Presidio Property Trust, Inc. - Quarter Report: 2010 March (Form 10-Q)

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period from to

000-53673
(Commission file No.)

NetREIT

(Exact name of registrant as specified in its charter)


CALIFORNIA		33-0841255
(State or other jurisdiction of incorporation or		(I.R.S. employer identification no.)
organization

1282 Pacific Oaks Place, Escondido, California 92029
(Address of principal executive offices)

(760) 471-8536
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At May 12, 2010, registrant had issued and outstanding 10,852,545 shares of its common stock, no par value.

INDEX


	Page

Part I FINANCIAL INFORMATION:

Item 1. FINANCIAL STATEMENTS:

Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009		3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (unaudited)		4

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2010 (unaudited)		5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)		6

Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures about Market Risk		41

Item 4T. Controls and Procedures		41

Part II OTHER INFORMATION

Item 1. Legal Proceedings		41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3. Defaults Upon Senior Securities		42

Item 4. [Removed and Reserved]		42

Item 5. Other Information		42

Item 6. Exhibits		43

Signatures		44

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

NetREIT

Condensed Consolidated Balance Sheets


	*March 31,*			*December 31,*
	*2010*			*2009*
	(Unaudited)
ASSETS
Real estate assets, net	$	90,514,834		$	69,829,603
Lease intangibles, net		765,674			719,857
Land purchase option		1,370,000			1,370,000
Investment in real estate ventures		—			14,192,629
Mortgages receivable and interest		920,216			920,216
Cash and cash equivalents		11,664,937			9,298,523
Restricted cash		225,897			296,395
Tenant receivables, net		126,008			163,875
Due from related party		39,404			20,081
Other assets, net		3,631,286			3,180,658


TOTAL ASSETS	$	109,258,256		$	99,991,837


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable	$	31,886,047		$	26,995,502
Accounts payable and accrued liabilities		1,705,717			1,923,811
Dividends payable		705,644			649,008
Tenant security deposits		258,183			258,455

Total liabilities		34,555,591			29,826,776


Commitments and contingencies

Shareholders’ equity:
Undesignated preferred stock, no par value, shares authorized: 8,995,000, no shares issued and outstanding at March 31, 2010 and December 31, 2009		—			—
Series A preferred stock, no par value, shares authorized: 5,000, no shares issued and outstanding at March 31, 2010 and December 31, 2009		—			—
Convertible Series AA preferred stock, no par value, $25 liquidating preference, shares authorized: 1,000,000; 50,200 shares issued and outstanding, liquidating value of $1,255,000 at March 31, 2010 and December 31, 2009		1,028,916			1,028,916
Common stock Series A, no par value, shares authorized: 100,000,000; 10,808,326 and 10,224,262 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		90,461,266			85,445,674
Common stock Series B, no par value, shares authorized: 1,000, no shares issued and outstanding at March 31, 2010 and December 31, 2009		—			—
Additional paid-in capital		433,204			433,204
Dividends paid in excess of accumulated losses		(23,934,005	)		(21,104,741	)

Total NetREIT shareholders’ equity		67,989,381			65,803,053
Noncontrolling interests		6,713,284			4,362,008


Total Shareholders’ equity		74,702,665			70,165,061


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	109,258,256		$	99,991,837

See notes to condensed consolidated financial statements.

NetREIT

Condensed Consolidated Statements of Operations

(Unaudited)


	*Three Months*			*Three Months*
	*Ended*			*Ended*
	*March 31,*			*March 31,*
	*2010*			*2009*

Rental income	$	2,013,676		$	1,240,287


Costs and expenses:
Interest		377,155			226,556
Rental operating costs		934,462			583,350
General and administrative		762,469			550,672
Depreciation and amortization		777,482			500,240

Total costs and expenses		2,851,568			1,860,818


Other income (expense):
Interest income		26,915			15,967
Equity in earnings (losses) of real estate ventures		1,769			(56,698	)

Total other income (expense)		28,684			(40,731	)


Net loss before noncontrolling interests		(809,208	)		(661,262	)


Income attributable to noncontrolling interests		36,776			—


Net loss		(845,984	)		(661,262	)

Preferred stock dividends		(21,963	)		(21,963	)


Net loss attributable to common shareholders	$	(867,947	)	$	(683,225	)


Loss per common share — basic and diluted	$	(0.08	)	$	(0.09	)


Weighted average number of common shares outstanding — basic and diluted		10,393,028			7,322,351

See notes to condensed consolidated financial statements.

NetREIT

Condensed Consolidated Statements of Shareholders’ Equity

Three Months Ended March 31, 2010

(Unaudited)


												Dividends
	Convertible											Paid			Total
	Series AA									Additional		in Excess of			NetREIT
	Preferred Stock				Common Stock					Paid-in		Accumulated			Shareholders’			Noncontrolling
	Shares		Amount		Shares		Amount			Capital		Losses			Equity			Interests		Total

Balance December 31, 2009		50,200	$	1,028,916		10,224,262	$	85,445,674		$	433,204	$	(21,104,741	)	$	65,803,053		$	4,362,008	$	70,165,061
Sale of common stock and warrants at $10 per share						442,008		4,420,082								4,420,082					4,420,082
Stock issuance costs								(692,841	)							(692,841	)				(692,841	)
Exercise of stock options						1,452		2,000								2,000					2,000
Shares issuable upon expiration of warrants						52,778		453,889					(453,889	)
Vesting of restricted stock previously issued						1,050		8,715								8,715					8,715
Contributed capital of noncontrolling interests																			2,314,500		2,314,500
Net loss													(845,984	)		(845,984	)		36,776		(809,208	)
Dividends (declared)/ reinvested						86,776		823,747					(1,529,391	)		(705,644	)				(705,644	)

Balance, March 31, 2010		50,200	$	1,028,916		10,808,326	$	90,461,266		$	433,204	$	(23,934,005	)	$	67,989,381		$	6,713,284	$	74,702,665

See notes to condensed consolidated financial statements.

NetREIT

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	*Three Months*			*Three Months*
	*Ended*			*Ended*
	*March 31,*			*March 31,*
	*2010*			*2009*
Cash flows from operating activities:
Net loss	$	(845,984	)	$	(661,262	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		777,482			500,240
Stock compensation		8,715			—
Bad debt expense		65,461			21,461
Distributions to real estate ventures in excess of earnings		(58,935	)		141,751
Equity in (earnings) losses of real estate ventures		(1,769	)		56,698
Income attributable to noncontrolling interests		36,776			—
Changes in operating assets and liabilities:
Deferred rent receivable		(21,453	)		(29,524	)
Tenant receivables		(27,594	)		(59,612	)
Due from related parties		(19,323	)		15,003
Other assets		(284,479	)		(43,897	)
Accounts payable and accrued liabilities		(218,096	)		(156,848	)
Tenant security deposits		(272	)		59,895

Net cash used in operating activities		(589,471	)		(156,095	)


Cash flows from investing activities:
Real estate investments		(140,858	)		(12,309,254	)
Deposits on potential acquisitions		—			360,618
Restricted cash		70,498			48,288

Net cash used in investing activities		(70,360	)		(11,900,348	)


Cash flows from financing activities:
Proceeds from mortgage notes payable		—			7,811,750
Repayment of mortgage notes payable		(161,467	)		(3,034,490	)
Net proceeds from issuance of common stock		3,727,241			4,224,590
Repurchase of common stock		—			(20,000	)
Exercise of stock options		2,000			9,437
Deferred stock issuance costs		(161,672	)		(185,988	)
Dividends paid		(649,008	)		(754,139	)

Net cash provided by financing activities		2,757,094			8,051,160


Net increase (decrease) in cash and cash equivalents		2,097,263			(4,005,283	)

Cash and cash equivalents:
Beginning of year		9,298,523			4,778,761

Addition to cash from consolidation of joint venture		269,151			—


End of year	$	11,664,937		$	773,478


Supplemental disclosure of cash flow information:
Interest paid	$	298,142		$	206,562


Non-cash investing activities:
Reclassification of real estate to investment in real estate ventures	$	—		$	15,910,644

Reclassification of investments in real estate ventures to real estate assets	$	21,188,400		$	—


Non-cash financing activities:
Reinvestment of cash dividend	$	823,747		$	591,768

Accrual of dividends payable	$	705,644		$	495,797

See notes to condensed consolidated financial statements.

NetREIT

Notes to Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization. NettREIT (the “Company”) was incorporated in the State of California on January 28, 1999 for the purpose of investing in real estate properties. The Company qualifies and operates as a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, (the “Code”) and commenced operations with capital provided by its private placement offering of its equity securities in 1999.

The Company invests in a diverse portfolio of real estate assets. The primary types of properties the Company invests in include office, retail, self-storage properties and residential properties located in the western United States.

As of March 31, 2010, the Company owned or had an equity interest in seven office buildings (“Office Properties”) which total approximately 354,000 rentable square feet, three retail shopping centers and a 7-Eleven property (“Retail Properties”) which total approximately 85,000 rentable square feet, four self-storage facilities (“Self-Storage Properties”) which total approximately 386,000 rentable square feet, investments in two limited partnerships with 19 model homes and one 39 unit apartment building (“Residential Properties”).

The Company is a General Partner in four limited partnerships (NetREIT 01 LP, NetREIT Palm Self-Storage LP, NetREIT Casa Grande LP and NetREIT Garden Gateway LP) and a Managing Member in one limited liability company (Fontana Medical Plaza, LLC) with ownership in real estate income producing properties. In addition, the Company is a limited partner in two partnerships that purchase and leaseback model homes from developers. We refer to these entities collectively, as the “Partnerships”.

In March 2010, the Company acquired the name, employee’s and rights to the use of the name and to do business as Dubose Model Homes USA (“DMHU”). The Company paid $300,000 cash for and agreed to issue up to 120,000 shares of Company common stock if certain production levels of new business are achieved over the next three years. The transaction has been accounted for as an asset acquisition. DMHU purchased and leased back model homes from and to developers. That business will continue doing business as NetREIT Dubose Model Homes. As a result of the Company’s management contract to manage the role of the former general partner, the two limited partnerships that NetREIT had an investment in at DMHU are consolidated into the financial statements of NetREIT effective March 1, 2010.

Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared by the Company’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures required for annual consolidated financial statements have been condensed or excluded pursuant to rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of our financial position, results of our operations, and cash flows as of and for the three months ended March 31, 2010 and 2009. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The condensed balance sheet at December 31, 2009 has been derived from the audited financial statements included in the Form 10-K.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of NetREIT and its subsidiaries, the Partnerships. As used herein, the “Company” refers to NetREIT and the Partnerships, collectively. All significant intercompany balances and transactions have been eliminated in consolidation.

Prior to formation of the Partnerships, the properties owned by those partnerships were held as tenants in common (“TIC”) with the other investors and accounted for using the equity method due to substantive participation rights of the TIC. Upon formation of the Partnerships, NetREIT became the sole general partner in each of these partnerships and the rights of the other partners were limited to certain protective rights. As a result of the change in the Company’s ability to influence and control the Partnerships, they are now accounted for as a subsidiary of the Company and are fully consolidated in the Company’s financial statements.

