Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to our financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to materially differ from those projected. Some of the information presented is forward-looking in nature, including information concerning projected future occupancy rates, rental rate increases, project development timing and investment amounts. Although the information is based on our current expectations, actual results could vary from expectations stated in this report. Numerous factors will affect our actual results, some of which are beyond our control. These include the timing and strength of national and regional economic growth, the strength of commercial and residential markets, competitive market conditions, and fluctuations in availability and cost of construction materials and labor resulting from the effects of worldwide demand, future interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We assume no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to disclose material information. For a discussion of important risks related to our business, and an investment in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information. See Item 1A for a discussion of material risks.
OVERVIEW
The Company operates as an internally managed diversified real estate investment trust, or REIT. The Company invests in a multi-tenant portfolio of commercial real estate assets comprised of office, industrial, and retail properties and model homes leased back to the homebuilder located primarily in the central United States. As of December 31, 2024, including properties held for sale, the Company owned or had an equity interest in:
•
Eight office buildings and one industrial building (“Office/Industrial Properties”) which total approximately 758,175 rentable square feet,
•
Three retail shopping centers (“Retail Properties”) which total approximately 65,242 rentable square feet, and
•
78 model homes owned totaling approximately 236,955 square feet, by four affiliated limited partnerships and one corporation (“Model Home Properties”).
Presidio Property Trust’s office, industrial and retail properties are located California, Colorado, Maryland, North Dakota and Texas. Our Model Home Properties are located in three states, primarily in Texas. We acquire properties that are stabilized or that we anticipate will be stabilized within two or three years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full calendar year, or has been operating for three years. Our geographical clustering of assets enables us to reduce our operating costs through economies of scale by servicing a number of properties with less staff, but it also makes us more susceptible to changing market conditions in these discrete geographic areas.
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Most of our office and retail properties are leased to a variety of tenants ranging from small businesses to large public companies, many of which are not investment grade. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense (NNN Leases) or pay increases in operating expenses over specific base years. Most of our office leases are for terms of 3 to 5 years with annual rental increases. Our model homes are typically leased for 2 to 3 years to the homebuilder on a triple net lease. Under a triple net lease, the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property.
We seek to diversify our portfolio by commercial real estate segments to reduce the adverse effect of a single under-performing segment, geographic market and/or tenant. We further supplement this at the tenant level through our credit review process, which varies by tenant class. For example, our commercial and industrial tenants tend to be corporations or individually owned businesses. In these cases, we typically obtain financial records, including financial statements and tax returns (depending on the circumstance), and run credit reports for any prospective tenant to support our decision to enter into a rental arrangement. We also typically obtain security deposits from these commercial tenants. Our Model Home business partners are substantial homebuilders with established credit histories. These tenants are subjected to financial review and analysis prior to us entering into a sale-lease transaction. Our ownership of the underlying property provides a further means to avoiding significant credit losses.
Significant Transactions in 2024 and 2023
Acquisitions during the year ended December 31, 2024:
•
We acquired 19 Model Home Properties and leased them back to the homebuilders under triple net leases during the year ended December 31, 2024. The purchase price for these properties was $9.7 million. The purchase price consisted of cash payments of $3.0 million and mortgage notes of $6.7 million.
Acquisitions during the year ended December 31, 2023:
•
We acquired 40 Model Home Properties and leased them back to the homebuilders under triple net leases during the year ended December 31, 2023. The purchase price for the properties was $21.9 million. The purchase price consisted of cash payments of $6.6 million and mortgage notes of $15.3 million.
We review our portfolio of investment properties for value appreciation potential on an ongoing basis, and dispose of any properties that no longer satisfy our requirements in this regard, taking into account tax and other considerations. The proceeds from any such property sale, after repayment of any associated mortgage or repayment of secured or unsecured indebtedness, are available for investing in properties that we believe will have a greater likelihood of future price appreciation.
Dispositions during the year ended December 31, 2024:
During year ended December 31, 2024, we disposed of the following properties:
•
51 model homes for approximately $24.8 million and the Company recognized a gain of approximately $3.4 million.
Dispositions during the year ended December 31, 2023:
During year ended December 31, 2023, we disposed of the following properties:
•
22 model homes for approximately $11.7 million and the Company recognized a gain of approximately $3.2 million.
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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. Murphy Canyon Acquisition Corp. (“Murphy Canyon” or the “SPAC”) raised $132,250,000 in capital investment to acquire an operating business. We, through our wholly-owned subsidiary, owned approximately 23.49% 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 following the completion of its initial business combination, the SPAC operates 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 Sponsor purchased an aggregate of 828,750 units (the “placement units”) of the SPAC at a price of $10.00 per unit, for an aggregate purchase price of $8,287,500. The placement units were sold in a private placement that closed simultaneously with the closing of the SPAC initial public offering. The Sponsor has agreed to transfer an aggregate of 45,000 placement units (15,000 each) to each of Murphy Canyon’s independent directors.
On November 8, 2022, the SPAC entered into an agreement and plan of merger with Conduit Pharmaceuticals Limited, a Cayman Islands exempted company (“Conduit Pharma”), and Conduit Merger Sub, Inc., a Cayman Islands exempted company and the SPAC’s wholly owned subsidiary. The merger agreement provided that the SPAC’s Cayman Island subsidiary will merge with and into Conduit Pharma, with Conduit Pharma surviving the merger as the SPAC’s wholly owned subsidiary and the public company renamed “Conduit Pharmaceuticals Inc.” (“Conduit”).
