Good afternoon, ladies and gentlemen and welcome to the Presidio Property Trust Third Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Lowell Hartkorn. Sir, the floor is yours..

Thank you, operator. Good afternoon and welcome to Presidio Property Trust’s third quarter 2021 earnings call. My name is Lowell Hartkorn, Investor Relations here at Presidio.

Joining me on the call today are Jack Heilbron, our President and Chief Executive Officer; Adam Sragovicz, Chief Financial Officer; Gary Katz, Senior Vice President of Asset Management; and Steve Hightower, Executive Vice President of our Model Homes division.

Jack, Adam, Gary and Steve will make prepared remarks today, and then, we will be happy to take your questions via chat. At any time during this call, you can click on the Ask Question button in the media player window to submit questions to our team. We ask for your patience today.

As consistent with social distancing recommendations, each of us from the company will be speaking from separate offices. And unless otherwise noted, comparisons made on this conference call will be between the third quarter of 2021 and the third quarter of 2020.

In addition, today’s discussion will include forward-looking statements, which are subject to risks and uncertainties. Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties.

During this call, we will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings press release, which was issued and filed along with our Form 8-K earlier today.

As a reminder, this conference call will be made available for a replay in the presentations area of the Investors sections of our website www.presidiopt.com, where we will also post our prepared remarks following the conclusion of this call. With that, I will now turn the call over to Jack Heilbron, our President and CEO..

Thank you, Lowell. On past calls, you have heard about the sales of some of our office and retail properties that we have held for several years, where we felt that given the market demand for these properties selling made sense. We are pleased that we can now start to see the future of Presidio taking shape.

In August, we announced the acquisition of a single tenant triple net property in Houston, which we refer to as a mandolin property. Gary will be able to tell you more about that property itself. But taking a big – a look at the big picture, the tenant is in the daycare business. We believe that this business is largely resistant to the internet.

Houston itself has a growing population. And Cypresswood is a very attractive solid sub-market of Houston. We continue to review deals in diversified property types, an approach that we believe will help insulate us from the inevitable cycles of real estate.

We favor areas with solid population growth, substantial university and/or government employment and tenants who provide necessary services. We have seen our share of options and buyers willing to pay, far above what we believe is a fair long-term price for properties.

You can see from our financials that we still have quite a bit of cash that we have not yet deployed. However, we expect to have invested all of it, or nearly all of it by the time we speak with you next.

In holding real estate for the long-term, the price that you buy at is critical and we intend to maintain our discipline, acquiring properties only after careful consideration and analysis. I will now turn the call over to Adam Sragovicz, our CFO to share some financial highlights.

Adam?.

Thank you, Jack. As our shareholder base continues to grow, I would like to extend a welcome to all of our new shareholders. And a reminder you can stay up-to-date on our company by visiting the Investors section of our website at www.presidiopt.com, where we post press releases as well as SEC filings.

Our press releases should also be visible at your favorite financial website or brokerage firm online account, if you look under our stock ticker, SQFT. We would also like to welcome shareholders of our preferred equity, which trades under the symbol, SQFTP.

At a high level, even though we have sold 4 commercial properties in the first half of 2021, our core FFO, which is our main measurement of cash flow, was up 8% for the first three quarters of 2021 when compared to the first three quarters of 2020.

Core FFO was $1.67 million in the first three quarters versus $1.55 million in the first three quarters of 2020. Among other factors, this illustrates the effect of significantly lower interest expense, where we no longer have the expense of mezzanine debt impacting our financial performance.

Going forward, we hope to grow the company with equity and use debt where prudent and customary such as first liens when we acquire properties. Jack mentioned the importance of being a diversified REIT, the benefits of which are reflected in our overall revenue collection this quarter during a time of turmoil suffered by many.

For the third quarter of 2021, we collected 96% of the rent that we build on a consolidated level, which includes the effects of rent abatements and deferrals related to COVID. The strongest areas of the business of Model Homes and Office Properties saw 197% of the budget revenue collected respectively.

The challenges in the industrial property, with 81% of the budgeted rents collected are a temporary nature we believe just related to the timing of tenant turnover. Retail has improved greatly with 92% collected at billed rents. A retail tenant that was operating on a COVID abatement until recently is now back to paying full rent in Q4.

Since Model Homes’ retail and Office Properties account for 94% of the quarter’s rents, the portfolio on balance performed very well during the quarter due to the strength of the core business.

COVID’s impact on our business in the third quarter of 2021, primarily rent abatements extended to businesses operated by retail tenants, totaled approximately $90,000 or only 2% of billed rents. I’ll pass the call now to Gary Katz to address leasing and property activity..

