  These costs were allocated to temporary and permanent equity and offset against the proceeds.

 

Immediately following the IPO, Murphy Canyon began to evaluate acquisition candidates in the real estate industry, including construction, homebuilding, real estate owners and operators, arrangers of financing, insurance, and other services for real estate, and adjacent businesses and technologies targeting the real estate space with an aggregate combined enterprise value of approximately $300 million to $1.2 billion. Murphy Canyon’s goal is to complete its initial business combination (“IBC”) within one year of its IPO.  We expect Murphy Canyon to operate as a separately managed, publicly traded entity following the completion of the IBC, or “De-SPAC”. 

 

 

10. 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 set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series of Preferred Stock.

 

On June 15, 2021, the Company completed its secondary offering of 800,000 shares of our Series D Preferred Stock for cash consideration of $25.00 per share to a syndicate of underwriters led by Benchmark, as representative, resulting in approximately $18.1 million in net proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company. The Company granted the underwriters a 45-day option to purchase up to an additional 120,000 shares of Series D Preferred Stock to cover over-allotments, which they exercised on June 17, 2021, resulting in approximately $2.7 million in net proceeds, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company.  In total, the Company issued 920,000 shares of Series D Preferred Stock with net proceeds of approximately $20.5 million, after deducting the underwriting discounts and commissions and the offering expenses paid by the Company and deferred offering costs.  The Series D Preferred Stock is listed and trading on The Nasdaq Capital market under the symbol SQFTP.   The Company has used these proceeds for general corporate and working capital purposes, including acquiring additional properties.  Below are some of the key terms of the Series D Preferred Stock:

 

Dividends:

Holders of shares of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 9.375% per annum of the $25.00 per share liquidation preference (equivalent to $2.34375 per annum per share). Dividends will be payable monthly on the 15th day of each month (each, a “Dividend Payment Date”), provided that if any Dividend Payment Date is not a business day, then the dividend that would otherwise have been payable on that Dividend Payment Date may be paid on the next succeeding business day without adjustment in the amount of the dividend.

 

22

 

Voting Rights:

Holders of shares of the Series D Preferred Stock will generally have no voting rights. However, if the Company does not pay dividends on the Series D Preferred Stock for eighteen or more monthly dividend periods (whether or not consecutive), the holders of the Series D Preferred Stock (voting separately as a class with the holders of all other classes or series of the Company’s preferred stock it may issue upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Series D Preferred Stock in the election referred to below) will be entitled to vote for the election of two additional directors to serve on the Company’s  Board of Directors until the Company pays, or declares and sets apart funds for the payment of, all dividends that it owes on the Series D Preferred Stock, subject to certain limitations.

 

In addition, the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series D Preferred Stock (voting together as a class with all other series of parity preferred stock the Company may issue upon which like voting rights have been conferred and are exercisable) is required at any time for the Company to (i) authorize or issue any class or series of its stock ranking senior to the Series D Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution or winding up or (ii) to amend any provision of the Company charter so as to materially and adversely affect any rights of the Series D Preferred Stock or to take certain other actions. 

 

Liquidation Preference:

In the event of the Company’s voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of Series D Preferred Stock will be entitled to be paid out of the assets the Company has legally available for distribution to its stockholders, subject to the preferential rights of the holders of any class or series of its stock the Company may issue ranking senior to the Series D Preferred Stock with respect to the distribution of assets upon liquidation, dissolution or winding up, a liquidation preference of $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any distribution of assets is made to holders of the Company’s common stock or any other class or series of the Company’s stock it may issue that ranks junior to the Series D Preferred Stock as to liquidation rights.

 

In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the Company’s available assets are insufficient to pay the amount of the liquidating distributions on all outstanding shares of Series D Preferred Stock and the corresponding amounts payable on all shares of other classes or series of the Company’s stock that it issues ranking on parity with the Series D Preferred Stock in the distribution of assets, then the holders of the Series D Preferred Stock and all other such classes or series of stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. 

 

Redemption:

Commencing on or after June 15, 2026, the Company may redeem, at its option, the Series D Preferred Stock, in whole or in part, at a cash redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including the redemption date. Prior to June 15, 2026, upon a Change of Control (as defined in the Articles Supplementary), the Company may redeem, at its option, the Series D Preferred Stock, in whole or part, at a cash redemption price of $25.00 per share, plus any accumulated and unpaid dividends to, but not including the redemption date. The Series D Preferred Stock has no stated maturity, will not be subject to any sinking fund or other mandatory redemption, and will not be convertible into or exchangeable for any of our other securities.