The Company classifies the noncontrolling interests in the Partnerships as part of consolidated net loss in the three months ended March 31, 2010 and includes the accumulated amount of noncontrolling interests as part of Shareholders’ equity from their inception in 2009. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interest will be remeasured with the gain or loss reported in the statement of operations. Management has evaluated the noncontrolling interests and determined that they do not contain any redemption features.

Federal Income Taxes. The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Code, for federal income tax purposes. To qualify as a REIT, the Company must distribute annually at least 90% of adjusted taxable income, as defined in the Code, to its shareholders and satisfy certain other organizational and operating requirements. As a REIT, no provision will be made for federal income taxes on income resulting from those sales of real estate investments which have or will be distributed to shareholders within the prescribed limits. However, taxes will be provided for those gains which are not anticipated to be distributed to shareholders unless such gains are deferred pursuant to Section 1031. In addition, the Company will be subject to a federal excise tax which equals 4% of the excess, if any, of 85% of the Company’s ordinary income plus 95% of the Company’s capital gain net income over cash distributions, as defined.

Earnings and profits that determine the taxability of distributions to shareholders differ from net income reported for financial reporting purposes due to differences in estimated useful lives and methods used to compute depreciation and the carrying value (basis) on the investments in properties for tax purposes, among other things. During the years ended December 31, 2009 and 2008, all distributions were considered return of capital to the shareholders and therefore non-taxable.

The Company believes that it has met all of the REIT distribution and technical requirements for the three months ended March 31, 2010 and for the year ended December 31, 2009.

Stock Dividend. In December 2009, the Company declared a 5% stock dividend which was paid in Company common stock on January 2, 2010 to shareholders of record on January 1, 2010. All loss per share calculations are based on adjusted shares for the stock dividend as if the shares were issued at the beginning of the first period presented.

Real Estate Assets

Property Acquisitions. The Company accounts for its acquisitions of real estate in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which requires the purchase price of acquired properties be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, a land purchase option, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships, based in each case on their fair values.

The Company allocates the purchase price to tangible assets of an acquired property (which includes land, building and tenant improvements) based on the estimated fair values of those tangible assets, assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third party valuations. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

The land lease acquired with the World Plaza acquisition in 2007 has a fixed purchase price option cost of $181,710 at the termination of the lease in 2062. Management valued the land option at its residual value of $1,370,000, based upon comparable land sales adjusted to present value. The difference between the strike price of the option and the recorded cost of the land purchase option is approximately $1.2 million. Accordingly, management has determined that exercise of the option is considered probable. The land purchase option was determined to be a contract based intangible asset associated with the land. As a result, this asset has an indefinite life and is treated as a non-amortizable asset. The amount is included as land purchase option on the accompanying balance sheets.

The value of in-place leases, unamortized lease origination costs and tenant relationships are amortized to expense over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what the Company would have paid to a third party to recruit a new tenant reduced by the expired term of the respective lease. The amount allocated to tenant relationships is the benefit resulting from the likelihood of a tenant renewing its lease. Amortization expense related to these assets was $133,455 and $86,861 for the three months ended March 31, 2010 and 2009, respectively.

Sales of Undivided Interests in Properties. Gains from the sale of undivided interests in properties are recognized under the full accrual method by the Company when certain criteria are met. Gain or loss (the difference between the sales value and the proportionate cost of the partial interest sold) shall be recognized at the date of sale if a sale has been consummated and the following criteria are met:

a. The buyer is independent of the seller.

b. Collection of the sales price is reasonably assured.

c. The seller will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest.

Gains relating to transactions which do not meet the criteria for full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met or by using the installment or deposit methods of profit recognition, as appropriate in the circumstances.

As of March 31, 2010 and December 31, 2009, the Company did not classify any properties as held for sale.

Depreciation and Amortization of Buildings and Improvements. Land, buildings and improvements are recorded at cost. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. The cost of buildings and improvements are depreciated using the straight-line method over estimated useful lives ranging from 30 to 55 years for buildings, improvements are amortized over the shorter of the estimated life of the asset or term of the tenant lease which range from 1 to 10 years, and 4 to 5 years for furniture, fixtures and equipment. Depreciation expense for buildings and improvements for the three months ended March 31, 2010 and 2009, was $644,027 and $403,531, respectively.

Impairment. The Company reviews the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows. There have been no impairments recognized on the Company’s real estate assets at December 31, 2009 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

Intangible Assets. Lease intangibles represents 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 a land purchase option. Intangible assets are comprised of finite-lived and indefinite-lived assets. Indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives.

The Company is required to perform a test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant. Based on the review, no impairment was deemed necessary at December 31, 2009 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value. 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. Based on the review, no impairment was deemed necessary at December 31, 2009 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

Investments in Real Estate Ventures. The Company analyzes its investments in joint ventures to determine whether the joint venture should be accounted for under the equity method of accounting or consolidated into the financial statements. The Company has determined that the tenant in common investors in its real estate ventures have certain protective and substantive participation rights that limit the Company’s control of the investment. Therefore, the Company’s share of its investment in real estate ventures were accounted for under the equity method of accounting in the accompanying financial statements while properties were held as tenants in common.

Under the equity method, the Company’s investment in real estate ventures is stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the Company’s ownership interest in the earnings of each of the unconsolidated real estate ventures. For the purposes of presentation in the statement of cash flows, the Company follows the “look through” approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture’s sale of assets) in which case it is reported as an investing activity. Management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired when events or circumstances indicate that there may be an impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment. No impairment charges were recognized for the years ended December 31, 2009 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

Revenue Recognition. The Company recognizes revenue from rent, tenant reimbursements, and other revenue once all of the following criteria are met:

	•		persuasive evidence of an arrangement exists;

	•		delivery has occurred or services have been rendered;

	•		the amount is fixed or determinable; and

	•		the collectability of the amount is reasonably assured.

Annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease.

Certain of the Company’s leases currently contain rental increases at specified intervals. The Company records as an asset, and includes in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rent receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews material deferred rent receivable, as it relates to straight-line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, the Company records an increase in the allowance for uncollectible accounts or records a direct write-off of the specific rent receivable. No such reserves have been recorded as of March 31, 2010 or December 31, 2009.

Interest income on mortgages receivable is accrued as it is earned. The Company stops accruing interest income on a loan if it is past due for more than 90 days or there is doubt regarding collectability of the loan principal and/or accrued interest receivable.

Loss Per Common Share. Basic loss per common share (“Basic EPS”) is computed by dividing net loss available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Diluted loss per common share (“Diluted EPS”) is similar to the computation of Basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net earnings per share.

The following is a reconciliation of the denominator of the basic loss per common share computation to the denominator of the diluted loss per common share computations, for the three months ended March 31:


	2010		2009
Weighted average shares used for Basic EPS		10,393,028		6,973,668

Stock dividend declared in December 2009 (retroactive adjustment)		—		348,683

Effect of dilutive securities:

Incremental shares from share-based compensation		—		—
Incremental shares from conversion of NetREIT 01 LP Partnership		—		—
Incremental shares from conversion of NetREIT Casa Grande LP Partnership		—		—
Incremental shares from conversion of NetREIT Palm LP Partnership		—		—
Incremental shares from conversion of NetREIT Garden Gateway Partnership		—		—
Incremental shares from convertible preferred stock and warrants		—		—

Adjusted weighted average shares used for diluted EPS		10,393,028		7,322,351

Weighted average shares from share based compensation, shares from conversion of NetREIT 01 LP Partnership, Casa Grande LP Partnership, NetREIT Palm Self-Storage LP Partnership, NetREIT Garden Gateway LP Partnership and shares from convertible preferred stock and warrants with respect to a total of 1,073,027 and 952,056 shares of common stock for the three months ended March 31, 2010 and 2009, respectively, were excluded from the computation of diluted earnings per share as their effect was anti-dilutive.

Fair Value of Financial Instruments and Certain Other Assets/Liabilities. The Company calculates the fair value of financial instruments using available market information and appropriate present value or other valuation techniques such as discounted cash flow analyses. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot always be substantiated by comparison to independent markets and in many cases, could not be realized in immediate settlement of the instruments. Management believes that the carrying values reflected in the accompanying balance sheets reasonably approximate the fair values for financial instruments.

The Company does not have any assets or liabilities that are measured at fair value on a recurring basis and, as of March 31, 2010, does not have any assets or liabilities that were measured at fair value on a nonrecurring basis.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allocation of purchase price paid for property acquisitions between land, building and intangible assets acquired including their useful lives; the allowance for doubtful accounts, which is based on an evaluation of the tenants’ ability to pay and the provision for possible loan losses with respect to mortgages receivable and interest. Actual results may differ from those estimates.

Segments. The Company acquires and operates income producing properties including office properties, residential properties, retail properties and self-storage properties and invests in real estate assets, including real estate loans and, as a result, the Company operates in five business segments. See Note 8 “Segments”.

3. REAL ESTATE ASSETS AND LEASE INTANGIBLES

A summary of the sixteen properties and investments in nineteen model homes owned by the Company as of March 31, 2010 is as follows:

Real estate

Square

Property

assets, net

Property Name

Date Acquired

Location

Footage

Description

(in thousands)

Casa Grande Apartments

April 1999

Cheyenne, Wyoming

29,250

Residential

1,553.9

Havana/Parker Complex

September 2006

Aurora, Colorado

114,000

Office

6,556.7

7-Eleven

September 2006

Escondido, California

3,000

Retail

1,320.2

Garden Gateway Plaza

March 2007

Colorado Springs, Colorado

115,052

Office

13,349.3

World Plaza

September 2007

San Bernardino, California

55,098

Retail

5,825.7

Regatta Square

October 2007

Denver, Colorado

5,983

Retail

2,019.2

Sparky’s Palm Self-Storage

November 2007

Highland, California

50,250

Self Storage

4,792.7

Sparky’s Joshua Self-Storage

December 2007

Hesperia, California

149,750

Self Storage

7,449.4

Executive Office Park

July 2008

Colorado Springs, Colorado

65,084

Office

9,069.7

Waterman Plaza

August 2008

San Bernardino, California

21,170

Retail

6,672.5

Pacific Oaks Plaza

September 2008

Escondido, California

16,037

Office

4,698.2

Morena Office Center

January 2009

San Diego, California

26,784

Office

6,211.4

Fontana Medical Plaza

February 2009

Fontana, California

10,500

Office

1,919.2

Rangewood Medical Office Building

March 2009

Colorado Springs, Colorado

18,222

Office

2,493.7

Sparky’s Thousand Palms Self-Storage

August 2009

Thousand Palms, California

113,126

Self Storage

6,078.7

19 Model Home Properties

Various in 2009

California and Nevada

46,637

Residential

7,725.6

Sparky’s Hesperia East Self-Storage

December 2009

Hesperia, California

72,940

Self Storage

2,778.7

Total real estate assets, net

90,514.8

A summary of the fifteen properties owned by the Company as of December 31, 2009 is as follows:

Real estate

Square

Property

assets, net

Property Name

Date Acquired

Location

Footage

Description

(in thousands)

Casa Grande Apartments

April 1999

Cheyenne, Wyoming

29,250

Residential

1,571.9

Havana/Parker Complex

September 2006

Aurora, Colorado

114,000

Office

6,587.6

7-Eleven

September 2006

Escondido, California

3,000

Retail

1,325.6

World Plaza

September 2007

San Bernardino, California

55,098

Retail

5,810.5

Regatta Square

October 2007

Denver, Colorado

5,983

Retail

2,030.2

Sparky’s Palm Self-Storage

November 2007

Highland, California

50,250

Self Storage

4,819.4

Sparky’s Joshua Self-Storage

December 2007

Hesperia, California

149,750

Self Storage

7,491.5

Executive Office Park

July 2008

Colorado Springs, Colorado

65,084

Office

9,180.5

Waterman Plaza

August 2008

San Bernardino, California

21,170

Retail

6,699.2

Pacific Oaks Plaza

September 2008

Escondido, California

16,000

Office

4,725.3

Morena Office Center

January 2009

San Diego, California

26,784

Office

6,247.7

Fontana Medical Plaza

February 2009

Fontana, California

10,500

Office

1,929.2

Rangewood Medical Office Building

March 2009

Colorado Springs, Colorado

18,222

Office

2,513.8

Sparky’s Thousand Palms Self-Storage

August 2009

Thousand Palms, California

113,126

Self Storage

6,112.9

Sparky’s Hesperia East Self-Storage

December 2009

Hesperia, California

72,940

Self Storage

2,784.3

Total real estate assets, net

69,829.6

The following table sets forth the components of the Company’s in real estate assets:


	*March 31,*			*December 31,*
	*2010*			*2009*
Land	$	17,856,540		$	13,820,313
Buildings and other		74,921,387			57,269,228
Tenant improvements		3,445,414			2,061,107

		96,223,341			73,150,648
Less accumulated depreciation and amortization		(5,708,507	)		(3,321,045	)

Real estate assets, net	$	90,514,834		$	69,829,603

Operations from each property are included in the Company’s financial statements from the date of acquisition.

The Company acquired the following properties in 2009:

In January 2009, the Company acquired the Morena Office Center, an office building located in San Diego, California. The purchase price for the property was $6.6 million, including transaction costs. The Company purchased the property with $3.4 million cash and a $3.2 million draw on its former line of credit facility. This property consists of a building of approximately 26,784 rentable square feet.

In February 2009, the Company and Fontana Dialysis Building, LLC formed Fontana Medical Plaza, LLC (“FMP”) for which the Company is Managing Member and 51% owner. FMP assumed an agreement to purchase the Fontana Medical Plaza located in Fontana, California. The purchase price for the property was $1.9 million. The Company purchased the property with $800,000 cash and a $1,100,000 draw on its former line of credit facility. The property consists of approximately 10,500 rentable square feet.

In March 2009, the Company acquired The Rangewood Medical Office Building (“Rangewood”) located in Colorado Springs, Colorado. The purchase price for the property was $2.6 million, including transaction costs. The Company purchased the property with $200,000 cash and a $2,430,000 draw on its former line of credit facility. Rangewood is a 3-story, Class A medical office building of approximately 18,222 rentable square feet.

In August 2009, the Company completed the acquisition of Sparky’s Thousand Palms Self-Storage (Formerly known as Monterey Palms Self-Storage) (“Thousand Palms”) located in Thousand Palms, California. The purchase price for the Property was $6.2 million. The Company paid the purchase price through a cash payment of $1.5 million which was applied to closing costs and fees and to an existing loan secured by Thousand Palms, and assumed a nonrecourse, variable interest rate, promissory note with a principal balance after the closing of $4.7 million. Thousand Palms consists of 113,126 rentable square feet comprised of 549 storage units.

In December 2009, the Company completed the acquisition of Sparky’s Hesperia East Self-Storage East (Formerly known as St. Thomas Self-Storage) located in Hesperia California. The purchase price for the Property was $2.8 million. The Company paid the purchase price through a cash payment of $1.1 million and a promissory note in the amount of $1.7 million. The property consists of approximately 5.8 acres of land, 72,940 rentable square feet and approximately 479 self-storage units.

The Company allocated the purchase price of the properties acquired during 2009 as follows:


			Buildings		Tenant		In-place		Leasing		Tenant		Total Purchase
	Land		and other		Improvements		Leases		Costs		Relationships		Price
Morena Office Center		1,333,000		4,833,141		242,324		80,861		85,674				6,575,000
Fontana Medical Plaza		556,858		1,362,942										1,919,800
Rangewood Medical Office Building		572,000		1,750,732		152,683		41,043		113,542				2,630,000
Sparky’s Thousand Palms Self-Storage		620,000		5,530,000								50,000		6,200,000
Sparky’s Joshua Self-Storage East		1,470,000		1,305,000										2,775,000

The Company did not acquire any properties during the three months ended March 31, 2010.

Lease Intangibles

The following table summarizes the net value of other intangible assets and the accumulated amortization for each class of intangible asset:


	March 31, 2010							December 31, 2009
						Lease								Lease
	Lease		Accumulated			intangibles,		Lease			Accumulated			intangibles,
	intangibles		Amortization			net		intangibles			Amortization			net
In-place leases	$	831,181	$	(426,187	)	$	404,994	$	643,630		$	(255,127	)	$	388,503
Leasing costs		658,003		(318,157	)		339,846		508,621			(188,100	)		320,521
Tenant relationships		332,721		(311,887	)		20,834		332,721			(299,388	)		33,333
Below-market leases		—		—			—		(40,160	)		17,660			(22,500	)

	$	1,821,905	$	(1,056,231	)	$	765,674	$	1,444,812		$	(724,955	)	$	719,857

As of March 31, 2010, the estimated aggregate amortization expense for the nine month period ending December 31, 2010, each of the four succeeding fiscal years and thereafter is as follows:


	Estimated
	Aggregate
	Amortization
	Expense
Nine month period ending December 31, 2010	$	227,624
2011		189,403
2012		138,713
2013		72,131
2014		36,683
Thereafter		101,120

	$	765,674

The weighted average amortization period for the lease intangibles, consisting of in-place leases, leasing costs, tenant relationships and below-market leases acquired as of March 31, 2010 was 5.6 years.

4. INVESTMENT IN REAL ESTATE VENTURES

The following table sets forth the components of the Company’s investment in real estate ventures:


	Equity
	Percentage			December 31, 2009
Garden Gateway Plaza		94.0	%	$	12,665,799
Dubose Acquisition Partners II, LTD & III, LTD		51.0			1,526,830

				$	14,192,629

The Garden Gateway Plaza property was held as tenants in common with the other investors at December 31, 2009. Effective February 1, 2010, the tenants in common exchanged their interests in the property into a partnership. As a result, the Company has consolidated this partnership as its activity as the general partner.

The Company is a limited partner in the Dubose Acquisition Partners II, LTD and III, LTD (“DAP II & III”). These are investments in limited partnerships that acquired model homes from homebuilders and leased them back to the seller. Effective March 1, 2010 the Company obtained the rights to manage the role of the general partner for these two partnerships and, as a result, has consolidated this partnership as its activity as managing the role of the general partner.

Condensed balance sheets of all investments included in investment in real estate ventures as of December 31, 2009 is as follows:


	December 31,
	2009

Real estate assets and lease intangibles	$	20,791,102

Total assets	$	20,791,102


Mortgage notes payable	$	5,131,516
Owner’s equity		15,659,586

Total liabilities and owners’ equity	$	20,791,102

Condensed statements of operations of all investments included in investment in real estate ventures for the three months ended March 31, 2010 and 2009 are as follows:


	March 31, 2010		March 31, 2009

Rental income	$	297,762	$	644,476

Costs and expenses:
Rental operating costs		62,055		266,666
Interest expense		106,030		163,441
Depreciation and amortization		99,908		193,567
Partner’s share of net operating income		28,000		77,500

Equity in earnings (losses) of real estate ventures	$	1,769	$	(56,698	)

Garden Gateway Plaza is included in rental income and rental operating costs for one month in the three month period ended March 31, 2010 and for three months for the period ended March 31, 2009. DAP II and III are included in the above table for two months of the three months ended March 31, 2010. DAP II and III are not included in the three months ended March 31, 2009.

5. MORTGAGE NOTES PAYABLE

Mortgage notes payable as of March 31, 2010 and December 31, 2009 consisted of the following:


	March 31,		December 31,
	2010		2008

Mortgage note payable in monthly installments of $24,330 through July 1, 2016, including interest at a fixed rate of 6.51%, collateralized by the Havana/Parker Complex property	$	3,375,936	$	3,393,776

Mortgage note payable in monthly installments of $71,412 through April 5, 2014, including interest at a fixed rate of 6.08%; collateralized by the leases and office buildings of the Garden Gateway Plaza property. Certain obligations under the note are guaranteed by the executive officers		10,013,751		10,075,155

Mortgage note payable in monthly installments of $27,088 through February 1, 2012, including interest at a fixed rate of 5.31%; collateralized by the World Plaza property		3,344,246		3,380,792

Mortgage note payable in monthly installments of $25,995 through September 1, 2015, including interest at a fixed rate of 6.5%; collateralized by the Waterman Plaza property		3,753,009		3,769,886

Mortgage note payable in monthly installments of $28,842 through March 1, 2034, including interest at a variable rate ranging from 5.5% to 10.5%; with a current rate of 5.5% collateralized by the Thousand Palms property		4,610,389		4,633,393

Mortgage note payable in monthly installments of $9,432 through December 18, 2016, including interest at a fixed rate of 5.00% through December 2011, 6.25% to maturity, collateralized by the Sparky’s Joshua Self-Storage East property		1,736,704		1,742,500

Mortgage notes payable in monthly installments of $31,443 through February 10, 2012, including interest at a fixed rate of 5.50%, collateralized by the model home properties		3,093,534		—

Mortgage notes payable in monthly installments of $20,153 through September 18, 2012, including interest at a fixed rate of 6.50%, collateralized by the model home properties		1,958,478		—

	$	31,886,047	$	26,995,502

The Company is in compliance with all conditions and covenants of its mortgage notes payable.

Scheduled principal payments of mortgage notes payable as of March 31, 2010 are as follows:


	Scheduled
	Principal
Years Ending:	Payments
Nine month period ending December 31, 2010	$	729,427
2011		974,699
2012		8,186,641
2013		605,292
2014		9,294,691
Thereafter		12,095,297

Total	$	31,886,047

6. RELATED PARTY TRANSACTIONS

The Company leases a portion of its corporate headquarters at Pacific Oaks Plaza in Escondido, California to C.I. Holding Group, Inc. and Subsidiaries (“CI”), a small shareholder in the Company that is approximately 35% owned by the Company’s executive management and to other affiliates. Total rents charged and paid by these affiliates was $12,487 for the three months ended March 31, 2010 and 2009.