Initially, the SPAC was required to complete its initial business combination transaction by 12 months from the consummation of its initial public offering or up to 18 months if it extended the period of time to consummate a business combination in accordance with its certificate of incorporation. On January 26, 2023, at a special meeting of the stockholders, the stockholders approved a proposal to amend the SPAC’s certificate of incorporation to extend the date by which it has to consummate a business combination up to 12 times, each such extension for an additional one-month period, from February 7, 2023, to February 7, 2024. The stockholders also approved a related proposal to amend the trust agreement allowing the SPAC to deposit into the trust account, for each one-month extension, one-third of 1% of the funds remaining in the trust account following the redemptions made in connection with the approval of the extension proposal at the special meeting. Following redemptions made in connection with the special meeting, we owned approximately 65% of the issued and outstanding equity of the SPAC.
Throughout 2023, we loaned Murphy Canyon $1.0 million to fund its trust account and for operating expenses. The loan was non-interest bearing, unsecured and was repaid in full on the date of Murphy Canyon’s business combination with Conduit Pharma.
On September 22, 2023, Murphy Canyon completed its business combination with Conduit Pharma and changed its name to “Conduit Pharmaceuticals Inc.” Immediately prior to the business combination the Company owned approximately 65% of the SPAC’s outstanding common stock. Upon consummation of the business combination, the SPAC’s shares of Class B common stock were converted into shares of its Class A common stock and the shares of Class A common stock were then reclassified as a single class of Conduit common stock. As a result of the business combination, the Company was issued (i) 3,306,250 shares of Conduit’s common stock due to the conversion of the shares of the SPAC’s Class B common stock into shares of the SPAC’s Class A common stock and then reclassification into shares of Conduit common stock, (ii) 754,000 shares of Conduit common stock, which prior to the business combination were shares of the SPAC’s Class A common stock and (iii) private warrants to purchase 754,000 shares of Conduit common stock, which prior to the business combination were warrants to purchase 754,000 shares of the SPAC’s Class A common stock. Also in the business combination, shareholders and debtholders of Conduit Pharma were issued 65,000,000 shares of Conduit common stock. Immediately following the consummation of the business combination, 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 for their services. As a result, the Company owned approximately 6.5% of Conduit’s common stock immediately following the business combination and currently own less than 1% of Conduit’s common stock. In connection with the business combination, the Company’s officers and directors who also served as officers and directors of the SPAC resigned from the SPAC, with the exception of the Company’s former Chief Financial Officer who resigned from the Company.
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ECONOMIC ENVIRONMENT
According to Nareit's, the National Association of Real Estate Investment Trusts, 2025 REIT Market Outlook, as discussed at the FTSE Nareit U.S. Real Estate Indexes in Review and What’s Next webinar on January 14, 2025, "there is a real possibility for an environment with both moderating interest rates and robust economic growth, otherwise known as an economic soft landing. Nevertheless, there are both lingering and emerging risks, including soft property fundamentals in some sectors, higher interest rates reflecting fiscal imbalances, and the possibility that shifting tariff policies could restrain commercial real estate (CRE) performance in 2025." Current U.S. economic conditions that seem to support a soft landing according to Nareit are:
●
Real gross domestic product (GDP) increased at an annual rate of 2.8% in the third quarter of 2024, according to the “second” estimate.
●
Total nonfarm employment increased by 227,000 jobs and the unemployment rate was 4.2% in November 2024.
●
The Consumer Price Index for All Urban Consumers (CPI) increased 2.7% over the 12 months through November 2024 and core CPI (excluding food and energy) rose 3.3%.
●
Through November, the Federal Open Market Committee (FOMC) reduced its target policy rate range twice in 2024; it now stands at 4.50% to 4.75%.
●
As of November 2024, the Bloomberg consensus forecast survey placed the probability of a U.S. recession within the next 12 months at 25%; it was 30% in September.
According to Nareit, the lingering public-private real estate valuation phenomenon has impeded significant property transaction activity. Despite reaching its crest two years ago, the spread between REIT implied and private appraisal cap rates has been stubbornly slow to close. Recent REIT performance, however, has made material progress in closing the gap. The long goodbye to the current valuation divergence may finally be reaching its end. Quarterly total return differences and cap rate spreads have a negative relationship, for example:
●
When REITs had the greatest degree of outperformance (+22.8%) in the fourth quarter of 2023, the cap rate spread plunged by 94 bps.
●
When REITs experienced the greatest degree of underperformance (-19.5%) in the second quarter of 2022, the cap rate spread surged by 79 bps.
●
When REITs outperformed (+16.5%) in the third quarter of 2024, the cap rate spread dropped to 69 bps, a level less than half its previous quarter’s value.
The chart below displays occupancy rates for the four traditional property types from the fourth quarter of 2008 to the third quarter of 2024. In recent years, the retail sector has enjoyed a rising occupancy rate, but it appears to have plateaued. In contrast, occupancy rates for the apartment and industrial sectors have dropped off in the face of record amounts of new supply following record rent growth in the past few years. Office occupancy reflects a shifting and uncertain demand environment with the advent of more widespread remote work. As of the third quarter of 2024, CoStar occupancy rates for the retail, industrial, apartment, and office sectors were 95.9%, 93.4%, 92.1%, and 86.1%, respectively.
Occupancy rate trends will likely weigh on future property operational performance. They also underscore the need for realism in investment underwriting (1) .
(1) Source: https://www.reit.com/news/blog/market-commentary/reit-cre-outlook-evolution-2025
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CREDIT MARKET ENVIRONMENT
Current market rates in February 2025 on fixed rate mortgages on homes ranged from 6.15% - 6.98%, depending on the term (2) . Current market rates for 5–10 year fixed rate loans for commercial properties ranged from 5.55% - 6.88%, depending on the type of building (retail/industrial/office) (3) . Interest rates decreased in 2024 compared to 2023 due to the Federal Reserve cutting interest rates 100 basis points, or 1%, in hopes of slowing down inflation going from 5.5% in July 2023 to 4.5% in December 2024. According to the Federal Reserve "The Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective” (4). Although rates decreased in 2024, it does not necessarily indicate that we would be unable to refinance or obtain mortgages on new homes or commercial properties at the same rate we have historically when they come due, as rates vary by property and are dependent upon factors including property cash flows, occupancy rates and lender credit.
