PRESIDIO PROPERT(SQFTP) - 2023 Q4 - Annual Report

Cautionary Language Regarding Forward-Looking Statements, Risk Factors and Industry Data This section outlines forward-looking statements and inherent risks in real estate investment, competition, economic challenges, and regulatory compliance - This 10-K report contains forward-looking statements involving uncertainties such as inherent risks in real estate investment, intense competition, declining demand for commercial space, major tenant defaults, economic challenges, insufficient cash flow for dividends or debt service, financing difficulties, unfavorable changes in real estate financing markets, potential uninsured losses, failed acquisitions or dispositions, reliance on third-party property managers, changes in single-family home supply and demand, failure to maintain REIT qualification, legal proceedings, changes in laws and regulations, Nasdaq delisting risk, bank deposit losses, inflation, and activist shareholder actions[14][16] Part I Business Overview Presidio Property Trust, Inc. is an internally managed REIT investing in a diversified portfolio of multi-tenant commercial properties and model homes, aiming to maximize shareholder value through active management and strategic acquisitions Company Profile and Corporate Structure Presidio Property Trust, Inc. is an internally managed Maryland REIT, owning and having interests in commercial properties and model homes through various entities - Presidio Property Trust, Inc. is an internally managed real estate investment trust (REIT), incorporated in California on September 28, 1999, reorganized as a Maryland corporation in August 2010, and renamed Presidio Property Trust, Inc. in October 2017[18] - The company owns fee simple interests in 12 commercial properties through itself, its subsidiaries, and partnerships, and holds partial interests in two commercial properties through its affiliates acting as general partners, members, and/or managers[18] - The company is a limited partner in five partnerships and owns all shares of one company, with these entities primarily engaged in purchasing and leasing back model homes to homebuilders[18] Market and Business Strategy The company invests in a diversified portfolio of multi-tenant real estate assets, primarily focusing on office, industrial properties, and model homes across several states - The company invests in a diversified portfolio of multi-tenant real estate assets, primarily focusing on office and industrial properties and model homes since 2015, gradually exiting retail properties[19] - Commercial properties are currently located in Colorado, North Dakota, California, Maryland, and Texas, with approximately 155 commercial tenants and an average remaining lease term of approximately 3.1 years as of December 31, 2023[19] - The company's primary goal is to maximize long-term shareholder value through managing, leasing, and selectively redeveloping its existing commercial property portfolio, as well as selectively acquiring future properties with value-add potential[20] Recent Developments The company engaged in significant acquisitions and dispositions of model homes in 2023 and 2022, implemented stock repurchase programs, and completed a SPAC business combination Significant Transactions in 2023 and 2022 | Transaction Type | 2023 | 2022 | | :--- | :--- | :--- | | Acquisitions | | | | Number of Model Homes | 40 units | 31 units | | Purchase Price | $21.9 million | $15.6 million | | Cash Paid | $6.6 million | $4.8 million | | Mortgages | $15.3 million | $10.8 million | | Dispositions | | | | Number of Model Homes | 22 units | 31 units | | Sales Proceeds | $11.7 million | $17.5 million | | Gain on Dispositions | $3.2 million | $5.4 million | | World Plaza Sale | Not applicable | $10.0 million | | World Plaza Loss on Disposition | Not applicable | $0.3 million | - As of December 31, 2023, the company owned 110 model homes with a net book value of approximately $50.8 million, primarily located in five U.S. states[24] - The company provides management services to its limited partnerships through its wholly-owned subsidiaries, NetREIT Advisors, LLC and Dubose Advisors LLC, and collects management fees, acquisition fees, and other fees[28] Stock Repurchase Program | Stock Type | Repurchase Year | Number of Shares Repurchased | Average Price (per share) | Total Cost | | :--- | :--- | :--- | :--- | :--- | | Series A Common Stock | 2022 | 196,631 shares | ~$1.59 | $313,578 | | Series D Preferred Stock | 2022 | 6,013 shares | ~$20.31 | $122,141 | | Series A Common Stock | 2023 | 0 shares | — | $0 | | Series D Preferred Stock | 2023 | 23,041 shares | ~$15.97 | $0.2 million | | Current Authorization (Authorized Nov 2023, Expires Nov 2024) | | | | | | Series A Common Stock | | | | Up to $6.0 million | | Series D Preferred Stock | | | | Up to $4.0 million | - The company entered into an At-The-Market Offering Agreement with The Benchmark Company, LLC on November 8, 2021, to offer and sell up to $4,399,000 of Series A common stock, but no sales were made as of December 31, 2023[31] - The company was a sponsor of Murphy Canyon Acquisition Corp., a special purpose acquisition company (SPAC), which completed its business combination with Conduit Pharmaceuticals Limited on September 22, 2023, resulting in the company holding approximately 6.3% of Conduit Pharmaceuticals Inc.'s common stock post-merger[32] - On January 2022, the company distributed Series A warrants to Series A common stockholders, granting the right to purchase one share of Series A common stock at $7.00 per share for five years, with unexercised warrants automatically converting to 1/10th of a Series A common share upon expiration[33] - The company completed the issuance of 920,000 shares of 9.375% Series D Cumulative Redeemable Perpetual Preferred Stock on June 15, 2021, generating net proceeds of approximately $20.5 million, with dividends paid at a fixed annual rate of 9.375% and having liquidation preference and limited voting rights[34][35][36] Use of Leverage The company utilizes mortgage financing, primarily non-recourse and fixed-rate, to maximize shareholder returns while managing debt obligations and maturities - The company uses mortgage financing to maximize shareholder returns, with loan terms typically five to ten years, and most loans being non-recourse to limit company risk[38] - As of December 31, 2023, approximately $11.2 million of the company's total debt was recourse debt, with $5.9 million related to model home properties[38] - The company prefers fixed-rate mortgage loans for cost predictability, and as of December 31, 2023, all mortgage loans had no floating rate terms[39] - In 2024, the company faces $13.1 million in model home mortgage principal payments, of which $12.5 million are maturing loans, and $10.4 million in commercial property