SQFT: 3Q21 Portfolio Shifts Towards Higher-Margin Property Types

By M. Marin

NASDAQ:SQFT

READ THE FULL SQFT RESEARCH REPORT

Presidio Property Trust (NASDAQ:SQFT), an internally-managed REIT that has a diversified portfolio of commercial and industrial properties and model homes, reported 3Q21 results last week. Same-store rental revenue was up about 3.5% compared to 3Q20, looking only at the 11 properties held consistently during both the 2020 and 2021 same periods. The company sold four properties earlier in 2021. The absence of rental revenue from those properties contributed to a decline in reported revenue to $4.2 million compared to $5.4 million in 3Q20.

SQFT collected 100% of budgeted revenue in its model homes. Management attributes its rental revenue and high rate of revenue collection to the diversified nature of its property portfolio. SQFT’s strategy is to focus on smaller markets that are less dependent on mass transport for daily commuting and generally characterized by strong economic and population growth.

Portfolio shifts towards high-growth, higher-margin properties

Moreover, the company continues to transition its real estate portfolio towards properties that have solid rental revenue prospects and strong margins. In 3Q21, the mix of properties shifted towards model homes, which have substantially lower operating costs. As a result, SQFT’s rental operating costs as a percentage of total revenue were 32.3% compared to 37.2% in 3Q20.

Real estate portfolio continues to strengthen

Consistent with its focus on rapidly-growing smaller cities, the company also purchased a single tenant triple net (NNN) property in Houston, which is a rapidly-growing market, for roughly $4.9 million. The property is a newly-built single story 10,500 square foot building that is completely occupied under a 15-year NNN lease.

The company recorded an uptick in lease activity, which management believes bodes well for resumed growth. SQFT signed 11 new or renewed office, retail and / or industrial leases in the quarter and more than 40 through the first three quarters of 2021.

Non-dilutive preferred stock offering enhances liquidity

With a strong cash balance following capital issuances and asset divestitures earlier this year, SQFT is well-positioned to add to its real estate portfolio, in our view. SQFT has several potential acquisitions currently in the pipeline.

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