As noted by Colliers Securities in its Q32024 Office Outlook: "The U.S. office market ended 2024 with early signs of stability as metrics improved throughout the year, and much less space was returned to the market than in 2023. However, strong headwinds in 2025 suggest an uneven recovery and likely several bumps over the next few years. Occupiers continue to reduce space as their leases expire but are likely to upgrade to a higher quality space and building. Despite headlines focused on large companies' return-to-office efforts, most have evolved their office operations, embracing flexibility to encourage productivity. Large, sprawling campuses are being rethought, with the potential for redevelopment opportunities."
(2) Source: https://www.bankrate.com/mortgages/mortgage-rates/#mortgage-news
(3) Source: https://selectcommercial.com/commercial-mortgage-rates.php
(4) Source: https://www.federalreserve.gov/newsevents/pressreleases/monetary20250129a.htm
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Going forward returning federal employees to offices five days a week could positively impact office occupancy, according to Colliers. However, initiatives to reduce overall leased space could negatively affect markets with a significant federal presence. Opportunities for the private sector to buy federally owned properties could stimulate redevelopment or conversion to another use, primarily if local municipalities assist with efforts to streamline approvals. Capital markets have been rebounding, noted Colliers. Price adjustments are leading investors back into the office market. While sales are not at pre-pandemic levels, Colliers noted that volume topped $21 billion in the fourth quarter, nearing year-end 2022 levels. Total sales increased 36% compared to one year ago, with central business district activity rebounding. Office sales have more than doubled from one year ago and have had the largest quarterly volume since first-quarter 2022.
MANAGEMENT EVALUATION OF RESULTS OF OPERATIONS
Management’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service and to fund distributions to our stockholders. As a result, management’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Management’s evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets or other assets.
In addition, management evaluates the results of the operations of our portfolio and individual properties with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties are regularly evaluated for potential added value appreciation and cash flow and, if lacking such potential, are sold with the equity reinvested in new acquisitions or otherwise allocated in a manner we believe is accretive to our stockholders. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.
Our results of operations for the years ended December 31, 2024 and 2023 may not be indicative of those expected in future periods. Management does not expect the level of administrative expenses related to the 2024 annual meeting and the switching external auditors will be repeated in 2025. Additionally the de-SPAC transaction in 2023 resulted in the Company having an investment in Conduit which totaled approximately $18.3 million as of December 31, 2023, with a cost basis of approximately $7.5 million. The Company entered into a lock-up agreement with Conduit regarding the common stock held by the Company, for 180 days from the closing of the business combination which ended March 20, 2024. Due to the declining stock price of Conduit, the Company was unable to monetize our investment. As of December 31, 2024, the investment in Conduit was valued at approximately $0.2 million. During 2023, elevated real estate prices in commercial real estate, increasing interest rates on lending, and compressing capitalization rates have made it challenging to acquire properties during 2024 that fit our portfolio needs. As a result, we did not find any suitable commercial properties to acquire during 2024, but we were able to acquire 19 Model Home Properties. Management will continue to evaluate potential acquisitions in an effort to increase our portfolio of commercial real estate and model homes.
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CRITICAL ACCOUNTING POLICIES
As a company primarily involved in owning income generating real estate assets, management considers the following accounting policies critical as they reflect our more significant judgments and estimates used in the preparation of our financial statements and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Impairment 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. Impairment is recognized on a property held for sale when the fair value less costs to sell is less than the carrying amount. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows that are determined based on a number of inputs and assumptions such as the intended hold period, market rental rates, leasing assumptions, capitalization rates and discount rates. Actual results could be significantly different from the estimates. 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.
Goodwill and Intangible Assets . Intangible assets, including goodwill and lease intangibles, are comprised of finite-lived and indefinite-lived assets. Lease intangibles represent the allocation of a portion of the purchase price of a property acquisition representing the estimated value of in-place leases, unamortized lease origination costs, tenant relationships and land purchase options. Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. Indefinite-lived assets are not amortized.
We test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset.
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.
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When available, we utilize quoted market prices from independent third-party sources to determine fair value and classify such items in Level 1 or Level 2
.
In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require us to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third-party may rely more on models with inputs based on information available only to that independent third-party. When we determine the market for a financial instrument owned by us to be illiquid or when market transactions for similar instruments do not appear orderly, we use several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establish a fair value by assigning weights to the various valuation sources.
As of December 31, 2024 and December 31, 2023, our marketable securities (excluding our investments in Conduit's common stock and common stock warrants), held at a third party broker, presented on the balance sheet were measured at fair value using Level 1 market prices and totaled approximately zero and $45,149, respectively, with a cost basis of approximately zero and $40,315, respectively. Our investments in Conduit's common stock and common stock warrants presented on the consolidated balance sheets were measured at fair value using Level 1 market prices, which are currently held at Conduit's transfer agent, taking into account the adoption of ASU 2022-03 Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions , and totaled approximately $0.2 million as of December 31, 2024, with a cost basis of approximately $7.5 million. The Company entered into a lock-up agreement with Conduit regarding the common stock held by the Company, for 180 days from the closing of the business combination which ended March 20, 2024. There were no financial liabilities measured at fair value as of December 31, 2024 and December 31, 2023 .