Thank you, Adam. As we felt good about the first half of 2021, the first three quarters of this year have been a solid period for leasing. We executed 43 leases covering a total of about 170,000 square feet, around a third of these transactions represent new tenants while the remainder consist of lease renewals or extensions.

We currently have approximately 19 additional prospective lease transactions in the pipeline and are optimistic about current leasing demand. Our office portfolio consists largely of suburban office properties in regions that are either high growth such as Denver or stable such as Fargo.

Most of our tenants regularly go into the office often with limited capability to work-from-home and we have so far seen limited effects of COVID in 2021. On the property sales front, during 2021, we sold 3 Colorado office properties and 1 California retail property, representing $33 million of transaction volume.

Our remaining California retail center is on the market for sale now. We will continue to market properties for sale when we believe stockholder value will be enhanced. As Adam mentioned, because of our diversified portfolio of properties and tenants, the pandemic has not had a significant impact in our rent collections.

Of the 220 or so tenants in our portfolio, all but one have either satisfied their obligations or currently abiding by the terms as planned. Looking forward, we currently see a lot of positive tenant activity in the market, with a solid number of inquiries for space and tour requests.

Regarding acquisitions, we are busy evaluating many opportunities, some of which we hope to tell you about within the next month or two. To buy smart in the market today, it requires an openness to various property types, such as single tenant, niche healthcare, education or other services.

It also requires us to spend more time visiting the properties, speaking with tenants and evaluating tenant credit. We feel that we have a strong position to execute and provide long-term shareholder value and look forward to telling you soon about new additions to the Presidio property portfolio.

I will pass the call now over to Steve Hightower who will cover activity in the Model Homes division..

Thank you, Gary. Our markets continue to perform very well. Once again, we collected 100% of billed rents in the first three quarters of 2021 validating our approach of seeing these assets as vital to homebuilders. COVID continues to have an impact on our market as prices continue to increase although the pace of increase is slowing.

Builders continue to struggle with shortages of laborer, suitable lots for building and materials. In the first three quarters of 2021, we sold 39 Model Homes for approximately $19 million and recognized the gain of about $2.9 million.

During the first three quarters of the year, we acquired 6 Model Home properties and leased them back to the homebuilders under triple net leases. The purchase price for the properties was approximately $2.9 million. We recently acquired 3 more model home properties in the past few weeks. It is nice to see a small bit of improvement.

Overall, this is a slower pace of acquisition than you saw last year, where we acquired 25 properties in the first three quarters of 2020. We have seen prices surged and watched as builders have been able to sell their inventory quickly. Our success over many years has been helped by not chasing every cycle.

We already see inventories of new homes creeping up and price increases slowing. We are confident that builders will return to our program as the current cycle runs its course and that we will make prudent acquisitions both to manage shareholder risk and position us for good results in the next cycle.

I will pass the call now to Adam to answer questions from our listeners..

Thank you, Steve. We will now take some questions from our listeners. If you have not already done so, please click on ask question, the button in your media player window that you should be able to see if you’d like to submit a question. First question that we got is actually a few different parts.

So, let me ask the first part here to Jack and I think the second part probably goes to Gary.

The first part is if you would say a few words about the recent $10 million purchase plan, is there a time limit and can you help us think about when you would look to repurchase shares?.

We have already repurchased some shares. We setup the program, because we thought the stock was significantly undervalued and we will continue over the course of the next 12 months if the stock sells down to levels that we feel are unattractive and not representative of the true value, we will continue to buy shares back.

Gary, do you want to take the second part?.

Sure. The – when you look at the range of lease rates in our portfolio, it’s a little complicated, because we are diversified and because we own industrial properties that garner low rents and we also own Class A office buildings that garner high rents.

So, our range of rents portfolio-wide would be on the low end of $6 per square foot, on the high end of probably about $28 a square foot. With respect to where renewals are occurring compared to previous, it’s a mixed bag. We have been able to increase rents in most cases.

In some cases, we had in-place rents that were on the high side of market, where we corrected and came down a little bit on the new rent for the renewal. As far as COVID goes, we really have not seen any reduction in rental rates in our markets.

What we have seen is maybe a little bit of additional tenant confession in the form of tenant improvement allowance or free rent, but contract rents have basically held steady..

Got it. Thanks very much.

And then there is a follow-on question related to same-store occupancy, which was down a few percent in 2021 at this point compared to 2020 and just a question if you see that as transitory or when we might expect same-store occupancy to improve?.