The Company has entered into a property management agreement with CHG Properties, Inc. (“CHG”), a wholly-owned subsidiary of CI, to manage all of its properties at rates up to 5% of gross income. During the three months ended March 31, 2010 and 2009, the Company paid CHG total management fees of $91,481 and $66,686, respectively.

During the term of the property management agreement, the Company has an option to acquire the business conducted by CHG. The option is exercisable, with the approval of a majority of the Company’s directors not otherwise interested in the transaction, without any consent of the property manager, its board or its shareholders,. The option price is shares of the Company to be determined by a predefined formula based on the net income of CHG during the 6-month period immediately preceding the month in which the acquisition notice is delivered.

In February 2010, the Company acquired the rights to use of the name Dubose Model Homes USA (“DMHU”) and the former employees of DMHU. Larry Dubose, a director of the Company since 2005, served as President of DMHU. In addition, the Company entered into a management agreement to manage the existing partnerships of DMHU in return for the rights to receive management fees from these partnerships. DMHU has historically invested in model homes and leased them back to the developers for a period of three to five years at which time the model homes are sold. NetREIT intends to begin to invest in model homes and lease them back to the developers under similar terms. Mr. Dubose will continue to manage the business as a director, officer and employee of NetREIT.

7. SHAREHOLDERS’ EQUITY

Employee Retirement and Share-Based Incentive Plans

Stock Options. The following table summarizes the stock option activity.


				Weighted
				Average
				Exercise
	Shares			Price
Balance, December 31, 2007		21,266		$	6.93
Options exercised		(14,204	)	$	7.76

Options outstanding and exercisable, December 31, 2008		7,062		$	8.23
Options exercised		(7,062	)	$	8.23

Options outstanding and exercisable, December 31, 2009		—		$	—

Share-Based Incentive Plan. An incentive award plan has been established for the purpose of attracting and retaining officers, key employees and non-employee board members. The Compensation Committee of the Board of Directors adopted a Restricted Stock plan (“Restricted Stock”) in December 2006 and granted nonvested shares of restricted common stock annually beginning on January 1, 2007. The nonvested shares have voting rights and are eligible for any dividends paid to common shares. The share awards vest in equal annual installments over a three or five year period from date of issuance. The Company recognized compensation cost for these fixed awards over the service vesting period, which represents the requisite service period, using the straight-line attribution expense method.

The value of the nonvested shares was calculated based on the offering price of the shares in the most recent private placement offering, net of issuance costs or $8.60 per share adjusted for stock dividends since granted and assumed selling costs. The value of granted nonvested restricted stock granted during the three months ended March 31, 2010 and 2009 was $461,100 and $418,900, respectively. Compensation expense recorded during the three months ended March 31, 2010 and 2009 was $71,100 and $39,000, respectively. The remaining 99,476 nonvested restricted shares will vest in equal installments over the next one to four years.

A table of non-vested restricted shares granted and vested since December 31, 2008 is as follows:


Balance, December 31, 2008	27,228
Granted	43,985
Vested	(24,787	)
Cancelled	(566	)

Balance, December 31, 2009	45,860
Granted	53,616
Vested	—
Cancelled	—

Balance, March 31, 2010	99,476

Stock Dividend. The Company’s Board of Directors declared stock dividends on common shares to all Shareholders of record and at rates shown in the table below:


		Stock			Common Stock
Date of Declaration	Record Date	Dividend Rate			Value		Shares		Amount
December 4, 2009	January 1, 2010		5	%	$	8.60		482,027	$	4,145,432

The stock dividend was issued on January 2, 2010.

Cash Dividends. Cash dividends declared per common share for the three months ended March 31, 2010 and 2009 were $0.143 and $0.15, respectively. The dividend paid to stockholders of the Series AA Preferred for the three months ended March 31, 2010 and 2009 was $21,963, or an annualized portion of the 7% of the liquidation preference of $25 per share.

Sale of Common Stock. During the three months ended March 31, 2010, the net proceeds from the sale of 442,008 shares of common stock was $3,727,241. During the three months ended March 31, 2009, the net proceeds from the sale of 498,691 shares of common stock was $4,224,590.

8. SEGMENTS

The Company’s reportable segments consist of the four types of commercial real estate properties for which the Company’s decision-makers internally evaluate operating performance and financial results: Residential Properties, Office Properties, Retail Properties, Self-Storage Properties and Mortgage Loans. The Company also has certain corporate level activities including accounting, finance, legal administration and management information systems which are not considered separate operating segments.

The Company’s chief operating decision maker evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, ground leases and provisions for bad debts) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and general and administrative expenses. The accounting policies of the reportable segments are the same as those described in the Company’s significant accounting policies (see Note 2). There is no intersegment activity.

The following tables reconcile the Company’s segment activity to its results of operations and financial position as of and for the three months ended March 31, 2010 and 2009.


	Three Months Ended March 31,
	2010			2009
Office Properties:
Rental income	$	1,042,318		$	691,928
Property and related expenses		497,377			362,286

Net operating income, as defined		544,941			329,642
Equity in (losses) from real estate ventures		(22,378	)		(82,002	)
Residential Properties:
Rental income		152,879			—
Property and related expenses		37,364			—

Net operating income, as defined		115,515			—
Equity in earnings from real estate ventures		24,147			2,277
Retail Properties:
Rental income		409,356			385,775
Property and related expenses		130,121			127,083

Net operating income, as defined		279,235			258,692
Equity in earnings from real estate ventures		—			7,372
Self Storage Properties:
Rental income		409,123			162,584
Property and related expenses		269,600			93,981

Net operating income, as defined		139,523			68,603
Equity in earnings from real estate ventures		—			15,655

Mortgage loan activity:		`
Interest income		14,576			14,576

Reconciliation to Net Income Available to Common Shareholders:
Total net operating income, as defined, for reportable segments		1,095,559			614,815
Unallocated other income:
Total other income		12,339			1,391
Unallocated other expenses:
General and administrative expenses		762,469			550,672
Interest expense		377,155			226,556
Depreciation and amortization		777,482			500,240

Net loss		(809,208	)		(661,262	)
Noncontrolling interests		36,776			—

Net loss		(845,984	)		(661,262	)
Preferred dividends		(21,963	)		(21,963	)

Net loss available for common shareholders	$	(867,947	)	$	(683,225	)


	March 31,		December 31,
	2010		2009

Assets:
Office Properties:
Land, buildings and improvements, net (1)	$	44,725,737	$	31,554,488
Total assets (2)		45,637,691		32,652,322
Investment in real estate ventures		—		12,665,799

Residential Property:
Land, buildings and improvements, net		9,279,542		1,571,935
Total assets		9,315,557		1,594,248
Investment in real estate ventures		—		1,526,830

Retail Properties:
Land, buildings and improvements, net (1)		17,524,824		17,574,262
Total assets (2)		17,643,864		17,746,702

Self Storage Properties:
Land, buildings and improvements, net (1)		21,120,405		21,241,275
Total assets (2)		21,219,737		21,364,770

Mortgage loan activity:
Mortgage receivable and accrued interest		920,216		920,216
Total assets		920,216		920,216

Reconciliation to Total Assets:
Total assets for reportable segments		94,737,065		88,470,887
Other unallocated assets:
Cash and cash equivalents		11,664,937		9,298,523
Prepaid expenses and other assets, net		2,856,253		2,222,427


Total Assets	$	109,258,255	$	99,991,837


(1)		Includes lease intangibles and the land purchase option related to property acquisitions.

(2)		Includes land, buildings and improvements, current receivables, deferred rent receivables and deferred leasing costs and other related intangible assets, all shown on a net basis.


	Three Months ended March 31,
	2010		2009
Capital Expenditures:(1)
Office Properties:
Acquisition of operating properties	$	—	$	11,124,800
Capital expenditures and tenant improvements		67,864		202,705

Residential Property:
Acquisition of operating properties (2)		—		981,749

Retail Properties:
Capital expenditures and tenant improvements		64,966

Self Storage Properties:
Capital expenditures and tenant improvements		8,028		—

Total Reportable Segments:
Acquisition of operating properties				12,106,549
Capital expenditures and tenant improvements		140,858		202,705

Total real estate investments	$	140,858	$	12,309,254


(1)		Total consolidated capital expenditures are equal to the same amounts disclosed for total reportable segments.

(2)		Included in investments in real estate ventures.

9. SUBSEQUENT EVENTS

In April 2010, the Company notified the preferred shareholders that it exercised its right to redeem the 50,200 shares outstanding of the Series AA preferred stock outstanding at the original liquidation value, or $25 per share. The Company has granted the Series AA preferred shareholders an option to redeem for cash or convert their Series AA preferred shares into NetREIT common shares at a conversion rate of 2.4310125 common shares for each share of Series AA preferred. The redemption is expected to be completed by May 14, 2010.

In April 2010, the Company submitted to shareholders a proposal to change the Company’s state of incorporation from California to Maryland. The Company has currently scheduled May 21, 2010 as its annual meeting date at which date the results of the voting on the proposal will become known. If a quorum is not present on May 21, 2010, the annual meeting date will be postponed.

In May 2010, the Company completed the acquisition of Sparky’s Rialto Self Storage (Formerly known as Las Colinas Self Storage) located in Rialto, California. The purchase price was $4.9 million. The Company paid the purchase price through a cash payment of approximately $2.0 million and a promissory note in the amount of approximately $2.9 million. The property consists of approximately 7.5 acres of land, 101,343 rentable square feet and approximately 771 self storage units.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion relates to our condensed consolidated 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 Item 1A and Item 7 included in the Form 10-K as filed with the Securities and Exchange Commission.

OVERVIEW AND BACKGROUND

We operate as a self-administered real estate investment trust (“REIT”) headquartered in San Diego County, California, formed to own, operate and acquire income producing real estate properties.

FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS

Growth and Expansion. During the last three years, we have completed the acquisition of fourteen income producing properties and we built our operational and administrative infrastructure, including hiring a staff of quality employees, to give us the capability to become a large real estate investing company as well as having the resources to deal with the additional burden of compliance with the U.S. Securities and Exchange Commission (“SEC”) rules and regulations. In the process, our general and administrative expenses have increased at a greater rate than our operating income, resulting in net losses of $845,984 and $661,262 for the three months ended March 31, 2010 and 2009, respectively. We continue to make additional property acquisitions and we expect revenues less rental operating costs to increase at a greater rate than our general and administrative costs. Therefore, we anticipate that our net loss will decline in the future.

During the last year we also experienced rapid growth, having increased capital by approximately 46% to $74.7 million at March 31, 2010 from $51.3 million at March 31, 2009. Our investment portfolio, consisting of real estate assets, lease intangibles, investment in real estate ventures, land purchase option and mortgages receivable, have increased by approximately 14.1% to $87.4 at March 31, 2010 compared to $76.6 million at March 31, 2009. The primary source of the growth in the portfolio over this period was attributable to increase in capital from the net proceeds of approximately $30.9 million from the sale of additional equity securities.