The following table presents as of December 31, 2024 the Company’s assets subject to measurement at fair value on a nonrecurring basis (in thousands):
Fair Value Measurements as of December 31, 2024
Level 1
Level 2
Level 3
Total
Impairment Loss
Assets:
Goodwill for Dubose Model Homes
$
-
$
-
$
1,123,000
$
1,123,000
$
-
Goodwill for NTR Property Management
-
-
266,000
266,000
185,000
Certain Real Estate assets
-
-
18,065,871
18,065,871
1,784,311
Total Assets
$
-
$
-
$
19,454,871
$
19,454,871
$
1,969,311
The following table presents as of December 31, 2023 the Company’s assets subject to measurement at fair value on a nonrecurring basis (in thousands):
Fair Value Measurements as of December 31, 2023
Level 1
Level 2
Level 3
Total
Impairment Loss
Assets:
Goodwill for Dubose Model Homes
$
-
$
-
$
1,123,000
$
1,123,000
$
-
Goodwill for NTR Property Management
-
-
451,000
451,000
849,000
Certain Real Estate assets
-
-
12,503,176
12,503,176
2,398,097
Total Assets
$
-
$
-
$
14,077,176
$
14,077,176
$
3,247,097
Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
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RESULTS FROM OPERATIONS FOR THE YEARS ENDED December 31, 2024 AND 2023
Our results from operations for 2024 and 2023 are not indicative of those expected in future periods as we expect that rental income, interest expense, rental operating expense, general and administrative expenses, and depreciation and amortization will significantly change in future periods as a result of the assets sold over the last two years.
Revenues. Total revenue was approximately $18.9 million for the year ended December 31, 2024, compared to approximately $17.6 million for the same period in 2023, an increase of approximately $1.3 million or 7.3%. As of December 31, 2024, we had approximately $127.6 million in net real estate assets including 78 model homes, compared to approximately $144.2 million in net real estate assets including 110 model homes at December 31, 2023. The average number of model homes held during the years ended December 31, 2024 and 2023 was 94 and 101, respectively. The change in revenue is directly related to the increase in model home transaction fees during the current period, new commercial real estate leases, mainly at Grand Pacific Center, and the management fees earned from Conduit during the current period, which was terminated in June 2024. Below is additional revenue and asset information for real estate segments as of December 31, 2024 and December 31, 2023.
% of Gross Revenue for the year ended
Segment
12/31/2024
12/31/2023
Office/Industrial
65.2
%
65.6
%
Model Home
23.4
%
23.4
%
Retail
11.2
%
10.7
%
% of Total Real Estate Assets as of
Segment
12/31/2024
12/31/2023
Office/Industrial
58.3
%
53.7
%
Model Home
29.3
%
35.2
%
Retail
12.3
%
11.0
%
Rental Operating Costs . Rental operating costs were approximately $6.3 million for the year ended December 31, 2024 compared to approximately $6.0 million for the same period in 2023, an increase of approximately $0.3 million or 4.9%. Rental operating costs as a percentage of total revenue were 33.1% and 33.8% for the years ended December 31, 2024 and 2023, respectively, as office property expenses continue to increase, specifically insurance costs. As of December 31, 2024 our model home assets made up 29% of our total real estate assets, which is down from 35% as of December 31, 2023, and our gross revenue from model home assets represented approximately 23.4% of our total revenue. This percentage is expected to increase in 2025 as the percentage of our model home real estate assets has increased, with the sale of Union Town Center and Research Parkway in February 2025, which will reduce future rental income until those proceeds are reinvested but it will also reduce rental operating costs. The sale of our Dakota Center building will also reduce rental operating costs.
General and Administrative . General and administrative (“G&A”) expenses were approximately $7.5 million for the year ended December 31, 2024, compared to approximately $6.8 million for the same period in 2023, representing an increase of approximately $0.7 million or 10.8%. As a percentage of total revenue, our general and administrative costs were approximately 39.8% and 38.5% for the years ended December 31, 2024 and 2023, respectively. G&A expenses increased by approximately $0.5 million mainly related to the 2024 annual meeting and settlement with Zuma Capital and certain individuals and entities affiliated or associated with Zuma Capital Management, LLC ("Zuma Capital"). This included additional consulting fees, higher proxy solicitation fees and legal fees, which increased by an aggregate of approximately $0.6 million in 2024 as compared to 2023. Additionally, employee, ex-officer and board costs, including stock compensation and bonus accruals increased during the year ended December 31, 2024 by approximately $0.5 million as compared to the same period in 2023 related to De-SPAC success bonuses to current and former employees. This was slightly offset by the approximately $0.2 million reduction of D&O insurance related to the SPAC in 2023 that was not consolidated during 2024.
Depreciation and Amortization . Depreciation and amortization expenses were approximately $5.5 million for the year ended December 31, 2024, compared to approximately $5.4 million for the same period in 2023.
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Asset Impairments . We review the carrying value of goodwill and each of our real estate properties annually to determine if circumstances indicate an impairment in the carrying value of these investments exists. During the year ended December 31, 2024, we recognized a non-cash impairment charge of approximately $2.0 million on goodwill and our real estate assets. Of the $2.0 million impairment for the year, approximately $1.4 million was related to our commercial properties Dakota Center and 300 NP, approximately $0.4 million was related to model homes, and approximately $0.2 million was related to goodwill impairment. The impairment on our commercial property, Dakota Center, was the result of the loan maturing in July and the Company not being able to reach an agreement with the lenders regarding a loan modification or extension. In October, the lender has agreed to a sale of the property to settle the balance of the non-recourse loan. Due to the uncertainties in the Fargo market, we concluded it was necessary to impair the property’s book value, in accordance with ASC 360-10. As such, we recorded an impairment charge of approximately $0.7 million, during September 2024. The impairment on 300 NP, totaling approximately $0.7 million related to changing cap rates in the area and low historical occupancy. This property is not listed for sale and has no debt. The new impairment charges for the model homes reflects the estimated and actual sales prices for these specific model homes that were sold after the end of each quarter. This was the result of an abnormally short hold period, less than two years, on model homes purchased in 2022. The builder changed their product style in the neighborhoods where these model homes are located, in Texas, after we had purchased the homes. We do not believe these losses are indicative of our overall model home portfolio. As noted above in the Overview section, during the year ended December 31, 2024, we sold 51 model homes for approximately $24.8 million and the Company recognized a gain of approximately $3.4 million. We expect to record a net gain on model home sales in the first quarter of 2025 as well. The impairment to goodwill was related to NTR Property Management and the fair market value adjustment based on future expected cash flows.