 

In accordance with the terms of the Series D Preferred Stock, the Series D monthly dividend has been approved by the Board of Directors through June 2022 in the amount of $0.19531 per share payable on the 15th of every month to stockholders of record of Series D Preferred Stock as of the last day of the prior month.  Total dividends paid to Series D Preferred stockholders during the three months ended March 31, 2022 was $539,055

 

Common Stock. The Company is authorized to issue up to 100,000,000 shares of Series A Common Stock, 1,000 shares of Series B Common Stock, and 9,000,000 shares of Series C Common Stock (collectively, the "Common Stock") each with $0.01 par value per share. Each class of Common Stock has 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 the Company's liquidation. No shares of Series B or Series C Common Stock have been issued. Each share of Common Stock entitles the holder to one vote. Shares of our Common Stock are not subject to redemption and do not have any preference, conversion, exchange, or preemptive rights. The Company’s charter contains restrictions on the ownership and transfer of the Common Stock that prevents one person from owning more than 9.8% of the outstanding shares of common stock.

 

23

 

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 Warrants were sold together at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal exercise price of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, were exercisable upon issuance and will expire five years from the date of issuance. 

 

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

 

The Company evaluated the accounting guidance in ASC 480 and ASC 815 regarding the classification of the Pre-Funded Warrant, Common Stock Warrants, and Placement Agent Warrants as equity or a liability and ultimately determined that it should be classified as permanent equity.  As of March 31, 2022, none of the Common Stock Warrants and Placement Agent Warrants have been exercised.

 

Stock Repurchase Program.  On September 17, 2021, the Board of Directors authorized a stock repurchase program of up to $10 million of outstanding shares of our Series A Common Stock.  During September 2021, the Company was able to purchase 18,133 shares at an average price of $3.73692 per share, plus commission of $0.035 per share, for a total cost of $68,396.  During December 2021, the Company was able to purchase 11,588 shares at an average price of $3.6097 per share, plus commission of $0.035 per share, for a total cost of $42,235.  These shares will be treated as unissued in accordance with Maryland law and shown as a reduction of stockholders' equity at cost.  While we will continue to pursue value creating investments, the Board believes there is significant embedded value in our assets that is yet to be realized by the market. Therefore, returning capital to shareholders through a repurchase program is an attractive use of capital currently.

 

Cash Dividends on Common Stock.  For the three months ended March 31, 2022, the Company declared and paid cash dividends of approximately $1.3 million. For the three months ended March 31, 2021 the Company declared and paid  $1.0 million.  The Company intends to continue to pay dividends to our common stockholders on a quarterly basis, 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 following is a summary of distributions declared per share of our Series A Common Stock and for our Series D Preferred Stock for the three months ended March 31, 2022 and 2021.

 

Series A Common Stock

 

Quarter Ended

 

2022

  

2021

 
  

Distributions Declared

  

Distributions Declared

 

March 31

 $0.105  $0.101 

Total

 $0.105  $0.101 

 

 

Series D Preferred Stock

 

Month

 

2022

  

2021

 
  

Distributions Declared

  

Distributions Declared

 

January

 $0.19531  $ 

February

  0.19531    

March

  0.19531    

Total

 $0.586  $ 

 

 

 

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

 

Partnership Interests. Through the Company, its subsidiaries, and its partnerships, we own 12 commercial properties in fee interest, two of which we own partial interests in through our holdings in various affiliates in which we serve as general partner, member and/or manager. Each of the limited partnerships is referred to as a “DownREIT.” In each DownREIT, we have the right, through put and call options, to require our co-investors to exchange their interests for shares of our Common Stock at a stated price after a defined period (generally five years from the date they first invested in the entity’s real property), the occurrence of a specified event or a combination thereof. The Company is a limited partner in five partnerships and sole stockholder in one corporation, which entities purchase and leaseback model homes from homebuilders.