Acquisitions. As part of our growth strategy, we continually evaluate selected property acquisition opportunities. We are presented and continually evaluate potential acquisitions and at any point, may have multiple acquisitions under consideration at various stages from initial review, negotiation and due diligence stages of completing a transaction while pending the clearance of certain contingencies as well. During the first quarter of 2010, we did not complete any acquisitions. In May 2010, we completed the acquisition of the following subject property:

•

Sparky’s Rialto Self Storage (Formerly know as Las Colinas Self Storage) located in Rialto, California. The purchase price was $4.9 million. The property consists of approximately 7.5 acres of land, 101,343 rentable square feet and approximately 771 self storage units.

We are currently engaged to acquire the following property:

•

A single tenant office building in San Diego, California consisting of 39,800 square feet. We expect to purchase the property with cash on hand and to assume an existing mortgage loan of approximately 60% of the purchase price with interest at 6.1% through the maturity date of 2016. We also expect this purchase to close in the second quarter of 2010.

We cannot provide assurances that the pending acquisition described above will be consummated.

Economic Outlook. Since 2007, the United States and global economy have been in a serious recession although during 2009, and into 2010, there were indications of improvement and stabilization. The current economic environment is characterized by a residential housing slump, depressed commercial real estate valuations, weak consumer confidence, high unemployment and concerns of inflation. Numerous financial systems around the world have become illiquid and more are expected in 2010. Banks have become less willing to lend to other banks and borrowers, including us. Uncertainty remains in terms of the depth and duration of the recession.

The conditions described above have created an environment of limited financing alternatives for acquiring properties as lending institutions have cut back on making loans and tightened credit standards. Continued market volatility could impact our ability to finance future property acquisitions. In addition, this difficult economic environment may make it difficult for our tenants to continue to meet their obligations to us.

The effect of the credit market or deterioration in individual tenant credit may lower the market values of properties. We generally seek three to five year leases with our tenants to mitigate the impact that fluctuations in interest rates have on the values of our investment portfolio.

Economic growth rates have shown trends of stabilizing in recent periods and inflation rates in the United States has remained low although it is expected that inflation rates are going to increase in the future. Changes in inflation/deflation are sometimes associated with changes in long-term interest rates, which may have a negative impact on the value of the portfolio we own. To mitigate this risk, we will continue to lease our properties with fixed rent increases and/or with scheduled rent increases based on formulas indexed to increases in the Consumer Price Index (“CPI”) or other indices for the jurisdiction in which the property is located. To the extent that the CPI increases, additional rental income streams may be generated from these leases and thereby mitigate the impact of inflation.

Management Evaluation of Results of Operations

Management evaluates our results of operations with a primary focus on increasing and enhancing the value, quality and quantity of properties and seeking to increase value in our real estate. Management focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals, or selectively selling assets in order to increase value in our real estate portfolio. The ability to increase assets under management is affected by our ability to raise capital and our ability to identify appropriate investments.

Management’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to fund distributions to our shareholders. 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 unstabilized properties, the long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from sales of our real estate.

During the two-year period ended December 31, 2009, our cash flow from operations and our net proceeds from sales of real estate exceeded the aggregate dividends we paid out to our shareholders. Our cash flow from operations and our net proceeds from sales of real estate during the year ended 2008 of $2,872,411 ($683,526 from operating activities and $2,188,885 from sales of real estate) exceeded our aggregate dividends paid to our shareholders of $1,381,090, while our cash flow from operating activities and net proceeds from sales of real estate during the year ended 2009 of $950,263 ($210,814 from operating activities and $739,449 from sales of real estate) was significantly less than the aggregate dividends we paid out to our shareholders of $2,399,523. During 2009, the excess dividends not paid from our operating cash flow were paid from the proceeds from our ongoing common stock offering. As we cannot predict when our sales of real estate will occur, and as such sales are subject to various factors, many of which are not in our control, our cash flow from such sales will likely fluctuate significantly. In light of the highly distressed nature of the commercial real estate economy in 2009 and into 2010, we exercised extreme caution with respect to potential property acquisitions, and consequently we consummated fewer property acquisitions which resulted in the accumulation of significant cash balances that provided a very low yield. In addition, our current cash flow from operating activities has been significantly impacted by the increase in general and administrative expenses required to facilitate our growth. We anticipate that as our existing properties are stabilized and fully reflected in the annual cash flow and as we acquire additional properties our revenues will increase at a faster rate than our general and administrative expenses due to efficiencies of scale. We therefore believe that when all properties are operating at stabilized rates and when excess available cash on hand is fully invested with future cash from continuing capital raising activities, we will be able to fund our future distributions to our shareholders from cash flow from operations.

Management focuses on measures of cash flows from investing activities and cash flows from financing activities in its evaluation of our capital resources. Investing activities typically consist of the acquisition or disposition of investments in real property and the funding of capital expenditures with respect to real properties. Financing activities primarily consist of raising proceeds from sale of common stock, borrowings and repayments of mortgage debt and the payment of distributions to our shareholders.

As of March 31, 2010, we owned or had an equity interest in seven office buildings (“Office Properties”) which total approximately 354,000 rentable square feet, three retail shopping centers and a 7-Eleven convenience store property (“Retail Properties”) which total approximately 85,000 rentable square feet, four self-storage facilities (“Self Storage Properties”) which total approximately 386,000 rentable square feet and one 39 unit apartment building (“Residential Properties”). In 2009, we acquired ownership interests in two limited partnerships that own an aggregate of 19 model homes. Effective March 1, 2010 the Company obtained the rights to manage the role of the general partner for these two partnerships and, as a result, has consolidated this partnership as its activity as managing the role of the general partner.

Our properties are located primarily in Southern California and Colorado with a single property in Wyoming. We do not develop properties but acquire properties that are stabilized or that we anticipate will be stabilized within two years of acquisition. We consider a property to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1 of such 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. We actively seek potential acquisitions through regular communications with real estate brokers and other third parties. 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 do not have publicly rated debt. 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 (Net, Net, Net Leases) or pay increases in operating expenses over specific base years.

Most of our leases are for terms of 3 to 5 years with annual rental increases built into such leases. The Residential Properties and Self-Storage Properties are rented pursuant to a rental agreement that is for no longer than 6 months. The Self-Storage Properties are located in markets having other self-storage properties. Competition with these other properties will impact our operating results of these properties, which depends materially on our ability to timely lease vacant self storage units, to actively manage unit rental rates, and our tenants’ ability to make required rental payments. To be successful, we must be able to continue to respond quickly and effectively to changes in local and regional economic conditions by adjusting rental rates of these properties within their regional market in Southern California. We depend on advertisements, flyers, websites, etc. to secure new tenants to fill any vacancies.

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made, and changes in the accounting estimate are reasonably likely to occur from period to period. As a company primarily involved in owning income generating real estate assets, management believes the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements. For a summary of all of our significant accounting policies, see note 2 to our financial statements included elsewhere in this report.

Federal Income Taxes. We have elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), for federal income tax purposes. To qualify as a REIT, we must distribute annually at least 90% of adjusted taxable income, as defined in the Code, to our shareholders and satisfy certain other organizational and operating requirements. As a REIT, no provision will be made for federal income taxes on income resulting from those sales of real estate investments which have or will be distributed to shareholders within the prescribed limits. However, taxes will be provided for those gains which are not anticipated to be distributed to shareholders unless such gains are deferred pursuant to Section 1031. In addition, the Company will be subject to a federal excise tax which equals 4% of the excess, if any, of 85% of the Company’s ordinary income plus 95% of the Company’s capital gain net income over cash distributions.

We believe that we have met all of the REIT distribution and technical requirements for the quarter ended March 31, 2010 and for the year ended December 31, 2009.

REAL ESTATE ASSETS

Property Acquisitions. We account for our acquisitions of real estate in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requiring that the purchase price of acquired properties be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, a land purchase option, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships, based in each case on their fair values.

We allocate the purchase price to tangible assets of an acquired property (which includes land, building and tenant improvements) based on the estimated fair values of those tangible assets, assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third party valuations. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

Estimates of the fair values of the tangible and intangible assets require us to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate estimates would result in an incorrect assessment of our purchase price allocation, which would impact the amount of our net income.

Sales of Undivided Interests in Properties. Gains from the sale of undivided interests in properties will not be recognized under the full accrual method until certain criteria are met. Gain or loss (the difference between the sales value and the proportionate cost of the partial interest sold) shall be recognized at the date of sale if a sale has been consummated and the following criteria are met:

The buyer is independent of the seller.

Collection of the sales price is reasonably assured.

The seller will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest.

As of March 31, 2010 and December 31, 2009, we did not classify any properties as held for sale.

Impairment. We review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the our best estimate of the property’s discounted future cash flows. There have been no impairments recognized on the Company’s real estate assets at December 31, 2009 and 2008 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

We are required to perform a test for impairment of other definite and indefinite lived intangible assets at least annually, and more frequently as circumstances warrant. Our testing date is the end of our calendar year. Based on our current reviews, no impairment was deemed necessary at December 31, 2009 or 2008 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value. 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. Based on the review, no impairment was deemed necessary at December 31, 2009 or 2008 and, as of March 31, 2010, management does not believe that any indicators of impairment were evident.

Investments in Real Estate Ventures. We analyze our investments in joint ventures to determine whether the joint venture should be accounted for under the equity method of accounting or consolidated into the financial statements. The Company has determined that the investors held as a tenant in common in its real estate ventures have certain protective and substantive participation rights that limit our control of the investment. Therefore, our share of investment in these real estate ventures was accounted for under the equity method of accounting in the accompanying financial statements while the properties were held as a tenant in common.

Under the equity method, our investment in real estate ventures is stated at cost and adjusted for our share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on our ownership interest in the earnings of each of the unconsolidated real estate ventures. For the purposes of presentation in the statement of cash flows, we follow the “look through” approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture’s sale of assets) in which case it is reported as an investing activity. Management assesses whether there are any indicators that the value of our investments in unconsolidated real estate ventures may be impaired when events or circumstances indicate that there may be an impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment. No impairment charges were recognized in the quarter ended March 31, 2010 or for the year ended December 31, 2009.

Revenue Recognition. We recognize revenue from rent, tenant reimbursements, and other revenue once all of the following criteria are met:

•

persuasive evidence of an arrangement exists;

•

delivery has occurred or services have been rendered;

•

the amount is fixed or determinable; and

•

the collectability of the amount is reasonably assured.

Annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease.

Certain of our leases currently contain rental increases at specified intervals. We record as an asset, and include in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rent receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, we determine, in our judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. We review material deferred rent receivable, as it relates to straight-line rents, on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, we record an increase in the allowance for uncollectible accounts, we record a direct write-off of the specific rent receivable. No such reserves related to deferred rent receivables have been recorded as of March 31, 2010 or December 31, 2009.