mortgage principal payments, including one Dakota Center loan maturing in July 2024[40] Property Management The company primarily manages its properties through a wholly-owned subsidiary, supplementing with third-party services in specific regions and internal management elsewhere - The company primarily manages all properties through its wholly-owned subsidiary, NTR Property Management, Inc., while subcontracting third-party property management companies for on-site services in California and North Dakota, and managing properties in Colorado, Maryland, and Texas internally[42] Competition The company faces intense competition from various real estate investors, with its commercial properties' geographic concentration increasing local market condition susceptibility - The company faces intense competition from other real estate investors, including REITs, pension funds, insurance companies, and investment funds, many of which have greater financial resources and can assume higher risks or invest at lower costs[43] - The geographic concentration of commercial properties in Colorado and North Dakota makes the company vulnerable to local market conditions in these areas[43] Regulation The company continuously reviews investment activities to avoid being deemed an investment company and adheres to environmental laws and regulations, conducting pre-acquisition environmental assessments - The company continuously reviews its investment activities to avoid being deemed an investment company under the Investment Company Act of 1940 and complies with various environmental laws and regulations, including those related to asbestos, lead-based paint, and waste management[45] - The company conducts environmental assessments prior to acquisitions to minimize environmental risks and has not identified any environmental hazards that would materially adversely affect its operations or financial condition to date[46][47] Management of the Company The company's management team includes key executives and a six-member board of directors, with a majority of independent directors - The company's management includes Jack K. Heilbron as Chairman and CEO, Ed Bentzen as CFO, Gary M. Katz as CIO, and Steven Hightower as President of NetREIT Dubose[48] - As of December 31, 2023, the company's board of directors consisted of six directors, four of whom were independent[50] Our REIT Status The company has maintained its REIT qualification since fiscal year 2000, requiring adherence to organizational and operational requirements, including annual income distribution - The company elected to be taxed as a REIT for federal income tax purposes starting from the fiscal year 2000 and has maintained its REIT qualification for the fiscal year 2023[51] - To maintain REIT qualification, the company must satisfy various organizational and operational requirements, including distributing at least 90% of its REIT taxable income to shareholders annually[51] Human Capital Resources The company's human capital management strategy focuses on retaining top talent and enhancing business agility, aligning with its operational needs - The company's human capital management strategy is closely aligned with its business needs, with a primary focus in 2023 on retaining top talent and improving business agility[52] Office and Employees The company operates from a 9,224 square foot office in San Diego, California, with a total of 15 full-time employees as of December 31, 2023 - The company's office is located in San Diego, California, covering approximately 9,224 square feet[53] - As of December 31, 2023, the company had a total of 15 full-time employees[54] Available Information The company's annual, quarterly, and other SEC filings are accessible on the SEC website and the company's corporate website - The company's annual reports, quarterly reports, and other SEC filings are available on www.sec.gov or the company's website at www.presidiopt.com[55](index=55&type=chunk) Risk Factors The company faces diverse risks including real estate market volatility, financial market disruptions, operational challenges, regulatory compliance, and potential impacts on its REIT status and equity securities Summary of Risk Factors Key risks encompass real estate industry inherent challenges, financial market instability, property value impairment, reliance on key personnel, and potential loss of REIT status - Major risks include real estate industry risks, financial market disruptions, impairment of real estate investment values, difficulty selling properties, limited control in joint ventures, dependence on the model home business, geographic concentration of properties, reliance on internal cash flow, loss of key personnel, changes in investment policies, Maryland law restrictions on acquisitions, management conflicts of interest, high indebtedness, loss of REIT qualification, tax liabilities, prohibited transaction taxes, COVID-19 pandemic impacts, insufficient dividend payments, stock dilution, decline in Conduit equity investment value, Nasdaq delisting, bank deposit losses, inflation, and activist shareholder actions[58][60] Risks Related to our Business, Properties and Operations Risks include economic downturns, inflation, financial market disruptions, COVID-19 impacts, competition, illiquidity of real estate, tenant defaults, and reliance on key personnel - Real estate industry risks include changes in economic conditions, interest rate fluctuations, tenant payment ability, competition, increased operating costs, weather conditions, oversupply of commercial space, changes in laws and regulations, and natural disasters[61][64] - Inflation may lead to increased property operating and management expenses that outpace rent growth and could affect tenants' ability to pay rent and renew leases[63] - Financial market conditions may affect the company's ability to obtain financing, leading to higher borrowing costs, reduced returns on real estate investments, and potential impacts on property values and refinancing capabilities[66][67][68] - The COVID-19 pandemic and its potential resurgence could lead to decreased rental income, property closures, reduced demand for commercial space, default or bankruptcy of major tenants, inability to reduce fixed expenses, limited capacity of third-party service providers, disruption of builder operations, financing difficulties, breach of financial covenants, asset impairment, and increased cybersecurity risks[69][71][72][74][76] - The company's portfolio of marketable securities faces market, interest rate, and credit risks, which could lead to a decline in their value and impact the company's earnings[75] - Adverse economic changes in the geographic areas where properties are located could negatively impact the value of the real estate portfolio[77] - Intense competition in the property acquisition