Executive Summary / Key Takeaways

• Strategic Portfolio Rebalancing: Presidio Property Trust (SQFT) is actively transforming its diversified portfolio through strategic dispositions of non-core assets and targeted acquisitions, aiming for enhanced cash flow stability and long-term value in a dynamic real estate market.
• Model Home Segment as a Differentiator: The company's unique triple-net leased model home portfolio provides a distinct operational advantage, offering stable rent collection and a flexible disposition strategy, although recent impairments highlight market-specific risks.
• Financial Transition Amidst Headwinds: While recent quarters show a net loss, strategic cost reductions in G&A and gains from property sales are partially offsetting challenges from rising interest rates and asset impairments, signaling a period of financial re-alignment.
• Capital Allocation for Stability: SQFT is leveraging capital raises and a stock repurchase program to manage debt maturities, fund strategic acquisitions, and return value to shareholders, emphasizing a disciplined approach to liquidity and capital deployment.
• Competitive Positioning and Risks: SQFT's internal management and geographic diversification offer competitive moats against larger, more specialized REITs, but its smaller scale and less specialized focus present vulnerabilities in a competitive and evolving industry landscape.

A REIT's Evolving Blueprint: Setting the Scene

Presidio Property Trust, Inc. (NASDAQ:SQFT) operates as an internally managed, diversified Real Estate Investment Trust, strategically acquiring, owning, and managing a portfolio that spans office, industrial, retail, and a distinctive segment of triple-net leased model home properties. Established in 1999 and reincorporated as a Maryland REIT in 2010, Presidio has consistently focused on building a geographically diversified asset base, primarily across Colorado, North Dakota, Southern California, Texas, and Maryland for its commercial properties, with model homes concentrated in Arizona, Tennessee, Texas, and Alabama. This diversification is not merely a collection of assets but a deliberate strategy to mitigate the inherent cyclicality and regional vulnerabilities of the real estate market.

The company's overarching strategy centers on disciplined acquisitions of stabilized properties or those expected to stabilize within two to three years, coupled with an active approach to portfolio optimization through strategic dispositions. This approach is designed to enhance cash flow stability and long-term shareholder value. Presidio's internal management structure provides a competitive advantage by eliminating external management fees, contributing to cost leadership and potentially better gross margins compared to externally managed peers. This operational efficiency is a key differentiator in a sector often characterized by high overheads.

In the broader real estate industry, SQFT operates alongside formidable competitors. Major industrial REITs like Prologis (PLD) dominate the logistics and warehouse space with global scale, while office giants such as Boston Properties (BXP) command premium urban markets. Retail-focused REITs like Realty Income (O) excel with their net lease models. SQFT's diversified approach, while offering resilience through varied asset classes, means it often lags these specialized rivals in scale and market share within their core segments. For instance, while SQFT's industrial assets contribute to its portfolio, they do not possess the extensive global networks or specialized logistics expertise of a Prologis. Similarly, its office holdings, largely suburban, do not compete directly with BXP's high-value urban centers, which typically command higher occupancy and rental rates.

Despite these competitive dynamics, Presidio's geographic diversification acts as a significant moat, spreading risk across different regional economies and property types. This strategy aims to deliver more stable revenue streams and foster stronger local tenant relationships. The company's unique model home segment, where properties are leased back to homebuilders on a triple-net basis, further differentiates its business model. This segment, while not a "technological" innovation in the traditional sense, represents an operational innovation in real estate investment, providing a stable, low-maintenance income stream by shifting operating expenses to the tenant. This model is particularly resilient as homebuilders view these assets as vital for their sales operations, leading to consistent rent collection.