New Accounting Pronouncements. There are currently no recently issued accounting pronouncements that are expected to have a material effect on our financial condition and results of operations in future periods.

THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2010 AND 2009

Our results of operations for the three months ended March 31, 2010 and 2009 are not indicative of those expected in future periods as we expect that rental income, interest expense, rental operating expense, general and administrative expense and depreciation and amortization will significantly increase in future periods as a result of the assets acquired over the last three years and as a result of anticipated growth through future acquisitions of real estate related investments.

RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS COMPARISONS

Property Acquisitions

In January 2009, we acquired the Morena Office Center, an office building located in San Diego, California. The purchase price for the property was $6.6 million. We purchased the property with $3.4 million cash and a $3.2 million draw on our former line of credit facility. This property consists of approximately 26,784 square foot building on approximately 0.62 acres. There are slightly less than three months of results of operations for this property included for the quarter ended March 31, 2009 compared to inclusion of the full three months ended March 31, 2010.

In February 2009, we formed Fontana Medical Plaza, LLC (“FMP”) with Fontana Dialysis LLC and we are the Managing Member and 51% owner of FMP. On February 19, 2009, FMP assumed an agreement to purchase the Fontana Medical Plaza located in Fontana, California. The purchase price for the property was $1,900,000. We purchased the property with $800,000 cash and a $1,100,000 draw on our former line of credit facility. The property consists of approximately 10,500 square feet and was unoccupied at the time of acquisition. The FMP has also assumed a lease agreement for a tenant to occupy 100% of the building for ten years with three five year renewal options. The new tenant commenced paying rent in November 2009. The lease agreement requires annual rent payments during the first five years of $259,973 increasing by 12.5% on the fifth year anniversary and on each five year anniversary thereafter. There are no results of operations for this property included for the three months ended March 31, 2009 compared to inclusion of the full three months ended March 31, 2010.

In March 2009, we acquired The Rangewood Medical Office Building (“Rangewood”) located in Colorado Springs, Colorado. The purchase price for the property was $2.6 million. We purchased the property with $200,000 cash and a $2,430,000 draw on our former line of credit facility. Rangewood is a 3-story, Class A medical office building of approximately 18,222 rentable square feet. There is approximately one month of results of operations for this property included for the quarter ended March 31, 2009 compared to inclusion of the full three months ended March 31, 2010.

In August 2009, we acquired Sparky’s Thousand Palms Self-Storage (formerly known as Monterey Palms Self-Storage) (“Thousand Palms”) located in Thousand Palms, California. The purchase price for the Property was $6.2 million. We paid the purchase price through a cash payment of $1.5 million which was applied to closing costs and fees and to an existing loan secured by Thousand Palms, and assumed a nonrecourse, variable interest rate, promissory note with a principal balance after the closing of $4.7 million. The property consists of nine (9) single story, Class A buildings, constructed of reinforced concrete masonry and metal construction with 113,126 rentable square feet comprised of 549 storage units which range in size from 25 to 300 square feet, and 94 enclosed RV and boat storage units that range in size from 150 to 600 square feet. There are no results of operations for this property included for the three months ended March 31, 2009 compared to inclusion of the full three months ended March 31, 2010.

In December 2009, we completed the acquisition of Sparky’s Hesperia East Self-Storage East (formerly known as St. Thomas Self-Storage) located in Hesperia California. The purchase price for the property was $2.8 million. We paid the purchase price through a cash payment of $1.1 million and a promissory note in the amount of $1.7 million. The Property consists of sixteen (16) single story, Class A buildings, constructed of reinforced concrete masonry and metal construction with 72,940 rentable square feet comprised of 479 storage units which range in size from 25 to 300 square feet. The property also includes an onsite lobby and management offices as well as a manager’s living quarter. There are no results of operations for this property included for the three months ended March 31, 2009 compared to inclusion of the full three months ended March 31, 2010.

In February 2010, the Company acquired the rights to use of the name Dubose Model Homes USA (“DMHU”) and the former employees of DMHU. In addition, the Company entered into a management agreement to manage the existing partnerships of DMHU in return for the rights to receive management fees from these partnerships. DMHU has historically invested in model homes and leased them back to the developers for a period of three to five years at which time the model homes are sold. NetREIT intends to begin to invest in model homes and lease them back to the developers under similar terms. NetREIT had invested approximately $1.5 million and was a limited partner in two different limited partnerships of which DMHU was the general partner.

Sales of Undivided Interests in Properties — Accounting Implications.

Casa Grande Apartments

In March 2008, we sold an undivided 54.92% interest in the Casa Grande Apartments located in Cheyenne, Wyoming. The purchasers paid $1.0 million, net of transaction costs, in cash.

In December 2008, we sold an additional undivided 25.0% interest in the Casa Grande Apartments. The purchaser paid $0.5 million, net of transaction costs, in cash.

In 2009, the Company and the other tenants in common in the property contributed their respective interests in Casa Grande into a DOWNREIT Partnership for which we serve as general partner and in which we own a 20.07% equity interest.

The results of operations for the three months ended March 31, 2009 were reported under the equity method of accounting. Due to the change in ownership structure and control, the partnership results of operations were consolidated with the results of operations of the Company for the three months ended March 31, 2010.

Sparky’s Palm Self-Storage

In October 2008, we sold an undivided 25.3% interest in the Sparky’s Palm Self Storage. The purchaser paid $1.4 million, net of transaction costs, in cash.

In December 2008, we sold an additional undivided 9.33% interest in the Sparky’s Palm Self Storage. The purchaser paid $0.5 million, net of transactions costs in cash.

In December 2008, we sold a further undivided 13.4% interest in the Sparky’s Palm Self Storage. The purchaser paid $0.7 million, of which $0.4 million was paid in cash and a $0.3 million promissory note was issued secured by the interest in the property.

In 2009, the Company and the other tenants in common in the property contributed their respective interests in Sparky’s Palm Self-Storage into a DOWNREIT Partnership for which we serve as general partner and in which we own an approximate 51.97% equity interest.

Garden Gateway Plaza

In October 2008, we sold an undivided 5.99% interest in the Garden Gateway Plaza. The purchaser paid $1.0 million, of which $0.4 million was paid in cash and a $0.6 million promissory note was issued secured by the interest in the property.

Effective February 1, 2010, the Company and the other tenant in common in the property contributed their respective interests in Garden Gateway Plaza into a DOWNREIT Partnership for which we serve as general partner and in which we own an approximate 94.01% equity interest.

The results of operations for the three months ended March 31, 2009 and the first month of 2010 were reported under the equity method of accounting. Due to the change in ownership structure and control, the partnership results of operations were consolidated with the results of operations of the Company for two of the three months ended March 31, 2010.

Financing

In February 2005, we commenced a private placement offering of up to $50 million of (i) Series AA Preferred Stock and (ii) units, each unit consisting of two shares of our common stock and a warrant to purchase one share of our common stock at an exercise price of $12.00 (now $9.87, as adjusted for stock dividends) exercisable as of the date of issuance and expiring if not exercised on or prior to March 31, 2010. Each Unit was priced at $20.00 and the Series AA Preferred Stock was priced at $25.00 per share. A total of 433,204 Units were sold in this offering comprising an aggregate of 433,204 warrants to purchase common stock and 866,408 shares of common stock, and a total of 50,200 shares of the Series AA Preferred Stock were sold in this offering. Each share of Series AA Preferred Stock (i) is non-voting, except under certain circumstances as provided in our Articles of Incorporation; (ii) is entitled to annual cash dividends of 7% which are cumulative and which we pay on a quarterly basis; (iii) ranks senior, as to the payment of dividends and distributions of assets upon liquidation, to common stock or any other series of preferred stock that is not senior to or on parity with the Series AA Preferred Stock; (iv) is entitled to receive $25.00 plus accrued and unpaid dividends upon liquidation; (v) may be redeemed by us prior to the mandatory conversion date at a price of $25.00 plus accrued dividends, (vi) may be converted into two shares of common stock at the option of the holder prior to the mandatory conversion date, and, (vii) if not previously redeemed or converted, shall be converted automatically into two shares of common stock on the fourth Friday of December 2015. The conversion price is subject to certain anti dilution adjustments.

In October 2006 we terminated our offering of Series AA Preferred Stock and Units, and we commenced a new offering of up to $200 million in shares of our common stock at a price of $10.00 per share. Net proceeds received from these offerings, after commissions, due diligence fees, and syndication expenses, were approximately $3.7 million for the three months ended March 31, 2010 and $4.2 million for the three months ended March 31, 2009. The net proceeds were primarily used to acquire properties in 2009 and to expand our administrative staff and support capabilities to levels commensurate with our increasing assets and staff requirements. The Company has accumulated cash balances in 2010 as we attempt to acquire additional properties. In May 2010, the Company completed an acquisition of a self-storage property and is under contract to purchase an office building.

Mortgage Loan Receivables

Mortgage loan receivables have been a very minor source of revenue to us since our inception. No mortgage loan receivables were originated during 2010 or 2009 and as a general policy, we are not in the business of originating mortgage loans.

In 2007, we originated three loans to one borrower secured by land to be developed into a senior assisted living housing facility (the “Default Property”). The borrower defaulted on the notes at the end of 2008 at a time when the balance due to us, including accrued interest, was approximately $2.1 million.

During 2009, we acquired title to the Default Property. In connection with acquiring title to the Default Property, we entered into an exclusive option to sell the Default Property to the original borrower. The selling price is equal to the face value of the notes, all accrued interest through the date we acquired title to the Default Property, all costs incurred to maintain the Default Property including taxes and insurance plus additional charges equal to 1.75% of the outstanding balance per month from June 2009 through the date the option is exercised. The selling price was set at approximately $2.3 million as of the closing date and increases by a minimum of approximately $41,000 monthly, plus reimbursable expenses, until 18 months from the date we acquired title, or December 2010, at which time the exclusive option to sell the Default Property expires. We do not anticipate incurring any losses with respect to the Default Property.

In connection with the sale of two properties to unrelated tenants in common during 2008, we received mortgage notes receivable totaling $920,216 with interest rates ranging from 6.25% to 6.50% and due dates of October 1, 2013. The loans call for interest only payments and both were current as of March 31, 2010. Both notes are secured by the mortgagee’s interest in the property.

As of March 31, 2010 and December 31, 2009, the aggregate total of mortgage notes receivable outstanding is $920,216, or less than 1% of total assets.

Revenues

Non-GAAP Supplemental Financial Measure: Rental Income and Rental Operating Costs before net down for Properties Accounted for Under the Equity Method.

As explained above under “Sales of Undivided Interests in Properties- Accounting Implications” we sold partial interests in four of our properties. Originally, the properties were held as tenants in common (“TIC”) with the other investors. While held as a TIC, the investor had certain protective and participating rights of ownership that prevented us from reporting the results of operations from the property on a gross rental income and rental operating cost basis. Instead, under the equity method used for GAAP purposes, we reported only its share of net income based upon its percentage share of its investment in the less than wholly owned property. For the first three months of 2009 all results of operations for these properties were reported under the equity method. In late 2009, the ownership of the three of the four properties converted from TIC interests to limited partnerships.