market may limit investment opportunities and increase acquisition costs, affecting the company's growth prospects and profitability[78] - Real estate investments are relatively illiquid, and the company may be unable to sell properties at desired times and conditions, limiting its ability to realize investment gains and pay dividends[79] - Default or termination of leases by major tenants could result in lost income and potentially incur high re-leasing costs or lead to a decrease in property value[80][81] - Property improvements may require substantial costs, and construction delays could affect income and debt service ability[82] - Insurance may not fully cover certain catastrophic losses, leading the company to bear uninsured or underinsured losses[83] - The company does not maintain permanent cash reserves and may face funding difficulties during increased expenses or unexpected outlays[84] - The company may need to provide credit to property buyers, and buyer defaults could adversely affect the company's operations and dividend payments[85] - Trends in remote work and co-working spaces may erode demand for office space, putting downward pressure on occupancy rates, rents, and property valuations[86] - Holding properties through joint ventures, partnerships, or limited liability companies may limit the company's control and ability to liquidate assets[87] - As a general partner or member of DownREIT entities, the company may be liable for all liabilities of these entities beyond its initial investment[88] - Property operations may be subject to contractual restrictions, affecting their maximum value realization[89] - Acquiring properties "as is" increases the company's risk of having to remedy defects or bear costs without recourse[90] - The model home business is highly dependent on the supply and demand for single-family homes, and market changes could affect acquisition opportunities and rent payment ability[91][92] - The limited number of model homes and intense competition may make it difficult for the company to acquire and manage more model homes at competitive prices[93][94] - Geographic concentration of properties increases the company's exposure to adverse economic developments and extreme weather events in specific regions[95][96] - Accounting standards may require impairment of one or more properties, which could have a significant adverse effect on the company's operating results and financial condition[97] - The discovery of toxic mold on properties could lead to costly remediation programs and liability claims from third parties[98] - The company's long-term growth may depend on obtaining additional equity capital, and inability to do so could affect asset growth and dividend payments[99][100][101] - The availability and timing of dividend payments are subject to various factors, and there is no guarantee of future dividend payments, maintenance, or increases[102][103] - The company relies on key personnel, and their loss could harm the company's ability to achieve its business objectives[104][105] - The company relies on third-party property managers and brokers to lease properties, and issues with them could adversely affect property operations and profitability[106] - The board of directors may change investment and business policies without shareholder consent, potentially increasing operational risks[107] - If deemed an investment company under the Investment Company Act, the company may need to alter its business model and impair its ability to operate as a REIT[108] - Maryland law provisions may restrict third-party acquisitions of the company or affect changes in control, including "business combination" and "control share" provisions[109][110][111] - The board may approve the issuance of stock, including preferred stock, with provisions that could deter third-party acquisitions[112] - The company's charter limits shareholders' rights to take action against directors and officers, potentially restricting shareholder recourse in the event of adverse conduct[114][119] - Management may face conflicts of interest, affecting the implementation of business strategies and shareholder returns[115][116] - The company relies on automated processes and the internet, facing system security risks and cyberattack risks that could lead to data breaches, business interruptions, and reputational damage[117][118][120] - Legislative uncertainty and political rhetoric could lead to market economic impacts, including capital market accessibility, real estate values, and rising interest rates[121] - Bank institution failures could result in losses of company deposits, reducing cash available for distribution or investment[122] - The value of the company's equity investment in Conduit may decline due to external factors, significantly adversely affecting future expansion, revenue, and profits[123][124] Risks Related to our Indebtedness The company's substantial debt, including mortgage obligations, poses risks of default, liquidity constraints, and limitations on operational and dividend policies - As of December 31, 2023, the company's total debt was approximately $108.5 million, and it may face default risk if it cannot generate sufficient cash flow to service its debt, affecting liquidity, financing ability, and dividend payments[125][126] - Mortgage loans and other borrowings increase operational risks, and failure to make timely debt payments could result in lenders charging default interest rates or foreclosing on properties[128] - Lenders typically require restrictive covenants, affecting the company's dividend and operating policies, borrowing capacity, and ability to resell properties[129] - Financing arrangements involving large, lump-sum repayment obligations may affect the company's ability to pay dividends, and it may be unable to refinance or sell properties on favorable terms when due[130][131] Risks Related to our Status as a REIT and Related Federal Income Tax Matters Failure to maintain REIT status could result in significant tax liabilities, while compliance requirements may force unfavorable financial decisions and expose the company to various tax penalties - Failure to maintain REIT qualification could result in the company being subject to federal income tax at regular corporate rates and potentially being unable to re-qualify as a REIT for four years, thereby reducing distributable cash[132] - Even if REIT qualification is maintained, the company may still face federal, state, and local tax burdens, including corporate income tax on undistributed income, a 4% excise tax on undistributed income, the highest corporate income tax rate on foreclosure property sales income, a 100% penalty tax on prohibited transactions, and federal corporate income tax on taxable REIT subsidiaries (TRS)[133][135] - The company's holdings in TRS are restricted, and