Presidio Property Trust (SQFT) recently concluded its Q4 2021 earnings call, and while the headline figures garnered attention, a closer look at the transcript reveals a compelling subplot – the strategic silence surrounding the Model Homes division. Often overshadowed by its larger commercial real estate counterpart, this division might be on the verge of a significant expansion, driven by a potent blend of favorable market dynamics and Presidio's characteristic patience.

A History of Steady Performance

The Model Homes division has long been a steady, if not flashy, performer for Presidio. The business model is straightforward yet effective: purchase model homes from homebuilders, lease them back under triple net agreements, and eventually sell them for a profit. Although the recent surge in the housing market led to a slowdown in acquisition rates in 2021, indicators suggest a potential reversal of this trend, potentially ushering in a period of heightened profitability for the division.

Whispers of a Shift

Buried within the transcript is a telling statement from Steve Hightower, President of the Model Home division: "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." This seemingly innocuous comment hints at a powerful underlying shift in the market.

As the housing market cools down from its pandemic-fueled frenzy, builders are likely to face mounting pressure to offload inventory, particularly model homes, which represent a substantial upfront investment. This scenario presents a prime opportunity for Presidio to acquire quality properties at potentially discounted prices, mirroring their historical strategy of capitalizing on market cycles.

Recent Acquisitions: A Sign of Things to Come?

Further evidence supporting this hypothesis can be found in Presidio's recent acquisition activity. During Q3 2021, the company acquired just six Model Homes. However, recent weeks have witnessed a noticeable uptick, with three more properties added to the portfolio. While seemingly insignificant in isolation, these acquisitions could signal the beginning of a broader trend, particularly given Hightower's assertion that builders are showing renewed interest in their program.

Crunching the Numbers: The Potential for a Profit Surge

Let's delve into the numbers. In 2021, Presidio sold 44 Model Homes, generating a profit of $3 million. Assuming even a modest increase in acquisition rate due to the evolving market dynamics, coupled with Presidio's consistent history of realizing gains on sales, the Model Homes division could be poised for a significant profit boost.

Consider this: if Presidio manages to acquire even 20% more Model Homes in 2022 compared to the previous year, their portfolio would expand by approximately nine new properties. If each property yields a conservative average profit of $70,000, the division's profit could surge to $3.6 million, representing a 20% year-over-year increase. This projection doesn't even account for the potential for even higher gains due to favorable acquisition prices in a cooling market.

The Impact on Presidio's Bottom Line

The potential ramifications of this silent expansion on Presidio's bottom line are substantial. While the Model Homes division currently represents a smaller segment of their overall revenue, its high-profit margin and potential for rapid growth cannot be disregarded. If Presidio plays its cards right, leveraging their market expertise and patient approach, the Model Homes division could transform from a steady contributor to a significant driver of shareholder value, turning the whispers of the market into a roar of success.

Financial Performance

"Fun Fact: The term "triple net lease" (NNN) refers to a lease agreement where the tenant is responsible for paying property taxes, insurance, and maintenance costs in addition to the rent. This structure shifts the risk of these expenses from the landlord to the tenant."