 

Dividend Reinvestment Plan. The Company adopted a distribution reinvestment plan (the “DRIP”) that allowed stockholders to have 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 DRIP. The purchase price per share used in the past was 95% of the price the Company sold its shares, or $19.00 per share. No sales commission or dealer manager fees were paid on shares sold through the DRIP. The Company may amend, suspend or terminate the DRIP at any time. Any such amendment, suspension or termination is effective upon a designated dividend record date and notice of such amendment, suspension or termination is sent to all participants at least thirty (30) days prior to such record date. The DRIP became effective on January 23, 2012, was suspended on December 7, 2018 and adopted on October 6, 2020 in connection with our IPO, and updated to reflect a change in transfer agent and registrar. As of March 31, 2022, approximately $17.4 million or approximately 917,074 shares of Common Stock have been issued under the DRIP. No shares were issued under the DRIP since it was suspended in 2018.

 

11. SHARE-BASED INCENTIVE PLAN

 

The Company maintains a restricted stock incentive plan for the purpose of attracting and retaining officers, employees, and non-employee board members. Share awards generally vest in equal annual installments over a three to ten year period from date of issuance. Non-vested shares have voting rights and are eligible for any dividends paid to common shares. The Company recognized compensation cost for these fixed awards over the service vesting period, which represents the requisite service period, using the straight-line method. Prior to our IPO, the value of non-vested shares was calculated based on the offering price of the shares in the most recent private placement offering of $20.00, adjusted for stock dividends since granted and assumed selling costs, which management believed approximated fair market value as of the date of grant. Upon our IPO, the value of non-vested shares granted is calculated based on the closing price of our common stock on the date of the grant.

 

A summary of the activity for the Company’s restricted stock was as follows:

 

Outstanding shares:

 

Common Shares

 
     

Balance at December 31, 2021

  295,471 

Granted

  369,377 

Forfeited

  (8,780)

Vested

  (87,749)

Balance at March 31, 2021

  568,319 

 

 

 

The non-vested restricted shares outstanding as of March 31, 2022 will vest over the next one to seven years.

 

The value of non-vested restricted stock granted as of  March 31, 2022 and  December 31, 2021 was approximately $2.3 million and $0.9 million, respectively.

 

Share-based compensation expense for the three months ended March 31, 2022, was approximately $0.3 million.  During the three months ended March 31, 2021, share-based compensation expense was approximately $0.3 million, respectively. 

 

 

12. SEGMENTS

 

The Company’s reportable segments consist of three types of 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.  There is no material 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 regarding allocation of resources.

 

The following tables compare the Company’s segment activity to its results of operations and financial position as of and for the three months ended March 31, 2022 and March 31, 2021:

 

  

Three Months Ended March 31,

 
  

2022

  

2021

 

Office/Industrial Properties:

        

Rental, fees and other income

 $3,122,888  $3,942,805 

Property and related expenses

  (1,356,534)  (1,854,272)

Net operating income, as defined

  1,766,354   2,088,533 

Model Home Properties:

        

Rental, fees and other income

  710,328   943,777 

Property and related expenses

  (27,768)  (50,285)

Net operating income, as defined

  682,560   893,492 

Retail Properties:

        

Rental, fees and other income

  753,341   782,172 

Property and related expenses

  (212,587)  (234,366)

Net operating income, as defined

  540,754   547,806 

Reconciliation to net loss:

        

Total net operating income, as defined, for reportable segments

  2,989,668   3,529,831 

General and administrative expenses

  (1,583,691)  (1,537,265)

Depreciation and amortization

  (1,339,225)  (1,428,934)

Interest expense

  (1,017,713)  (1,584,394)

Gain on extinguishment of government debt

     10,000 

Other income (expense), net

  73,605   (32,785)

Income tax expense

  (265,239)  (50,199)

Gain (loss) on sale of real estate

  1,522,785   (1,161,328)

Net income (loss)

 $380,190  $(2,255,074)

 

 

 
  

March 31,

  

December 31,

 

Assets by Reportable Segment:

 

2022

  

2021

 

Office/Industrial Properties:

        

Land, buildings and improvements, net (1)

 $77,623,021  $78,240,086 

Total assets (2)

 $75,031,111  $76,453,436 

Model Home Properties:

        

Land, buildings and improvements, net (1)

 $32,864,698  $34,089,046 

Total assets (2)

 $32,039,086  $