transactions with TRS that do not comply with arm's-length principles may incur a 100% penalty tax[133][134] - To meet REIT minimum distribution requirements or working capital needs, the company may be forced to borrow short-term, sell assets, or issue securities, even if market conditions are unfavorable[136][137] - Tax restrictions on "prohibited transactions" for REITs may limit the company from engaging in certain transactions deemed sales and could result in a 100% penalty tax[138] - Legislation or other actions affecting REITs could negatively impact investors and the company, including changes in tax laws[139] - REIT stock ownership limitations (no more than 50% of value held by five or fewer individuals) and the company's charter's 9.8% ownership limit may prevent potential acquisitions, thereby depriving shareholders of a premium opportunity[140] - Dividends paid by REITs are generally taxed at ordinary income rates, which may reduce shareholders' net cash income and adversely affect the company's ability to raise capital through common stock issuances in the future[141] - Tax-exempt shareholders may be subject to unrelated business taxable income (UBTI) tax on dividends distributed by the company[142] - The company has material weaknesses in internal controls, primarily due to a lack of formal review and approval processes for non-recurring significant transactions related to income tax provisions and insufficient internal controls design; failure to effectively remediate these could lead to material misstatements in financial statements, impacting investor confidence and financial performance[143][144][145][146][147] Risks Related to our Common Stock, Preferred Stock and Series A Warrants Risks include potential delisting from Nasdaq, subordination of preferred stock, limited voting rights, dividend payment uncertainty, redemption risks, and market price volatility for all equity securities - Failure to comply with Nasdaq Capital Market's continued listing requirements could result in the delisting of the company's common stock, affecting market price, liquidity, and financing ability[148][149] - Series D preferred stock is subordinate to existing and future debt and may be diluted by the issuance of additional preferred stock or other transactions[150] - Series D preferred stockholders have extremely limited voting rights, primarily restricted to adverse changes in preferred stock terms and the issuance of senior preferred stock[151] - The company's cash flow may be insufficient to pay expected dividends on Series D preferred stock, and it may need to borrow or sell assets to pay dividends, affecting operations[152] - Maryland law requirements may prevent the company from paying cash dividends on Series D preferred stock[153][154] - The company may redeem Series D preferred stock, preventing holders from receiving expected dividends, and the preferred stock has no maturity date or mandatory redemption date[155][156][157] - Series D preferred stock is not convertible into common stock, so an increase in common stock price will not result in corresponding gains[158] - Change of control rights may make it more difficult for third parties to acquire the company or deter acquisitions[159] - The company's charter specifies exclusive forums for certain litigation, which may limit shareholders' ability to choose a favorable judicial forum[160] - Nasdaq listing does not guarantee an active market for Series D preferred stock, and its market price and trading volume may fluctuate significantly due to various factors[161][162][167][168][169][170][171] - The sale of a large number of shares in a short period could lead to a decrease in the market price of Series D preferred stock[173][174] - Broad market fluctuations could negatively impact the market price of Series D preferred stock[176] - The company's cash distribution levels may adversely affect the market price of Series D preferred stock[177] - Future issuances of debt or preferred stock could adversely affect the market price of Series D preferred stock[178][179] - Series A warrants may have no value, and their exercise price may not be related to the common stock market price[180][181] - An active trading market for warrants may not be sustained[182] - Warrant holders do not have the rights of common stockholders until they exercise their warrants and receive common stock[183] - Maryland law requirements may prevent the company from paying cash dividends on Series A common stock[184] - Activist shareholder actions could result in significant costs for the company, divert management's attention and resources, and adversely affect the business[185] Risks Related to Legal and Regulatory Requirements Compliance with government regulations, environmental laws, and accessibility mandates may increase costs, reduce distributable cash, and expose the company to liabilities - The cost of complying with government laws and regulations may reduce the company's net income and distributable cash, including zoning, environmental, land use, disability access, and air and water quality regulations[186] - Property contamination or failure to properly remediate contamination could affect tenant operations, lead to third-party liability, and hinder property sales or leases[187][194][195][196][197] - Compliance with the Americans with Disabilities Act (ADA) may require unexpected expenditures, affecting operating performance[188][189] - Property taxes may increase due to changes in tax rates, reassessments, or changes in tax laws, adversely affecting cash flow, particularly if California's Proposition 13 is repealed or modified[190] - The company is subject to California laws requiring board gender and diversity quotas and may face recruitment challenges, financial penalties, and reputational damage[191][192][193] Unresolved Staff Comment The company has no unresolved staff comments regarding its periodic or current reports - The company has no unresolved staff comments regarding its periodic or current reports[198] Cybersecurity Presidio Property Trust employs a cross-functional approach to cybersecurity, involving management, external advisors, and the board, and has not experienced any material adverse cyber incidents to date - Presidio Property Trust employs a cross-functional approach to cybersecurity, involving senior management, employees, external advisors, and the board of directors[199] - The company operates in a SaaS IT environment and assesses cybersecurity risks of third-party service providers, requiring them to provide SOC 1 or SOC 2 reports[200] - The company has engaged third-party managed service providers for server, network, and email security, and maintains robust business continuity and disaster recovery procedures, along with cybersecurity insurance[201] - The company has developed company-wide cybersecurity