Effective February 1, 2010, Garden Gateway Plaza, the last property held under TIC ownership also converted to limited partnership.

As a result of the change in the Company’s ability to influence and control the Partnerships, they began to be accounted for as a subsidiary of the Company and are fully consolidated in the financial statements. Our year to year comparability has been affected by this change in accounting methodology. For the first three months of 2010, all but Garden Gateway Plaza results of operations are fully consolidated. Garden Gateway is included on a fully consolidated basis for two months in the three month period ended March 31, 2010. All the aforementioned properties were accounted for under the equity method for the three months ended March 31, 2009.

Effective March 1, 2010, in connection with the Dubose Model Home acquisition described above under Recent Events, the Company also had a change in its ability to influence and control its investments in two limited partnerships we invested in in 2009. As a result, the accounting methodology was changed from equity method to full consolidation for the one month of the three months ended March 31, 2010.

Management has chosen to provide an integrated analysis that includes a non-GAAP supplemental measure because we manage our real estate portfolio in this manner and we consider this computation to be an appropriate supplemental measure of comparable period to period rental income and rental operating costs.

Our calculations of “grossed-up” rental income and rental operating costs may be different from calculations used by other companies. This information should not be considered as an alternative to the equity method under GAAP.

The following table reflects the adjustments made to reconcile from the equity method used to the actual results had we reported based on total gross rental income and rental operating costs of all properties including properties less than 100% owned.


	Three months ended March 31, 2010						Three months ended March 31, 2009
			Equity Method						Equity Method
	As Reported		Adjustments		Grossed-up		As Reported		Adjustments		Grossed-up

Rental income	$	2,013,676	$	138,746	$	2,152,422	$	1,240,287	$	644,476	$	1,884,763

Rental operating costs		934,462		58,635		993,097		583,350		266,666		850,016


Net operating income	$	1,079,214	$	80,111	$	1,159,325	$	656,937	$	377,810	$	1,034,747

Rental income as reported, was $2,013,676 for the three months ended March 31, 2010, compared to $1,240,287 for the same period in 2009, an increase of $773,389, or 62.4%. On a “grossed-up” basis, rental income increased to $2,152,422 for the three months ended March 31, 2010, compared to $1,884,763 for the same period in 2009, an increase of $267,659, or 14.2%. The increase in rental income as reported in 2010 compared to 2009 is primarily attributable to:

•

The addition of the four properties acquired in 2009 and consolidating our investment in two limited partnerships, which generated an additional $384,883 of rent revenue in the three month period ended March 31, 2010 compared to the same period in 2009;

•

Offset by a decrease in rent revenue for the twelve properties acquired prior to 2009 which decreased by $117,224. This decrease was due to a decline in occupancy, which accounted for approximately $106,733 in the three months ended March 31, 2010. Of the total decline, approximately $10,491 was attributable to a reduction in lease rental rates. The Company has recently hired a full time Senior Vice President, Asset Manager who will focus efforts on improving the occupancy rates and performance of our properties; and

•

Rental income was increased by approximately $505,730 for properties that had sales of undivided interests in 2007 and 2008 and converted to the equity method of accounting as discussed above.

Rental revenues are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during 2009 for an entire year and future acquisitions of real estate assets.

Interest income was $26,915 for the three months period ended March 31, 2010, compared to $15,967 for the same period in 2009, an increase of $10,948, or 68.6%. The increase was primarily attributable to an increase in cash balances in 2010 that were invested in interest bearing accounts.

Rental Operating Expenses

Rental operating expenses were $934,462 for the three month period ended March 31, 2010 compared to $583,350 for the same period in 2009, an increase of $351,112, or an increase of 60.2%. The increase in operating expense year over year is primarily attributable to the same reasons that rental revenue increased. Rental operating costs on a “grossed-up” basis as a percentage of “grossed-up” rental income was 43.4% and 45.1% for the three months ended March 31, 2010 and 2009, respectively. The increase in operating costs as a percentage of revenue is due to the addition of two self-storage facilities that were non-stabilized at the time of acquisition in the second half of 2009. As these two facilities become stabilized, operating costs as a percentage of rent income will decline due to the fixed nature of the operating costs.

Rental operating costs are expected to continue to increase in future periods, as compared to historical periods, as a result of owning recently acquired assets for entire periods and anticipated future acquisitions of real estate assets.

Interest Expense

Interest expense, including amortization of deferred finance charges, increased by $150,599, or 66.5% during the three month period ended March 31, 2010 compared to the same period in 2009. The primary reason for the increase is attributable to interest expense on the Garden Gateway Plaza property that had been reclassified to equity in earnings (losses) of real estate ventures since the sale of an undivided interest in Garden Gateway in October 2008 through January 31, 2010. Effective February 1, 2010, the Garden Gateway Plaza property is consolidated in the financial statements. Interest on the Garden Gateway loan excluded from interest expense during the three months ended March 31, 2010 was $51,535, compared to interest that was excluded from interest expense of $163,441 for the same period in 2009 accounting for $111,906 of the increase in interest expense in the current year. The balance of the increase was due to the addition of two new mortgage notes payable in the second half of 2009 and the addition of interest expense on the Dubose Acquisition Partners II and III limited partnerships offset by a lower weighted average rate of mortgage notes outstanding. During the three month period ended March 31, 2010, the average balance of the mortgage loans on seven of the properties was $26.9 million while the average for the same period in 2009 on five properties was $25.1 million. The weighted average interest rate as of March 31, 2010 was 5.93% compared to 6.13% as of March 31, 2009.

The following is a summary of our interest expense on loans by property for the three months ended March 31, 2010 and 2009:


	Date Acquired	2010		2009

Havana/Parker Complex	June 2006	$	55,050	$	56,130
Garden Gateway Plaza	March 2007		101,577		—
World Plaza	September 2007		44,557		46,451
Executive Office Park	July 2008		—		49,851
Waterman Plaza	August 2008		61,079		62,140
Sparky’s Thousand Palms Self-Storage	August 2009		63,506		—
Sparky’s Hesperia East Self-Storage	December 2009		22,490		—
Interest on Dubose Acquisition Partners II and III notes	2009		22,713		—
Amortization of deferred financing costs			6,183		11,984

		$	377,155	$	226,556

General and Administrative Expenses

General and administrative expenses increased by $211,797 to $762,469 for the three months ended March 31, 2010, compared to $550,672 in the same period in 2009. As a percentage of rental income, including rental income from joint ventures, general and administrative expenses were 36.8% and 29.2% for the three months ended March 31, 2010 and 2009, respectively. In comparing our general and administrative expenses with other REITs, you should take into consideration that we are a self administered REIT, which means such expenses are greater for us than an advisory administered REIT.

For the three months ended March 31, 2010, our salaries and employee related expenses increased $159,423 to $360,518 compared to $201,095 for the same three months in 2009. The increase in salary and employee expenses in 2010 was attributable to the Company adding six employee’s in connection with the Dubose Model Home acquisition that will not generate revenue until the model home division is fully functional. In addition, the Company hired a Senior Vice-President — Asset Management, with extensive real estate experience, to manage the existing portfolio and to help with growing the Company through identification of potential property acquisitions. Further, the vesting of non-cash compensation related to restricted stock grants to employees was approximately $12,300 greater for the three months ended March 31, 2010 compared to the same period in 2009. We anticipate an increase in staff and compensation costs as our capital and portfolio continue to increase. However, we anticipate that these costs as a percentage of total revenue will decline in future years.

Legal, accounting and public company related expenses and increased by $39,696, to $193,117 for the three month period ended March 31, 2010, compared to $153,421 during the same period in 2009. The increase is primarily due to the additional costs associated with the legal costs incurred with respect to the Company’s effort to reincorporate in the state of Maryland.

Directors’ compensation expense that consisted of non-cash amortization of restricted stock grants was approximately $19,800 higher for the three months ended March 31, 2010 over the same period in prior year due to the addition of a new independent director and an additional annual grant of restricted stock to all independent directors.

Net Loss

Net loss for the three months ended March 31, 2010 was $845,984, or $0.08 loss per share, compared to a net loss for the three months ended March 31, 2009 of $661,262, or $0.09 loss per share. The increase in net loss of $184,722 in the three month period ended March 31, 2010 was primarily attributable to increased general and administrative costs.

LIQUIDITY AND CAPITAL RESOURCES

As discussed above under Economic Outlook, credit and real estate financing markets have experienced significant deterioration and liquidity disruptions that have caused the spreads on prospective debt financings and the amount of financing in relation to the property values to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers like us less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. During 2009 and early 2010, there have been indications of economic improvement and stabilization in the equity markets, however, we expect the market turbulence could increase in the commercial real estate arena as mortgage financing originated over the past three to seven years mature.

We believe that as a result of these negative trends, new mortgage financing will continue to be difficult to obtain, which may negatively impact our ability to finance future acquisitions. Long-term interest rates remain relatively low by historical standards. On the other hand, we believe the negative trends in the mortgage markets will reduce property prices and may, in certain cases, reduce competition for those properties.

Cash and Cash Equivalents

At March 31, 2010, we had approximately $11.7 million in cash and cash equivalents compared to $9.3 million at December 31, 2009. We intend to use this cash to make additional acquisitions and for general corporate purposes.

Our cash and cash equivalents are held in accounts managed by third party institutions and consist of invested cash and cash in our operating accounts. During the three months ended March 31 2010 and for the twelve months ended December 31, 2009, we did not experience any loss or lack of access to our cash or cash equivalents.

Operating Activities

Net cash used in operating activities during the three months ended March 31, 2010 was $589,471 compared to net cash used in operating activities of $156,095 for the same period in 2009. The increase in cash used in operating activities was due to increased general and administrative expenses.

Investing Activities

Because we did not close any property acquisitions in the first quarter of 2010, net cash used in investing activities was only $70,360 in the three months ended March 31, 2010 consisting primarily of property improvements offset by a reduction in restricted cash balances. Net cash used in investing activities during the three months ended March 31, 2009 was approximately $11.9 million, which consisted of the purchase of three properties and improvements totaling $12.3 million.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2010 was approximately $2.8 million, which primarily consisted of $3.7 million net proceeds from the sale and issuance of our common stock offset by dividend payments of $0.6 million.

Net cash provided by financing activities for the three months ended March 31, 2009 was approximately $8.1 million, which primarily consisted of $4.2 million net proceeds from issuance of common stock, proceeds from mortgage notes payable, net of repayments of 4.8 million offset by dividend payments of $0.8 million.

Contractual Obligations

The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and interest payments on our fixed-rate debt at March 31, 2010 and provides information about the minimum commitments due in connection with our ground lease obligation. Our secured debt agreements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Non-compliance with one or more of the covenants or restrictions could result in the full or partial principal balance of such debt becoming immediately due and payable.