During the year ended December 31, 2023, we recognized a non-cash impairment charge of approximately $3.2 million related to goodwill and model homes. Of the $3.2 million impairment for the year, approximately $2.0 million was related to our One Park Center property, approximately $0.4 million was related to eight model homes, and approximately $0.8 million was related to goodwill impairment. The impairment charge for One Park Center reflects management’s revised estimate of the fair market value based on sales comparable of like property in the same geographical area as well as an evaluation of future cash flows or an executed purchase sale agreement.
Interest Expense-mortgage notes. Interest expense, including amortization of deferred finance charges was approximately $6.1 million for the year ended December 31, 2024 compared to approximately $5.0 million for the same period in 2023, an increase of approximately $1.0 million, or 20.9%. The increase in mortgage interest expense relates to the increase in weighted average interest rate from 5.18% to 5.63% over the same time period. With the sale of our commercial properties in 2025, we will expect interest expense to decrease.
Gain on Sale of Real Estate Assets. For the year ended December 31, 2024, the change in gain on sale relates to the mix and type of properties sold. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Significant Transactions in 2024 and 2023 above for further detail.
Income Tax Expense / Benefit. For the year ended December 31, 2023, the Company recorded a benefit of approximately $335,780 related to estimated refunds from federal and state taxes for capital gains from the sale of model homes held by the taxable REIT subsidiary. For the year ended December 31, 2024, the Company recorded an expense of approximately $60,855 related to federal and state taxes for capital gains from the sale of model homes held by the taxable REIT subsidiary.
Income allocated to non-controlling interests. Income allocated to non-controlling interests for the years ended December 31, 2024 and 2023 totaled approximately $2.5 million, and $3.0 million, and was directly impacted by the sale of 18 and 13 model homes, during the years ended December 31, 2024 and 2023, respectively, held by our Model Home Partnerships.
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Gain on deconsolidation of SPAC and remeasurement.
On April 22, 2024, the Company entered into a lockup agreement with Conduit pursuant to which the Company agreed not to transfer or sell 2,700,000 of its 4,015,250 shares of Conduit common stock for a period of one year. In consideration for entering into the lockup agreement, Conduit issued the Company warrants to purchase 540,000 shares of common stock at an exercise price of $3.12 per share, a two year term and exercisable one year after the date of issue (the "Private CDT Warrants"). The Private CDT Warrants meet the ASC 321 scope exception for derivative instruments and are accounted for as a derivative under ASC 815. As such, the Private CDT Warrants were recorded at fair value on the date of issuance and subsequently measured at fair value each period, with changes in fair value reported in gain or loss on Conduit marketable securities. As of April 22, 2024, the Private CDT Warrants were valued at $891,000 based on a Level 3 fair value measurement. As of December 31, 2024, the Private CDT Warrants fair value was adjusted to zero, which is included in the total Investment in Conduit marketable securities on the December 31, 2024 consolidated balance sheet. Our investments in Conduit's common stock (2,944,514 shares of CDT) and public common stock warrants (709,000 warrants of CDTTW) presented on the consolidated balance sheets were measured at fair value using Level 1 market prices, taking into account the adoption of ASU 2022-03 Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, and totaled approximately $0.2 million as of December 31, 2024. The combined value of our Investment in Conduit marketable securities, including the Private CDT Warrants, totaled $0.2 million as of December 31, 2024, resulting in a net loss on investment for the year ended December 31, 2024 totaling approximal $17.9 million.
During the year ended December 31, 2023, and in connection with the deconsolidation we recorded a gain of approximately $40.3 million. Of the total gain recognized on deconsolidation, approximately $34.1 million relates to the remeasurement of our retained investment in Murphy Canyon via the Sponsor shares which converted into shares of Conduit's common stock on September 22, 2023, and approximately $6.2 million relates to the deconsolidation of Murphy Canyon's assets and liabilities as of September 22, 2023. Since deconsolidating Conduit, on September 22, 2023, our investments in Conduit's common stock and common stock warrants presented on the consolidated balance sheets were measured at fair value totaled approximately $18.3 million as of December 31, 2023, with a cost basis of approximately $7.5 million. This resulted in net loss on investment for the year ended December 31, 2023 totaling approximal $23.4 million.
During October 2024, the Company paid part of an accrued bonus to the former CFO with shares of CDT common stock. The total number of CDT common stock shares transferred to our former CFO was 1,045,805 shares at $0.1087 per share with a fair market value of $113,679 at the time of transfer. After the transfer the Company still owned 2,944,514 shares of CDT common stock, 709,000 CDTTW warrants and 540,000 private warrants. Since December 31, 2024, CDT has affected a 1-for-100 reverse stock split of the CDT common stock, resulting in our 2,944,514 shares being converted into 29,445 shares.