policies and procedures and conducts annual internal reviews[202] - To date, the company has not experienced any cyber incidents that have had a material adverse effect on its business, financial condition, results of operations, or cash flows[203] Properties The company invests in a diversified portfolio of multi-tenant real estate assets, primarily including office/industrial, retail, and model home properties, mainly located in the Western U.S General Information As of December 31, 2023, the company's portfolio comprises 9 office/industrial buildings, 3 retail centers, and 110 model homes, with its largest tenant contributing 6.43% of 2023 total revenue - As of December 31, 2023, the company owned or had interests in 9 office/industrial buildings (approximately 758,175 square feet), 3 retail centers (approximately 65,242 square feet), and 110 model homes[204] - Property income primarily derives from base rents with lease terms of one to five years, and most leases include contractual rent escalation clauses[204] - The company's largest tenant accounted for 6.43% of total revenue in 2023[204] Geographic Diversification Table The company's office/industrial, retail, and model home properties are geographically diversified across several states, with significant concentrations in Colorado and North Dakota for commercial properties and the Southwest for model homes Office/Industrial and Retail Property Geographic Distribution (as of December 31, 2023) | State | Number of Properties | Total Square Feet | % of Total Square Feet | Current Annualized Base Rent | % of Total Annualized Base Rent | | :--- | :--- | :--- | :--- | :--- | :--- | | California | 1 | 57,807 | 7.0% | $1,425,269 | 12.9% | | Colorado | 5 | 324,245 | 39.4% | $4,883,335 | 44.2% | | Maryland | 1 | 31,752 | 3.9% | $710,248 | 6.4% | | North Dakota | 4 | 399,113 | 48.4% | $3,687,043 | 33.5% | | Texas | 1 | 10,500 | 1.3% | $335,973 | 3.0% | | Total | 12 | 823,417 | 100.0% | $11,041,868 | 100.0% | Model Home Property Geographic Distribution (as of December 31, 2023) | Geographic Region | Number of Properties | Total Square Feet | % of Total Square Feet | Current Annualized Base Rent | % of Total Annualized Base Rent | | :--- | :--- | :--- | :--- | :--- | :--- | | Midwest | 4 | 12,307 | 3.7% | $182,748 | 4.3% | | Southeast | 4 | 9,875 | 2.9% | $172,428 | 4.0% | | Southwest | 102 | 312,174 | 93.4% | $3,926,124 | 91.7% | | Total | 110 | 334,356 | 100.0% | $4,281,300 | 100.0% | Property Summary The company's property portfolio, as of December 31, 2023, includes 12 commercial properties (office/industrial and retail) with an 81.5% occupancy rate and total mortgage debt of $73.651 million Property Portfolio Overview (as of December 31, 2023) | Property Type | Number of Properties | Total Square Feet | Purchase Price (in thousands USD) | Occupancy Rate | Mortgage Loans (in thousands USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Office/Industrial | 9 | 758,175 | $91,892 | 81.0% | $60,619 | | Retail | 3 | 65,242 | $18,954 | 86.2% | $13,032 | | Total | 12 | 823,417 | $110,846 | 81.5% | $73,651 | Top Ten Tenants Physical Occupancy Table The top ten tenants collectively account for 34.48% of the company's total annualized base rent, with John Hopkins University being the largest at 6.43% Top Ten Tenant Information (as of March 2023) | Tenant | Number of Leases | Annualized Base Rent | % of Total Annualized Base Rent | | :--- | :--- | :--- | :--- | | John Hopkins University | 1 | $710,248 | 6.43% | | KLJ Engineering LLC | 1 | $536,080 | 4.85% | | Finastra USA Corporation | 1 | $525,480 | 4.76% | | MasTec North America, Inc. | 1 | $362,182 | 3.28% | | L&T Care LLC | 1 | $335,973 | 3.04% | | Wells Fargo Bank, NA | 1 | $293,742 | 2.66% | | Republic Indemnity of America | 1 | $270,710 | 2.45% | | Nova Financial & Investment Corporation | 1 | $269,155 | 2.44% | | Meissner Jacquet Real Estate Management Group, Inc. | 1 | $255,177 | 2.31% | | Fredrikson & Byron P.A. | 1 | $249,270 | 2.26% | | Total | | $3,808,017 | 34.48% | Lease Expirations Tables The company's lease expiration schedule for office/industrial, retail, and model home properties shows significant portions of leases expiring in 2024 and 2025 Office/Industrial and Retail Property Lease Expirations (as of December 31, 2023) | Expiration Year | Number of Leases Expiring | Leased Area (Square Feet) | Rental Revenue | % of Total Rent | | :--- | :--- | :--- | :--- | :--- | | 2023 | 20 | 23,297 | $254,966 | 2.3% | | 2024 | 27 | 61,354 | $1,021,491 | 9.3% | | 2025 | 29 | 141,493 | $2,384,600 | 21.6% | | 2026 | 34 | 207,887 | $3,179,628 | 28.8% | | 2027 | 13 | 48,840 | $924,512 | 8.4% | | 2028 | 18 | 73,658 | $1,481,512 | 13.4% | | Thereafter | 14 | 101,459 | $1,795,159 | 16.2% | | Total | 155 | 657,988 | $11,041,868 | 100.0% | Model Home Property Lease Expirations (as of December 31, 2023) | Expiration Year | Number of Leases Expiring | Leased Area (Square Feet) | Rental Revenue | % of Total Rent | | :--- | :--- | :--- | :--- | :--- | | 2024 | 71 | 214,566 | $2,396,376 | 56.0% | | 2025 | 39 | 119,790 | $1,884,924 | 44.0% | | Total | 110 | 334,356 | $4,281,300 | 100.0% | Physical Occupancy Table for Last 5 Years Property occupancy rates have varied across the portfolio over the past five years, with some properties achieving 100% occupancy in 2023 while others experienced fluctuations Property Occupancy Rates (as of December 31) | Property Name | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Genesis Plaza | 78.5% | 74.7% | 85.6% | 96.2% | 100.0% | | Dakota Center | 86.0% | 86.0% | 73.5% | 71.8% | 58.1% | | Grand Pacific Center | 71.8% | 74.2% | 56.6% | 56.4% | 89.7% | | Arapahoe Center | 100.0% | 100.0% | 100.0% | 100.0% | 88.0% | | West Fargo Industrial | 77.1% | 82.0% | 90.8% | 94.3% | 100.0% | | 300 N.P. | 73.0% | 72.8% | 64.8% | 75.5% | 66.4% | | One Park Centre | 79.1% | 84.8% | 80.5% | 84.9% | 75.0% | | Shea Center II | 90.9% | 91.2% | 91.6% | 95.4% | 67.1% | | Baltimore | N/A | N/A | 100.0% | 100.0% | 100.0% | | Union Town Center | 100.0% | 100.0% | 87.4% | 72.9% | 79.5% | | Research Parkway | 100.0% | 100.0% | 100.0% | 88.8% | 100.0% | | Mandolin | N/A | N/A | 100.0% | 100.0% | 100.0% | Annualized Base Rent Per Square Foot for Last 5 Years Annualized base rent per square foot has shown varied trends across the company's properties over the last five years, reflecting market dynamics and lease renewals Annualized Base Rent Per Square Foot (as of December 31) | Property Name | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Genesis Plaza | $28.15 | $22.97 | $25.71 | $26.26 | $29.34 | | Dakota Center | $12.87 | $13.24 | $13.22 | $14.09 | $15.45 | | Grand Pacific Center | $13.97 | $13.71 | $13.79 | $13.90 | $14.57 | | Arapahoe Center | $14.69 | $15.18 | $11.87 | $13.75 | $14.43 | | West Fargo Industrial | $6.65 | $6.77 | $6.81 | $6.80 | $7.09 | | 300 