This is Gary. I will field that one. We do believe it’s transitory. It’s really a function of just market conditions. It’s not structural vacancy by any stretch. We are – based on the statistics we gave earlier, with respect to our leasing, we are absorbing additional space.

Our renewal rate is pretty strong given where we are in the economy with coming out of the pandemic. And I would expect that the occupancy rate will increase as the quarters – next quarter and then coming year. Back to you, Adam..

Great. Thanks, Gary. Next question here looks like it’s for Steve Hightower.

Question of if you expect further declines in interest rates that might impact the Model Home activity? And the second and third part of that question, I think we will go to Jack, but for the first part, Steve, if you see any further declines?.

Thank you, Adam. I don’t know that we are going to see any substantial decline in the interest rates. I think we are going to start to see some stabilization. I expect as those level off, as noted in the comments, we will start to see some additional interest in the Model Home activity.

Right now, we are seeing the markets that we are in, where there is a lot of buyer interest. And there is not a tremendous amount of product, which is creating a lot of activity for the builders.

And the builders are frankly focused on getting inventory finished for their current clients and getting them on the market versus trying to get new construction up for speculative buying. But I don’t think that we will see any substantial softening in the market, as far as interest rates go..

Great. The next parts of that question, I think are for Jack, if there are any markets that we weren’t looking at before, that might be worth looking at now.

And if we have any sense about inflationary pressure and what we see rates going forward?.

We are looking at different markets than we have been in and are optimistic that we will actually close some transactions in those markets. The inflationary pressure, while it seems to be in goods, the grocery store gasoline prices, we have not seen it yet generally hit what I would call the overall market.

I know each consumer is feeling it, because it costs more to go to the store. But we are not seeing it or having it except in the homebuilders, a shortage of goods and services.

So, I would say right now, inflationary pressure, at least through this year, we feel will be pretty muted and probably end of the first quarter and second quarter of next year..

Great. Thanks for that.

Another question here for Steve Hightower, if you could provide a little more color on the Model Home business, in the sense, is there an opportunity to further scale the business? Something we have discussed many times internally, but why don’t you take that one, Steve?.

Sure. I do think there is some opportunity for continued growth within the business. As we previously noted, the shortage of labor and materials has significantly impacted builders and their ability to put product on the ground. And we expect that there is going to be some improvement in that cycle.

And that as there is some stabilization of the product and buyers. And as there is a little bit more product on the ground, we will start to have some additional opportunities from our clients, existing and new clients that will provide us some opportunities to continue some growth..

That’s great. Thanks very much. Question probably could go to both Jack and Gary.

If we have thought about how if there would be another COVID related lockdown, how that might affect our business and our properties?.

Gary, do you want to go first?.

Sure. The – obviously, the most impacted factor of the market is going to be retail. In the worst of the pandemic lockdowns our centers overall did very well. I think we did – I think we had 11 or 12 tenant workouts out of our entire portfolio. And as we have stated before, we only have one tenant who is still within the throes of that.

I would think that, given the nature of our retail tenants being primarily needs based Amazon proof more service businesses and food, restaurant and grocery that we have seen the worst of it, I would expect, I would hope.

And if we had any issues coming forward, if situation gets worse, I would imagine that we would have worst case some additional deferrals of rent, which are tenants with catch-up at the end either through the amortization of the deferral or an extension of lease term or a combination of both? Jack?.

Thank you, Gary. From my point of view, I think our philosophy of avoiding the major cities, the Chicago’s, New York, San Francisco, LA, has proven out. The cities we have own office buildings in and properties are not necessarily small cities, although Fargo is relatively small.

But COVID did not lock those cities down for them our city – our properties for the most part. Certain employees may have worked from home for a while. We certainly did not have the problem that the major cities had.

And while LA is still on virtual lockdown, if you haven’t had your vaccinations, our markets are operating as they were six months ago and probably will be six months in the future with very little restrictions.

Adam?.

Great. I think we have reached all of our questions. So, I will pass the call now to Lowell to conclude..

Well, thank you, Adam. This concludes Presidio’s third quarter 2021 earnings call. Please be sure to visit our website at www.presidiopt.com and click on the Investors section to stay up-to-date on our press releases and SEC filings. We have also posted supplemental financial information there, in addition to what we filed with the SEC.

Our sincere thanks to everyone for taking the time to join us today and thanks also to those who listened by means of recording. And we are looking forward to visiting with you again when we discuss the results of our 2021 year, which we expect will take place in March of 2022. And once again, thank you..