	Less than a year		1-3 Years		3-5 Years		More than 5 Years
	2010		(2011-2012)		(2013-2014)		(After 2014)		Total
Principal payments — secured debt	$	729,427	$	9,161,340	$	9,899,983	$	12,095,297	$	31,886,047
Interest payments — fixed rate debt		1,179,015		2,911,272		1,804,728		670,227		6,565,242
Interest payments — Variable rate debt		188,675		488,412		464,771		2,557,922		3,699,780
Ground lease obligation (1)		20,040		41,194		43,820		1,115,294		1,220,348

	$	2,117,157	$	12,602,218	$	12,213,302	$	16,438,740	$	43,371,417


(1)		Lease obligations represent the ground lease payments due on our World Plaza property.

We are in compliance with all conditions and covenants of our mortgage notes payable as of March 31, 2010.

Other Liquidity Needs

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify and maintain our qualification as a REIT for federal income tax purposes. Accordingly, we intend to continue to make regular quarterly distributions to our common shareholders and preferred shareholders from cash flow from operating activities. Although we are not contractually bound to make regular quarterly dividend distributions to our common stock holders, under the terms of our charter we are required to make annual dividend distributions in the aggregate amount of $87,850 to the holders of our Series AA Preferred Stock. We may be required to use borrowings or other sources of capital, if necessary, to meet REIT distribution requirements and maintain our REIT status. In the past, as noted above, we have distributed cash amounts in excess of our taxable income resulting in a return of capital to our shareholders, and we currently have the ability to refrain from increasing our distributions while still meeting our REIT requirement for 2010. If our net cash provided by activities and gains on sale of real estate (assuming we are successful in selling any of our properties) do not exceed our intended distributions to our common shareholders, we would have to borrow funds or use proceeds of our ongoing common stock offering to pay the distribution or reduce or eliminate the distribution. We consider market factors and our historical and anticipated performance in addition to REIT requirements in determining our distribution levels.

Until proceeds from our offering are fully invested and our acquired properties are generating operating cash flow sufficient to fully cover distributions to our shareholders, we intend to pay a portion of the distributions to our shareholders from the proceeds of our ongoing common stock private placement offering or from borrowings in anticipation of future cash flows, as deemed appropriate.

Capitalization

As of March 31, 2010, our total debt as a percentage of total capitalization was 22.6% and our total debt and liquidation value of our preferred equity as a percentage of total market capitalization was 23.5%, which was calculated based on the offering price per share of our common stock of $10.00 under our ongoing current private placement of our common stock.


			Aggregate
			Principal
	Shares at		Amount or $		% of Total
	March 31,		Value		Market
	2010		Equivalent		Capitalization
Debt:
Total debt			$	31,886,047		22.6	%


Equity:
Convertible Series AA preferred stock (1)		50,200	$	1,255,000		0.9	%
Common stock outstanding (2)		10,808,326		108,083,260		76.5	%

Total equity			$	109,338,260		77.4	%

Total Market Capitalization			$	141,224,307


(1)		Value based on $25.00 per share liquidation preference.

(2)		Value based on $10.00 per share the current price of shares being sold under the current private placement offering.

Off-Balance Sheet Arrangements

As of March 31, 2010 and December 31, 2010, we do not have any off-balance sheet arrangements or obligations, including contingent obligations.

Capital Expenditures, Tenant Improvements and Leasing Costs

We currently project that during 2010 we could spend an additional $200,000 to $800,000 in capital improvements, tenant improvements, and leasing costs for properties within our portfolio. 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 gross capital expenditures during 2010 compared to 2009 due to rising construction costs and the anticipated increase in property acquisitions in 2010. 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.

Non-GAAP Supplemental Financial Measure: Funds From Operations (“FFO”)

FFO for the three months ended March 31, 2010 was $9,443 compared to $10,582 for the three months ended March 31, 2009.

Management believes that FFO is a useful supplemental measure of our operating performance. We compute FFO using the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss) in accordance with GAAP, plus depreciation and amortization of real estate assets (excluding amortization of deferred financing costs and depreciation of non-real estate assets) reduced by gains and losses from sales of depreciable operating property and extraordinary items, as defined by GAAP. Other REITs may use different methodologies for calculating FFO and, accordingly, our FFO may not be comparable to other REITs. Because FFO excludes depreciation and amortization, gains and losses from property dispositions that are available for distribution to shareholders and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, management believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs. However, FFO should not be viewed as an alternative measure of our operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties which are significant economic costs and could materially impact our results from operations.

The following table presents our FFO for the quarters ended March 31, 2010 and 2009. FFO should not be considered an alternative to net income (loss), as an indication of our performance, nor is FFO indicative of funds available to fund our cash needs or our ability to make distributions to our shareholders. In addition, FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of debt, each of which may impact the amount of cash available for distribution to our shareholders.


	Quarter ended March 31,
	2010			2009
Net loss	$	(845,984	)	$	(661,262	)
Adjustments:
Preferred stock dividends		(21,963	)		(21,963	)
Depreciation and amortization		777,482			500,240
Joint venture real estate depreciation and amortization		99,908			193,567

Funds from operations	$	9,443		$	10,582

Inflation

Since the majority of our leases require tenants to pay most operating expenses, including real estate taxes, utilities, insurance and increases in common area maintenance expenses, we do not believe our exposure to increases in costs and operating expenses resulting from inflation would be material.

Segments Disclosure

Our reportable segments consist of mortgage activities and the four types of commercial real estate properties for which our decision-makers internally evaluate operating performance and financial results: Residential Properties, Office Properties, Retail Properties and Self-Storage Properties. We also have certain corporate level activities including accounting, finance, legal administration and management information systems which are not considered separate operating segments.

Our chief operating decision maker evaluates the performance of our segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, ground leases and provisions for bad debts) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and general and administrative expenses. There is no intersegment activity.

See the accompanying financial statements for a Schedule of the Segment Reconciliation to Net Income Available to Common Shareholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4T. CONTROLS AND PROCEDURES

NetREIT maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings. —

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended March 31, 2010, the Company sold 442,008 shares of its common stock for an aggregate net proceeds of $3,727,241. These shares were sold at a price of $10.00 per share in a private placement offering to a total of 119 accredited investors. Each issuee purchased their shares for investment and the shares are subject to appropriate transfer restrictions. The offering was made by the Company through selected FINRA member broker-dealer firms. The sales were made in reliance on the exemptions from registration under the Securities Act of 1933 and applicable state securities laws contained in Section 4(2) of the Act and Rule 506 promulgated thereunder.

During the three months ended March 31, 2010, the Company also sold 79,068 shares of its common stock to certain of its existing shareholders under its dividend reinvestment plan. The shares were sold directly by the Company without underwriters to a total of 1,258 persons participating in the plan. The Company sold these shares in reliance on the exemptions from registration under the Securities Act of 1933 and applicable state securities laws set forth in Section 4(2) of the Act and Rule 506 promulgated thereunder. Each issuee purchased the shares for investment and the shares are subject to appropriate transfer restrictions.

On January 2, 2010, the Company issued 482,027 shares of its common stock to 2,105 shareholders as a stock dividend declared in December 2009.

During the three months ended March 31, 2010, the Company issued 1,452 shares at an average exercise price of $8.23 upon the exercise of options by two of the Company’s Directors and one of its employees.

All shares issued in these offerings were sold for cash consideration. The Company used the net proceeds it received for the sale of these shares to acquire and/or maintain its real estate investments.

Issuer Purchases of Equity Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

Not Applicable

Item 5. Other Information.

None.

ITEM 6. EXHIBITS.


Exhibit
Number		Description

	3.1	Articles of Incorporation filed January 28, 1999 (1)

	3.2	Certificate of Determination of Series AA Preferred Stock filed April 4, 2005 (1)

	3.3	Bylaws of NetREIT (1)

	3.4	Audit Committee Charter (1)

	3.5	Compensation and Benefits Committee Charter (1)

	3.6	Nominating and Corporate Governance Committee Charter (1)

	3.7	Principles of Corporate Governance of NetREIT (1)

	4.1	Form of Common Stock Certificate (1)

	4.2	Form of Series AA Preferred Stock Certificate (1)

	4.3	Registration Rights Agreement 2005 (1)

	4.4	Registration Rights Agreement 2007 (1)

	10.1	1999 Flexible Incentive Plan (1)

	10.2	NetREIT Dividend Reinvestment Plan (1)

	10.3	Form of Property Management Agreement (1)

	10.4	Option Agreement to acquire CHG Properties (1)

	10.5	Employment Agreement as of April 20, 1999 by and between the Company and Jack K. Heilbron (2)

	10.6	Employment Agreement as of April 20, 1999 by and between the Company and Kenneth W. Elsberry (2)

	10.7	Lease Agreement by and between Philip Elghanian and DVA Healthcare Renal Care, Inc. dated February 6, 2009. (3)

	10.8	Assignment and Assumption of Lease by and between Philip Elghanian and Fontana Medical Plaza, LLC. dated February 19, 2009.(4)

	10.9	Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate between Philip Elghanian and Hovic Perian and Rima Perian dated September 8, 2008.(5)

	10.10	Assignment and Assumption of Purchase Agreement Philip Elghanian and Fontana Medical Plaza, LLC. dated February 19, 2009.(6)^.

	10.11	Additional and/OR Amendment to Escrow Instructions between Fontana Medical Plaza, LLC and Hovic Perian and Rima Perian dated February 18, 2009. (7)^.

	10.12	Buyer Final Closing Statement dated February 20, 2009.(8)

	10.13	Loan Assumption and Security Agreement, and Note Modification Agreement. (9)

	10.14	Promissory Note.(10)^.

	31.1	Certificate of the Company’s Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*

	31.2	Certification of the Company’s Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. *

	32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *


⁽¹⁾		Previously filed as an exhibit to the Form 10 for the year ended December 31, 2007.

⁽²⁾		Previously filed as an exhibit to the amended Form 10 for the year ended December 31, 2007 filed June 26, 2009.

⁽³⁾		Originally filed as Exhibit 10.1 on Form 8-K filed February 25, 2009.

⁽⁴⁾		Originally filed as Exhibit 10.2 on Form 8-K filed February 25, 2009.

⁽⁵⁾		Originally filed as Exhibit 10.3 on Form 8-K/A filed on March 2, 2009.

⁽⁶⁾		Originally filed as Exhibit 10.4 on Form 8-K filed February 25, 2009.

⁽⁷⁾		Originally filed as Exhibit 10.5 on Form 8-K filed February 25, 2009.

⁽⁸⁾		Originally filed as Exhibit 10.6 on Form 8-K filed February 25, 2009.

⁽⁹⁾		Originally filed as Exhibit 10.7 on Form 8-K filed August 27, 2009.

⁽¹⁰⁾		Originally filed as Exhibit 10.8 on Form 8-K filed August 27, 2009.

*		Filed Herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: May 13, 2010	NetREIT
	By:	/s/ Jack K. Heilbron
		Name:	Jack K. Heilbron
		Title:	Chief Executive Officer

	By:	/s/ Kenneth W. Elsberry
		Name:	Kenneth W. Elsberry
		Title:	Chief Financial Officer