Strategic Portfolio Rebalancing and Operational Focus

Presidio's recent activities underscore a commitment to strategic portfolio rebalancing. Historically, the company expanded its commercial footprint significantly in the 2010s, building a foundation of office, industrial, and retail assets. More recently, this strategy has involved a calculated exit from certain markets. In 2021, Presidio divested three Colorado office properties and a California retail property, culminating in the sale of the World Plaza retail center to exit non-headquarters California retail. This move reflects management's belief that "California is a dynamic real estate market, but we believe that based on what we see currently there are better investment returns to be had elsewhere."

The first half of 2025 continued this rebalancing, with the sale of Union Town Center and Research Parkway, two commercial properties, for a combined $16.95 million, yielding a net gain of $4.20 million. Concurrently, the company acquired 22 model homes for approximately $9.40 million, demonstrating a continued commitment to its specialized model home segment. This segment, comprising 87 properties totaling 260,227 square feet, operates on a triple-net lease basis, where homebuilders cover all operating expenses. This structure has historically ensured 100% rent collection, validating its resilience. However, recent impairment charges of $0.10 million for model homes in Q2 2025, attributed to "short hold period, less than two years, and the builder changing their model style," highlight the segment's exposure to market-specific shifts in homebuilder strategies and housing trends.

The office and industrial segments, totaling 758,175 square feet across eight office buildings and one industrial property, have shown resilience. Management noted "limited effects of COVID" in 2021, with tenants largely returning to offices in their suburban and stable markets like Denver and Fargo. Leasing activity remains robust, with 50 leases covering 217,000 square feet executed in 2021, and 18 additional prospective transactions in the pipeline. This stability is crucial, especially given the ongoing re-leasing efforts for the 45,535 square foot vacant space at Shea Center II, a property that incurred a $0.90 million impairment charge in Q2 2025 based on market conditions and occupancy rates.

Financial Performance: A Period of Transition

Presidio's financial performance in the first half of 2025 reflects a company in transition, actively reshaping its asset base. For the three months ended June 30, 2025, total revenues were approximately $4.40 million, a slight decrease from $4.60 million in the same period of 2024, primarily due to the commercial property sales in February 2025. This revenue decline was accompanied by a notable reduction in General and Administrative (G&A) expenses, which fell by approximately $1.00 million to $1.20 million in Q2 2025 compared to Q2 2024. This improvement stemmed from the absence of certain 2024 consulting and legal fees, reduced board fees (offset by stock compensation), lower income tax preparation fees, and decreased company-wide bonus accruals.

Despite these cost efficiencies, the company reported a net loss attributable to common stockholders of $5.85 million for Q2 2025, an improvement from the $12.39 million loss in Q2 2024.

This period saw significant non-cash impairment charges totaling $4.32 million, including $3.30 million for the Dakota Center property due to its pending sale, which is expected to close in Q3 2025 with a discounted payoff for its non-recourse loan. For the six months ended June 30, 2025, total revenues were $8.50 million, down from $9.40 million in the prior year period, mainly due to decreased model home rental income, transaction fees, and the commercial property sales. However, a net gain of $4.78 million from real estate sales partially offset this, contributing to a reduced net loss of $4.16 million for common stockholders, compared to $18.16 million in the first half of 2024.

Operating cash flow for the six months ended June 30, 2025, showed a net use of $1.01 million, an improvement from $1.30 million used in the prior year. Investing activities provided $11.37 million in cash, largely driven by the $16.95 million commercial property sales. However, financing activities used $11.11 million, reflecting debt repayments and stock repurchases.

The weighted average interest rate on outstanding debt increased to 5.90% as of June 30, 2025, from 5.38% a year prior, indicating rising financing costs. The company's TTM financial ratios, including a negative P/E ratio of -0.49 and a P/S ratio of 0.40, reflect the ongoing revaluation and restructuring of its asset base.

Capital Structure and Liquidity: Managing Debt and Funding Growth

Presidio's liquidity strategy is multifaceted, balancing debt management with opportunistic capital deployment. The company anticipates future liquidity from existing cash, operating cash flows, refinancing existing mortgages, future real estate sales, and new borrowings. As of June 30, 2025, cash, cash equivalents, and restricted cash stood at $7.30 million. A significant portion, $1.50 million to $2.00 million, is earmarked for capital expenditures on existing properties over the next 12 months.