N.P. | $13.67 | $14.86 | $14.89 | $16.72 | $15.32 | | One Park Centre | $19.51 | $21.85 | $23.42 | $20.35 | $23.81 | | Shea Center II | $18.47 | $19.24 | $20.37 | $19.40 | $19.17 | | Baltimore | N/A | N/A | $21.50 | $21.93 | $22.37 | | Union Town Center | $25.63 | $23.73 | $23.86 | $25.22 | $24.65 | | Research Parkway | $22.58 | $29.09 | $22.69 | $23.53 | $23.74 | | Mandolin | N/A | N/A | $30.75 | $31.37 | $32.00 | Legal Proceedings The company is not currently involved in any material legal proceedings nor has it received notice of any significant threatened litigation - The company is not currently involved in any material legal proceedings, nor has it received any notice of significant threatened litigation[226] Mine Safety Disclosures Not applicable - Not applicable[227] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Series A common stock, Series D preferred stock, and Series A warrants are listed on Nasdaq, with regular dividend payments and an active stock repurchase program Market Information The company's Series A common stock, Series D preferred stock, and Series A warrants are all listed and traded on the Nasdaq Capital Market - The company's Series A common stock (SQFT) has been listed on the Nasdaq Capital Market since October 7, 2020[228] - The company's Series D preferred stock (SQFTP) has been listed on the Nasdaq Capital Market since June 11, 2021[228] - The company's Series A warrants (SQFTW) have been listed on the Nasdaq Capital Market since January 24, 2022[228] Number of Common Stockholders As of March 27, 2024, the company had approximately 6,000 holders of its Series A common stock - As of March 27, 2024, the company had approximately 6,000 holders of its Series A common stock[230] Dividend Payments The company provides detailed dividend payment information for both Series A common stock and Series D preferred stock for 2022 and 2023 Series A Common Stock Dividends (per share) | Quarter End | 2023 Dividend | 2022 Dividend | | :--- | :--- | :--- | | March 31 | $0.022 | $0.105 | | June 30 | $0.023 | $0.106 | | September 30 | $0.023 | $0.020 | | December 31 | $0.023 | $0.021 | | Total | $0.091 | $0.252 | Series D Preferred Stock Dividends (per share) | Month | 2023 Dividend | 2022 Dividend | | :--- | :--- | :--- | | January | $0.19531 | $0.19531 | | February | $0.19531 | $0.19531 | | March | $0.19531 | $0.19531 | | April | $0.19531 | $0.19531 | | May | $0.19531 | $0.19531 | | June | $0.19531 | $0.19531 | | July | $0.19531 | $0.19531 | | August | $0.19531 | $0.19531 | | September | $0.19531 | $0.19531 | | October | $0.19531 | $0.19531 | | November | $0.19531 | $0.19531 | | December 31 | $0.19531 | $0.19531 | | Total | $2.34372 | $2.34372 | Warrant Dividend Series A warrants, distributed in January 2022, grant holders the right to purchase common stock at $7.00 per share, with a five-year validity and automatic conversion upon expiration - The company distributed Series A warrants to Series A common stockholders in January 2022, granting the right to purchase one share of Series A common stock at $7.00 per share for five years, with unexercised warrants automatically converting to 1/10th of a Series A common share upon expiration[234] Dividend Policy The company plans to distribute at least 90% of its annual REIT taxable income to maintain REIT status and intends to continue quarterly common stock and monthly preferred stock dividends - The company plans to distribute at least 90% of its annual REIT taxable income to shareholders to maintain REIT qualification and intends to continue paying quarterly dividends to common stockholders and monthly dividends to Series D preferred stockholders[235] Dividends Paid | Stock Type | 2023 | 2022 | | :--- | :--- | :--- | | Series A Common Stock | $1.2 million | $3.1 million | | Series D Preferred Stock | $2.1 million | $2.2 million | - In 2023 and 2022, all dividends paid to Series A common stockholders were treated as a return of capital for federal income tax purposes, thus being tax-exempt[237] Issuer Purchases of Equity Securities The board authorized a stock repurchase program in November 2023 for Series A common stock and Series D preferred stock, expiring in November 2024 - The company's board of directors authorized a stock repurchase program in November 2023 to repurchase up to $6.0 million of Series A common stock and up to $4.0 million of Series D preferred stock, which expires in November 2024[239][241][242] 2023 Stock Repurchase Activity | Stock Type | Number of Shares Repurchased | Average Price (per share) | Total Cost | | :--- | :--- | :--- | :--- | | Series A Common Stock | 0 shares | — | $0 | | Series D Preferred Stock | 23,041 shares | ~$15.97 | $0.2 million | Reserved This item is reserved and not applicable - This item is reserved and not applicable[243] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and operating results for 2023 and 2022, highlighting portfolio optimization, SPAC de-consolidation, and liquidity strategies amidst economic uncertainties Overview The company operates as an internally managed REIT, diversifying its portfolio across office, industrial, retail, and model home properties, primarily in the Western U.S - The company operates as an internally managed, diversified real estate investment trust (REIT), investing in office, industrial, retail properties, and model homes leased back to homebuilders, primarily located in the Western United States[246] - As of December 31, 2023, the company owned or had interests in 8 office buildings and 1 industrial building (approximately 758,175 square feet), 3 retail shopping centers (approximately 65,242 square feet), and 110 model homes[247] - The company mitigates risk through diversification across commercial property segments, geographic markets, and tenants, and conducts credit reviews of its tenants[249] Significant Transactions in 2023 and 2022 The company completed significant acquisitions and dispositions of model homes in 2023 and 2022, including the sale of World Plaza in 2022 Significant Transactions in 2023 and 2022 | Transaction Type | 2023 | 2022 | | :--- | :--- | :--- | | Acquisitions | | | | Number of Model Homes | 40 units | 31 units | | Purchase Price | $21.9 million | $15.6 million | | Cash Paid | $6.6 million | $4.8 million | | Mortgages | $15.3 million | $10.8 million | | Dispositions | | | | Number of Model Homes | 22 units | 31 units | | Sales Proceeds | $11.7 million | $17.5 million | | Gain on Dispositions | $3.2 million | $5.4 million | | World Plaza Sale | Not applicable | $10.0 million | | World Plaza Loss on Disposition | Not applicable | $0.3 million | Sponsorship of Special Purpose Acquisition Company The company, as a sponsor of Murphy Canyon Acquisition Corp., completed a business combination with Conduit Pharmaceuticals Limited in September 2023, resulting in a 6.3% equity stake in Conduit Pharmaceuticals Inc - The company was a sponsor of Murphy Canyon Acquisition Corp., a special purpose acquisition company (SPAC), which completed its business combination with Conduit Pharmaceuticals Limited on September 22, 2023, and was renamed Conduit Pharmaceuticals Inc.