Geographic Diversification Tables
The following table shows a list of commercial properties owned by the Company grouped by state and geographic region as of December 31, 2024:
State
No. of Properties
Aggregate Square Feet
Approximate % of Square Feet
Current Base Annual Rent
Approximate % of Aggregate Annual Rent
California
1
57,807
7.0
%
$
1,542,066
12.9
%
Colorado
5
324,245
39.4
%
5,766,166
48.2
%
Maryland
1
31,752
3.9
%
724,453
6.1
%
North Dakota
4
399,113
48.4
%
3,565,621
29.9
%
Texas
1
10,500
1.3
%
342,692
2.9
%
Total
12
823,417
100.0
%
$
11,940,998
100.0
%
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The following table shows a list of our Model Home Properties by geographic region as of December 31, 2024:
State
No. of Properties
Aggregate Square Feet
Approximate % of Square Feet
Current Base Annual Rent
Approximate % of Aggregate Annual Rent
Arizona
2
6,822
2.9
%
$
149,196
4.4
%
Florida
3
8,199
3.4
%
136,812
4.1
%
Texas
73
221,934
93.7
%
3,086,580
91.5
%
Total
78
236,955
100.0
%
$
3,372,588
100.0
%
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings from our model home lines of credit, and the sale of our equity or issuance of debt securities or bonds. Our cash and restricted cash at December 31, 2024 was approximately $8.0 million. Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking model home investments that are likely to produce income and achieve long-term gains in order to pay dividends to our stockholders. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity.
Our short-term liquidity needs include paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. Future principal payments due on our mortgage notes payables during 2025, total approximately $38.8 million, of which $8.3 million is related to model home properties. During the next 12 months our four commercial property loans, Dakota Center, Research Parkway, Union Town Center, Genesis Plaza and Shea Center II, have mortgage loans with maturity dates, totaling approximately $30.1 million. The Dakota Center loan matured in July 2024, and will be settled when the property is sold, which is expected to sell in the next 12 months. Management has begun discussions with various lenders to either restructure, extend or refinance these loans. Additionally, management may consider selling these properties if we are unsuccessful in extending the maturity dates or are unable to raise additional funds to pay these non-recourse loans in full. Additional details for maturing loans are as follows:
●
Dakota Center (Fargo) (July 2024): We have been in negotiations with the lender and their special servicer of the loan since May 2024 regarding an extension or modification of the non-recourse loan; however, the lender's final decision was to have the Company sell the property on the open market with a real estate broker. The current loan balance is approximately $9.1 million, and our book value is approximately $8.3 million, after a $0.7 million impairment taken in Q3 2024. On October 17, 2024, we also provided an unsolicited offer from Edgewood Properties for $8.0 million, but the lender has asked the Company to conduct a market sale for the property to recover the maximum proceeds to repay the non-recourse loan. The lender rejected this offer and we are proceeding with the open market sale. In January 2025, we finalized the broker agreement with CBRE to sell the property. CBRE has the property listed without a sales price, but has a cashflow model with the target sales price at $9.0 million. The lender will have final say on approval of a purchase offer and closing price, so there can be no guarantee CBRE will be able to achieve a $9.0 million sales price. Either way, this is a non-recourse loan and will not affect our future cash flow if it sells for less than the loan amount.
●
Union Town Center (January 2025) and Research Pkwy (January 2025): We have listed the properties for sale as of December 31, 2024. The Company was able to obtain a short term extension with the lenders in order to accommodate the close date for the sale. The sale took place on February 6, 2025, with a price of $16,950,000 for both UTC and Research Parkway. Internally, we allocated the purchase price at 80.2% to UTC and 19.8% to Research Parkway, based on total square feet, book value and adjusted book value to the liabilities and assets to be eliminated at the closing. We received $6.37 million in cash proceeds from the sale and additional funds post-closing from the lender's reserve accounts.
●
One Park Centre – We have begun exploring refinancing options with our current broker at NorthMarq to pay off the current loan at maturity. The property’s current occupancy is 85.7% and has positive cash flow. During the year, we have invested approximately $275,000 in building and tenant improvements for the property.
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●
Genesis Plaza – We have begun exploring refinancing options with our current broker at NorthMarq to pay off the current loan at maturity. The property’s current occupancy is 95.6% and has positive cash flow. During the year, we have invested approximately $74,000 in building and tenant improvements for the property, expanded the space for our tenant Meissner and extended the term of their lease to 2035, and reduced the space used by the Company. On January 1, 2025, Meissner took possession of the expanded space and Genesis Plaza was 100% leased.
●
Shea Center II - We will begin exploring refinancing options with our current broker at NorthMarq to pay off the current loan at maturity during April and May. The property’s current occupancy is 68.9% and has positive cash flow. We are still working to fill the vacant Halliburton space. During the year ended December 31, 2024, the Company has invested approximately $275,000 in building and tenant improvements for the property.
Management expects certain model homes will be sold, and that the underlying mortgage notes will be paid off with sales proceeds, while other mortgage notes will be refinanced as the Company has done in the past. Additional principal payments will be made with cash flows from ongoing operations.
While we will continue to pursue value creating investments, the Board of Directors believes there is significant embedded value in our assets that is yet to be realized by the market. Therefore, returning capital to stockholders through a repurchase program is an attractive use of capital currently. On September 15, 2022, the Board of Directors authorized a stock repurchase program of up to $6.0 million of outstanding shares of our Series A Common Stock and up to $4.0 million of our Series D Preferred Stock, which expired in September 2023. In November 2023, the Board of Directors authorized a stock repurchase program of up to $6.0 million of outstanding shares of our Series A Common Stock and up to $4.0 million of our Series D Preferred Stock which expired in November 2024. During the year ended December 31, 2023, the Company repurchased 23,041 shares of our Series D Preferred Stock at an average price of approximately $16.06 per share, including a commission of $0.035 per share, and no shares of our Series A Common Stock, for a total cost of $0.4 million for the Series D Preferred Stock. In December 2024, the Board of Directors authorized a stock repurchase program of up to $6.0 million of outstanding shares of our Series A Common Stock and up to $4.0 million of our Series D Preferred Stock, which shall expire in December 2025. During the year ended December 31, 2024, we repurchased 190,640 shares of our Series A Common Stock, for a total cost of $140,416, with an average price of approximately $1.10 per share, including a commission of $0.025 per share. During the year ended December 31, 2024, the Company repurchased 2,918 shares of our Series D Preferred Stock at an average price of approximately $14.02 per share, including a commission of $0.035 per share, for a total cost of $40,910 for the Series D Preferred Stock. Any repurchased shares are treated as authorized and unissued in accordance with Maryland law and shown as a reduction of stockholders’ equity at cost.