A critical near-term challenge is the maturity of three commercial property loans totaling approximately $28.10 million within the next 12 months. Management is actively exploring refinancing, restructuring, or selling these properties, having already finalized terms sheets to refinance Genesis Plaza and One Park Centre loans, expected to close in August and September 2025, respectively. The non-recourse loan on the Dakota Center property, which matured in July 2024, is being settled through a property sale expected in Q3 2025. This proactive approach to debt maturities is essential for maintaining financial flexibility.

The weighted average interest rate on outstanding debt increased to 5.90% as of June 30, 2025, from 5.38% a year prior, indicating rising financing costs.

In July 2025, Presidio successfully completed a registered direct offering, raising approximately $1.70 million in net proceeds from the sale of Series A Common Stock and pre-funded warrants. This capital is intended for working capital and potential property acquisitions. This follows earlier capital raises in 2021, including $23 million from preferred shares and $10 million from common shares and warrants, which significantly bolstered the company's financial capacity. The company also maintains a stock repurchase program, authorized in December 2024 for up to $6.00 million of Series A Common Stock and $4.00 million of Series D Preferred Stock, signaling management's belief in "significant embedded value in our assets that is yet to be realized by the market."

Outlook and Risks: Charting a Course Through Uncertainty

Presidio's outlook is one of cautious optimism, grounded in a disciplined approach to real estate investment and a commitment to portfolio optimization. Management expects current working capital and refinancing capabilities to fund operations for at least the next 12 months. The strategic focus remains on "yield driven, stable longer term lease properties with little capital expense exposure and little lease rollover expense," aiming to generate consistent cash flow. The company anticipates new mortgages for acquisitions will likely be at higher interest rates, reflecting current market conditions.

However, several risks warrant close monitoring. The inability to secure new tenants for the substantial vacant space at Shea Center II poses an operational challenge. Broader macroeconomic concerns, including potential recession, rising interest rates, trade wars, labor shortages, and inflation, could impact property values and rental rates. Geopolitical conflicts, such as those in the Middle East and Ukraine, introduce further uncertainty, potentially disrupting supply chains and affecting commercial real estate fundamentals. The company's smaller scale and less specialized focus, compared to larger REITs, could limit its access to capital and increase costs in competitive acquisition scenarios.

Despite these headwinds, Presidio's internal management and diversified portfolio, particularly its model home segment, offer a degree of resilience. The company's historical ability to manage through economic downturns and the COVID-19 pandemic, with limited impact on rent collections, provides a testament to its operational strategy. Management's commitment to "smart acquisitions" and a disciplined capital allocation framework aims to position Presidio for long-term growth, even as it navigates a complex and evolving real estate landscape.

Conclusion

Presidio Property Trust is undergoing a strategic re-alignment, shedding non-core assets and focusing on a diversified, cash-flow-centric portfolio. The unique model home segment, alongside a resilient office/industrial presence, forms the bedrock of its operational strategy, providing stability through triple-net leases and disciplined acquisitions. While recent financial results reflect the impact of asset impairments and portfolio rebalancing, the company's proactive management of G&A expenses and successful capital raises underscore a commitment to strengthening its financial foundation.

For investors, SQFT represents a REIT in transition, leveraging its internal management and geographic diversification as competitive advantages in a market dominated by larger, specialized players. The ongoing efforts to manage debt maturities, deploy capital into yield-driven properties, and selectively return value to shareholders through repurchases are critical indicators of its forward trajectory. The investment thesis hinges on management's ability to execute its rebalancing strategy effectively, mitigate macroeconomic and operational risks, and continue to identify accretive opportunities that capitalize on its differentiated business model in a dynamic real estate environment.