[255][257][260] - Prior to the merger, the company held approximately 65% of the SPAC's outstanding common stock; post-merger, the company received 3,306,250 shares of Conduit common stock, 754,000 shares of Conduit common stock, and private warrants to purchase 754,000 shares of Conduit common stock[260] - Post-merger, the company transferred 45,000 shares of Conduit common stock and warrants to purchase 45,000 shares of Conduit common stock to the SPAC's independent directors as compensation, resulting in the company holding approximately 6.5% of Conduit's common stock immediately after the merger, and currently holding approximately 6.3%[260] Economic Environment Economic uncertainty is expected to persist into 2024, with a notable divergence between REIT implied and private market capitalization rates, potentially leading to significant real estate value adjustments - According to Nareit's 2024 REIT Market Outlook, economic uncertainty will persist into 2024, with a significant divergence between REIT implied capitalization rates and transaction and appraisal capitalization rates, signaling potential substantial value write-downs in the private real estate market[261] - Nareit notes that REITs typically perform strongly after monetary policy tightening cycles, and valuation discrepancies may converge in 2024, with strong balance sheets providing acquisition and growth advantages[261][263] Credit Market Environment Interest rates rose in 2023 due to Federal Reserve actions, but stabilized by early 2024, with expectations for transaction market recovery and varied capitalization rates across property sectors - In February 2024, fixed-rate residential mortgage rates ranged between 6.15% and 7.29%, while commercial property 5-10 year fixed-rate loans ranged between 6.71% and 6.84%[262] - Interest rate increases in 2023 were due to Federal Reserve rate hikes to curb inflation, but the Federal Reserve did not raise rates in September, November, December 2023, or January 2024[262] - Colliers Securities anticipates a recovery in the transaction market in the second half of 2024 as interest rates stabilize or decline, providing acquisition opportunities for REITs[265] - Industrial property capitalization rates reached 6.24% in January 2024 after fluctuating in 2023, with significant variations across cities; retail sector capitalization rates showed the most volatility, decreasing in January; office sector capitalization rates decreased to 6.03% in January, with a significant divergence between Class A and Class B assets[265][266][267] Management Evaluation of Results of Operations Management prioritizes cash flow generation for operational expenses, debt service, and shareholder distributions, optimizing the portfolio through re-leasing, rent negotiations, and strategic asset sales - Management evaluates operating performance primarily by focusing on the ability to generate cash flow to cover operating expenses, general and administrative expenses, debt service, and distributions to shareholders, with less emphasis on non-cash expenses such as depreciation, amortization, and impairment losses[268] - Management optimizes the portfolio through re-leasing, negotiating rents, and selling underperforming assets, reinvesting proceeds into properties with higher value-add potential[269] - Operating results for 2023 and 2022 are not indicative of future performance, as the SPAC de-consolidation and post-de-consolidation investment in Conduit Pharmaceuticals will lead to significant changes in expenses and interest income in future periods[270] - In 2023, high commercial property prices, rising interest rates, and compressed capitalization rates made it challenging to acquire properties meeting the company's portfolio needs, but the company successfully acquired 40 model homes[270] Critical Accounting Policies Key accounting policies cover real estate assets, impairment, revenue recognition, income taxes, and fair value measurements, crucial for financial reporting and REIT compliance - Critical accounting policies include accounting for real estate assets and lease intangibles, classification of real estate held for sale and discontinued operations, impairment of real estate assets, goodwill and intangible assets, sales of real estate assets, revenue recognition, income taxes, and fair value measurements[271] - Real estate assets and lease intangibles are recorded at cost, with purchase price allocated among land, buildings, tenant improvements, and lease intangibles based on fair value[272][273][274][275][276] - Real estate held for sale is measured at the lower of its carrying value or estimated sales price less costs to sell, and operating results of discontinued operations are reported as such for all periods presented[277] - Impairment of real estate assets is recognized when estimated future undiscounted cash flows are less than the carrying value, and the carrying value is written down to the estimated fair value[278] - Goodwill and intangible assets are tested for impairment at least annually and more frequently if circumstances indicate a need[279][280] - Sales of real estate are generally recognized as gains or losses when control is transferred to the buyer[281] - Revenue recognition includes recognizing minimum rents on a straight-line basis and determining the commencement of rental income based on ownership of tenant improvements[282][286] - The company estimates the collectability of tenant receivables and establishes an allowance for doubtful accounts based on historical bad debts, customer creditworthiness, and economic trends[284] - The company elects to be taxed as a REIT for federal income tax purposes and treats certain subsidiaries as taxable REIT subsidiaries (TRS), which are subject to federal and state income taxes[287][288] - Fair value measurements use a three-level input hierarchy, and as of December 31, 2023, the company's holdings of Conduit common stock and warrants were measured at Level 1 market prices, valued at approximately $18.3 million with a cost basis of approximately $7.5 million[289][290][291][292] - Depreciation and amortization expenses are calculated using the straight-line method over the estimated useful lives of the assets[294] - Earnings per share (EPS) are calculated in accordance with FASB ASC Topic 260, using the two-class method for unvested restricted stock[296] Results from Operations for the Years Ended December 31, 2023 and 2022 Operating results for 2023 and 2022 are not indicative of future performance due to the SPAC de-consolidation and asset sales, with total