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There can be no assurance that the Company will refinance loans, take out additional financing or capital will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it will most likely be required to reduce its plans, reduce certain discretionary spending or even sell properties, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. We believe that cash on hand, cash flow from our existing portfolio, distributions from joint ventures in Model Home Partnerships and property sales during 2025 will be sufficient to fund our operating costs, planned capital expenditures and required dividends for at least the next twelve months. If our cash flow from operating activities is not sufficient to fund our short-term liquidity needs, we plan to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness, from real estate sales, issuance of debt instruments, additional investors, or we may reduce or suspend the rate of dividends to our stockholders.
Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. We are continually reviewing our existing portfolio to determine which properties have met our short- and long-term goals and reinvesting the proceeds in properties with better potential to increase performance. We expect to obtain additional cash in connection with refinancing of maturing mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. If we are unable to arrange a line of credit, borrow on properties, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives.
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 years ended December 31, 2024 and 2023. The Company intends to continue to pay dividends to our common stockholders on a quarterly basis, and on a monthly basis for the Series D Preferred stockholders going forward, but there can be no guarantee the Board of Directors will approve any future dividends. The Board has not indicated when it will resume approving dividends on our Series A Common Stock.
Quarter Ended
2024
2023
Distributions Declared
Distributions Declared
March 31
$
—
$
0.022
June 30
—
0.023
September 30
—
0.023
December 31
—
0.023
Total
$
—
$
0.091
Month
2024
2023
Distributions Declared
Distributions Declared
January
$
0.19531
$
0.19531
February
0.19531
0.19531
March
0.19531
0.19531
April
0.19531
0.19531
May
0.19531
0.19531
June
0.19531
0.19531
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
0.19531
0.19531
Total
$
2.34372
$
2.34372
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Cash, Cash Equivalents and Restricted Cash
At December 31, 2024 and December 31, 2023, we had approximately $8.0 million and $6.5 million in cash equivalents, respectively, including $5.0 million and $3.7 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash, cash in our operating accounts and cash held in bank accounts at third-party institutions. During the years ended December 31, 2024 and 2023, we did not experience any loss or lack of access to our cash or cash equivalents. Approximately $1.7 million of our cash and restricted cash balance is intended for capital expenditures on existing properties (including deposits held in reserve accounts by our lenders) over the next 12 months. We intend to use the remainder of our existing cash and cash equivalents for asset/property acquisitions, reduction of principal debt, general corporate purposes, common stock repurchases (if market conditions are met),or dividends to our stockholders.
Secured Debt
As of December 31, 2024, all our commercial properties, except 300 NP which has no debt, had fixed-rate mortgage notes payable in the aggregate principal amount of $76.8 million, collateralized by a total of 11 commercial properties with loan terms at issuance ranging from 5 to 10 years. The weighted-average interest rate on these mortgage notes payable as of December 31, 2024 was approximately 5.24%, and our debt to estimated market value for our commercial properties was approximately 67.2%. As noted above, during the next 12 months our four commercial property loans, Dakota Center, Research Parkway, Union Town Center, Genesis Plaza and Shea Center II, have mortgage loans with maturity dates, totaling approximately $30.1 million.
As of December 31, 2024, the Company had fixed-rate mortgage notes payable related to model homes in the aggregate principal amount of $26.1 million, excluding loans eliminated through consolidation, collateralized by a total of 78 Model Homes. These loans generally have a term at issuance of three to five years. As of December 31, 2024, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans are approximately $334,113 and 6.78%, respectively. Our debt to estimated market value on all our Model Home Properties is approximately 62.0%, excluding any loans eliminated through consolidation. We have been able to refinance maturing mortgages to extend maturity dates and we have not experienced any notable difficulties financing our acquisitions. The Company anticipates that any new mortgages used to acquire commercial properties or model homes in the near future will be at rates higher than our currently weighted average interest rate. As of December 31, 2023, we had issued two promissory notes to our majority owned subsidiaries, Dubose Model Home Investors 202 LP and Dubose Model Home Investors 204 LP, for the refinancing of two Model Home Properties in Texas and Wisconsin, for approximately $0.5 million with interest rates ranging from 3.0% to 5.55% per annum and maturity dates between August 2024 and November 2025. These notes payable and notes receivable, including interest expense and interest income related to these promissory notes, are eliminated through consolidation on our financial statements and were paid in full as of December 31, 2024.
Cash Flows for the years ended December 31, 2024 and December 31, 2023
Operating Activities: Net cash used / provided by operating activities for the years ended December 31, 2024 and 2023 decreased by $2.2 million to approximately $0.7 million used from $1.4 million provided by. The change in net cash used in operating activities is mainly due to changes in net income, which fluctuates due to new leases, leasing renewals, tenant move outs and model home sales and acquisitions, as well as changes in non-cash addbacks or subtractions such as straight-line rent. G&A expenses increased by approximately $0.5 million mainly related to the 2024 annual meeting and settlement with Zuma Capital and certain individuals and entities affiliated or associated with Zuma Capital Management, LLC (Zuma Capital"). This included additional consulting fees, higher proxy solicitation fees and legal fees, which increased by an aggregate of approximately $0.6 million in 2024 as compared to 2023. Additionally, employee, ex-officer and board costs, including stock compensation and bonus accruals increased during the year ended December 31, 2024 by approximately $0.5 million as compared to the same period in 2023 related to De-SPAC success bonuses to current and former employees. This was slightly offset by the approximately $0.2 million reduction of D&O insurance related to the SPAC in 2023 that was not consolidated during 2024.