revenue slightly decreasing in 2023 - Operating results for 2023 and 2022 are not indicative of future performance, as the SPAC de-consolidation and asset sales will lead to significant changes in income and expenses in future periods[298] Total Revenue | Metric | 2023 | 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $17.6 million | $17.8 million | -$0.2 million | -1% | | Reason for Change | Primarily due to non-renewal of Halliburton lease, partially offset by increased model home revenue | | | | Leasing Operating Costs | Metric | 2023 | 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Leasing Operating Costs | $6.0 million | $5.8 million | +$0.12 million | +2% | | % of Total Revenue | 33.8% | 32.9% | | | | Reason for Change | Increased office property expenses, particularly insurance costs | | | | Percentage of Total Revenue and Total Real Estate Assets by Segment | Segment | % of Total Revenue 2023 | % of Total Revenue 2022 | % of Total Real Estate Assets 2023 | % of Total Real Estate Assets 2022 | | :--- | :--- | :--- | :--- | :--- | | Office/Industrial | 65.9% | 71.2% | 53.5% | 60.3% | | Model Homes | 23.4% | 16.3% | 35.2% | 26.9% | | Retail | 10.7% | 12.5% | 11.3% | 12.8% | General and Administrative Expenses | Metric | 2023 | 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | General and Administrative Expenses | $6.8 million | $6.2 million | +$0.6 million | +10% | | % of Total Revenue | 38.5% | 34.7% | | | | Reason for Change | Decreased salary costs in 2022 (including employee retention credits and reduced stock compensation) were offset by increased D&O insurance and accounting consulting fees for the SPAC; no employee retention credits in 2023 | | | | Depreciation and Amortization | Metric | 2023 | 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Depreciation and Amortization Expense | $5.4 million | $5.5 million | -$0.1 million | -1.8% | | Reason for Change | Slight decrease | | | | Asset Impairment | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Goodwill and Real Estate Asset Impairment | $3.2 million | $0 | +$3.2 million | | Impairment Components | $2.0 million for One Park Center property, $0.4 million for 8 model homes, $0.8 million for goodwill | | | Mortgage Interest Expense | Metric | 2023 | 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Mortgage Interest Expense | $5.0 million | $4.7 million | +$0.3 million | +6% | | Reason for Change | Increased mortgage debt (from $97.8 million to $108.5 million) and higher weighted average interest rate (from 4.57% to 5.18%) | | | | Income Tax Expense/Credit | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Income Tax Expense/Credit | -$0.3 million (expense) | $1.2 million (credit) | -$1.5 million | | Reason for Change | Lower model home sales gains in 2023 and SPAC de-consolidation in September 2023 | | | Income Attributable to Non-Controlling Interests | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Income Attributable to Non-Controlling Interests | $3.0 million | $3.6 million | -$0.6 million | | Reason for Change | Primarily affected by changes in the number of model homes sold by model home partnerships | | | SPAC De-consolidation Gain | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | SPAC De-consolidation Gain | $40.3 million | $0 | +$40.3 million | | Components | Remeasurement of retained investment $34.1 million, de-consolidation of assets and liabilities $6.2 million | | | Geographic Diversification Tables The company's commercial and model home properties exhibit geographic diversification across various states, with detailed breakdowns of square footage and annual base rent contributions Commercial Property Geographic Distribution (as of December 31, 2023) | State | Number of Properties | Total Square Feet | % of Total Square Feet | Current Annualized Base Rent | % of Total Annualized Base Rent | | :--- | :--- | :--- | :--- | :--- | :--- | | California | 1 | 57,807 | 7.0% | $1,425,269 | 12.9% | | Colorado | 5 | 324,245 | 39.4% | $4,883,335 | 44.2% | | Maryland | 1 | 31,752 | 3.9% | $710,248 | 6.4% | | North Dakota | 4 | 399,113 | 48.4% | $3,687,043 | 33.5% | | Texas | 1 | 10,500 | 1.3% | $335,973 | 3.0% | | Total | 12 | 823,417 | 100.0% | $11,041,868 | 100.0% | Model Home Property Geographic Distribution (as of December 31, 2023) | Geographic Region | Number of Properties | Total Square Feet | % of Total Square Feet | Current Annualized Base Rent | % of Total Annualized Base Rent | | :--- | :--- | :--- | :--- | :--- | :--- | | Midwest | 4 | 12,307 | 3.7% | $182,748 | 4.3% | | Southeast | 4 | 9,875 | 2.9% | $172,428 | 4.0% | | Southwest | 102 | 312,174 | 93.4% | $3,926,124 | 91.7% | | Total | 110 | 334,356 | 100.0% | $4,281,300 | 100.0% | Liquidity and Capital Resources The company plans to meet short-term and long-term liquidity needs through existing cash, operating cash flow, refinancing, property sales, and potential equity or debt issuances - The company's future liquidity sources include existing cash, operating cash flow, refinancing existing mortgages, future real estate sales, new borrowings under model home credit lines, sales of Conduit Pharma investments, and equity or debt securities issuances[313] - As of December 31, 2023, the company's cash and restricted cash totaled approximately $6.5 million[313] - Short-term liquidity needs include operating costs, debt service, tenant improvements, leasing commissions, and dividends; total mortgage principal payments for 2024 are approximately $23.5 million, with $13.1 million related to model home properties[314] - The company plans to meet operating costs, planned capital expenditures, and required dividends for the next 12 months through existing cash, operating cash flow, model home partnership distributions, and property sales in 2024[316] - Long-term liquidity needs include funds for growth and maintenance of the portfolio, and the company anticipates sufficient financing capital in the future[317] Series A Common Stock Dividends (per share) | Quarter End | 2023 Dividend | 2022 Dividend | | :--- | :--- | :--- | | March 31 | $0.022 | $0.105 | | June 30 | $0.023 | $0.106 | | September 30 | $0.023 | $0.020 | | December 31 | $0.023 | $0.021 | | Total | $0.091 | $0.252 | Series D Preferred Stock Dividends (per share) | Month | 2023 Dividend | 2022 Dividend | | :--- | :--- | :--- | | January | $0.19531 | $0.19531 | | February | $0.19531 | $0.19531 | | March | $0.19531 | $0.19531 | | April | $0.19531 | $0.19531 | | May | $0.19531 | $0.19531 | | June | $0.19531 | $0.19531 | | July | $0.19531 | $0.19531 | | August | $0.19531 | $0.19531 | | September | $0.19531 | $0.19531 | | October | $0.19531 | $0.19531 | | November | $0.19531 | $0.19531 | | December 31 | $0.19531 | $0.19531 | | Total | $2.34372 | $2.34372 | Cash, Cash Equivalents, and Restricted Cash | Metric | December 31, 2023 | December 31, 2022 | | :--- | :--