Investing Activities: Net cash from investing activities for the year ended December 31, 2024 was approximately $12.9 million compared to cash provided by investing activities of approximately $120.6 million during the same period in 2023.
The change from each period was primarily related to the gross cash withdrawal of approximately $114.1 million during the first quarter of 2023 for SPAC redemptions. There were no similar transactions during the year ended December 31, 2024. Proceeds from the sale of real estate assets total approximately $24.8 million, which is up from the same period in 2023, net of selling costs, while cash used in real estate acquisition and capital improvement totaled approximately $12.0 million, for the year ended December 31, 2024, which is down from the same period in 2023.
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We currently project that we could spend up to $1.7 million (some of which is held in deposits reserve accounts by our lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio during the rest of the year. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.
Financing Activities: Net cash used in financing activities during the year ended December 31, 2024 was $10.6 million compared to $132.1 million provided by financing activities for the same period in 2023 and was primarily due to the following activities for the year ended December 31, 2024:
•
Proceeds from mortgage notes payable, net of issuance costs totaled approximately $22.3 million.
•
Proceeds from the issuance of Series D Preferred Stock, net of offering costs, totaled approximately $1.2 million.
•
Repayment of mortgage notes payable totaled approximately $27.9 million during the year ended December 31, 2024.
•
Distributions to noncontrolling interest of approximately $3.4 million during the year ended December 31, 2024.
•
Dividends paid to Series D Preferred Stockholders of approximately $2.2 million during the year ended December 31, 2024.
•
Cash used to repurchase our Series A Common Stock and Series D Preferred Stock totaled approximately $0.2 million.
Off-Balance Sheet Arrangements
On July 12, 2021, the Company entered into a securities purchase agreement with a single U.S. institutional investor for the purchase and sale of 1,000,000 shares of its Series A Common Stock, Common Stock Warrants to purchase up to 2,000,000 shares of Series A Common Stock and Pre-Funded Warrants to purchase up to 1,000,000 shares of Series A Common Stock. Each share of Common Stock and accompanying Common Stock Warrants were sold together at a combined offering price of $5.00, and each share of Common Stock and accompanying Pre-Funded Warrant were sold together at a combined offering price of $4.99. The Pre-Funded Warrants were exercised in full during August 2021 at a nominal exercise price of $0.01 per share. The Common Stock Warrants have an exercise price of $5.50 per share, 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 Warrants. The Placement Agent Warrants were issued in August 2021, post exercise of the Pre-Funded Warrants with an exercise price of $6.25 and will expire five years from the date of issuance.
Common Stock Warrants: If all the potential Common Stock Warrants outstanding at December 31, 2024, were exercised at the price of $5.00 per share, gross proceeds to us would be approximately $10 million and we would as a result issue an additional 2,000,000 shares of common stock.
Placement Agent Warrants: If all the potential Placement Agent Warrants outstanding at December 31, 2024, were exercised at the price of $6.25 per share, gross proceeds to us would be approximately $0.5 million and we would as a result issue an additional 80,000 shares of common stock.
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January 14, 2022 was the record date with respect to the distribution of five-year listed warrants (the “Series A Warrants”). The Series A Warrants and the shares of common stock issuable upon the exercise of the Series A Warrants were registered on a registration statement that was filed with the SEC and was declared effective January 21, 2022. The Series A Warrants commenced trading on the Nasdaq Capital Market under the symbol “SQFTW” on January 24, 2022 and were distributed on that date to persons who held shares of common stock and existing outstanding warrants as of the January 14, 2022 record date, or who acquired shares of common stock in the market following the record date, and who continued to hold such shares at the close of trading on January 21, 2022. The Series A Warrants give the holder the right to purchase one share of common stock at $7.00 per share, for a period of five years. Should warrant holders not exercise the Series A Warrants during that holding period, the Series A Warrants will automatically convert to 1/10 of a common share at expiration, rounded down to the nearest number of whole shares.
Series A Warrants: If all the potential Series A Warrants outstanding at December 31, 2024, were exercised at the price of $7.00 per share, gross proceeds to us would be approximately $101.2 million and we would as a result issue an additional 14,450,069 shares of common stock.
Inflation
The prevailing inflationary environment has affected U.S. consumers and the repercussions may persist. As evidenced by the Consumer Price Index for All Urban Consumers (CPI), a gauge employed by the U.S. Bureau of Labor Statistics, there was a 2.9% (not seasonally adjusted) increase for the 12-month period ending December 31, 2024. The CPI serves as a metric for capturing the average fluctuations in prices paid by urban consumers across a diverse array of consumer goods and services. The macroeconomic landscape, including ongoing conflicts around the world, introduces an additional layer of complexity to the inflationary dynamics. These geopolitical disruptions have the potential to intensify inflationary pressures, contributing to the volatility witnessed in the broader economic context. As consumers navigate this challenging landscape, the potential for continued impact on their purchasing power remains a significant consideration.
Leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, or increases in clients’ sales volumes. We expect that inflation will cause these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation and other costs.
Moreover, our strategic focus on the use of net lease agreements reduces our exposure to rising property expenses due to inflation because the client is responsible for property expenses. Even though the utilization of net leases reduces our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our clients if increases in their operating expenses exceed increases in revenue, which may adversely affect our clients' ability to pay rent. Additionally, inflationary periods may cause us to experience increased costs of financing, make it difficult to refinance debt at attractive rates or at all, and may adversely affect the properties we can acquire if the cost of financing an acquisition is in excess of our anticipated earnings from such property, thereby limiting the properties that can be acquired.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are filed with this report as described under Item 15.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.