Presidio Property Trust, Inc. - Quarter Report: 2012 March (Form 10-Q)

netr-10q_033112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2012

OR

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, Inc.

(Exact name of registrant as specified in its charter)

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

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 þ No o.

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 x
		(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 x.

At May 9, 2012, registrant had issued and outstanding 15,403,816 shares of its common stock, $0.01 par value.

Index

		Page

Part I FINANCIAL INFORMATION:		1

Item 1. FINANCIAL STATEMENTS:		1
	Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited)	2
	Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2012 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures about Market Risk		51
Item 4T. Controls and Procedures		51

Part II OTHER INFORMATION		52

	Item 1. Legal Proceedings	52
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
	Item 3. Defaults Upon Senior Securities	53
	Item 4. Mine Safety Disclosures	53
	Item 5. Other Information	53
	Item 6. Exhibits	53
		53
	Signatures	54

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

NetREIT, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

	March 31,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Real estate assets and lease intangibles, net	$	145,244,536		$	147,754,887
Mortgages receivable and interest		1,031,307			1,032,082
Cash and cash equivalents		4,176,410			4,872,081
Restricted cash		684,771			966,687
Other real estate owned		2,178,531			2,178,531
Other assets, net		4,767,101			4,847,663

TOTAL ASSETS	$	158,082,656		$	161,651,931

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable	$	64,144,320		$	65,929,797
Accounts payable and accrued liabilities		3,716,777			4,001,055
Dividends payable		1,034,558			1,008,699
Total liabilities		68,895,655			70,939,551

Commitments and contingencies

Shareholders’ equity:
Convertible series AA preferred stock, no par value, $25 liquidating
preference, shares authorized: 1,000,000; no shares issued and outstanding
at March 31, 2012 and December 31, 2011, respectively		-			-
Convertible series 6.3% preferred stock, $0.01 par value, $1,000 liquidating
preference, shares authorized: 10,000; 1,649 shares issued and outstanding
at March 31, 2012 and December 31, 2011, respectively		16			16
Common stock series A, $0.01 par value, shares authorized: 100,000,000;
15,403,816 and 15,287,998 shares issued and outstanding at
March 31, 2012 and December 31, 2011, respectively		154,038			152,881
Common stock series B, $0.01 par value, shares authorized: 1,000; no shares
issued and outstanding		-			-
Additional paid-in capital		131,491,691			130,416,731
Dividends in excess of accumulated losses		(50,436,661	)		(47,777,886	)
Total shareholders’ equity before noncontrolling interest		81,209,084			82,791,742
Noncontrolling interest		7,977,917			7,920,638
Total shareholders’ equity		89,187,001			90,712,380

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	158,082,656		$	161,651,931

See notes to condensed consolidated financial statements.

NetREIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2012 and 2011
(Unaudited)

	March 31,			March 31,
	2012			2011

Rental income	$	3,978,614		$	3,088,930
Fee and other income		109,572			238,300
		4,088,186			3,327,230

Costs and expenses:
Rental operating costs		1,333,131			1,107,459
General and administrative		1,124,718			917,702
Depreciation and amortization		1,176,738			978,486
Total costs and expenses		3,634,587			3,003,647

Income from operations		453,599			323,583

Other income (expense):
Interest expense		(981,484	)		(728,364	)
Interest income		20,359			24,174
Gain (loss) on sale of real estate		44,082			(82,277	)
Total other expense, net		(917,043	)		(786,467	)

Net loss before noncontrolling interests		(463,444	)		(462,884	)

Income attributable to noncontrolling interests		108,167			75,915

Net loss attributable to common stockholders	$	(571,611	)	$	(538,799	)

Loss per common share - basic and diluted:	$	(0.04	)	$	(0.04	)

Weighted average number of common shares outstanding
- basic and diluted (1)		15,305,083			13,291,485

(1) Data is adjusted for a 5% stock dividend declared in December 2011.

See notes to condensed consolidated financial statements.

NetREIT, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2012

	Convertible										Addit-			Dividends			Total
	Series 6.3%										ional			In Excess of			NetREIT, Inc			Non-cont-
	Preferred Stock				Common Stock						Paid-in			Accumlated			Shareholders’			rolling
	Shares		Amount		Shares			Amount			Capital			Losses			Equity			Interests			Total

Balance, December 31, 2011		1,649	$	16		15,287,998		$	152,881		$	130,416,731		$	(47,777,886	)	$	82,791,742		$	7,920,638		$	90,712,380

Net (loss) income															(571,611	)		(571,611	)		108,167			(463,444	)

Conversion of partnership interests to common stock						17,060			171			143,734						143,905						143,905

Repurchase of common stock-related parties						(17,060	)		(171	)		(143,734	)					(143,905	)					(143,905	)

Dividends declared						110,688			1,106			1,051,500			(2,087,164	)		(1,034,558	)					(1,034,558	)

Issuance of vested restricted stock						5,130			51			42,355						42,406						42,406

Distributions to noncontrolling interests net of contributions received																					(50,888	)		(50,888	)

Stock issuance costs												(18,895	)					(18,895	)					(18,895	)

Balance, March 31, 2012		1,649	$	16		15,403,816		$	154,038		$	131,491,691		$	(50,436,661	)	$	81,209,084		$	7,977,917		$	89,187,001

See notes to condensed consolidated financial statements.

NetREIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(571,611	)	$	(538,799	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization		1,243,735			978,486
Stock compensation		166,787			109,620
(Gain) loss on sale of real estate assets		(44,082	)		82,277
Bad debt expense		16,605			15,919
Income attributable to noncontrolling interests		108,167			75,915
Other assets		347,577			(627,097	)
Accounts payable and accrued liabilities		(408,659	)		(156,431	)
Net cash provided by (used in) operating activities		858,519			(60,110	)

Cash flows from investing activities:
Real estate acquisitions and improvements		(873,640	)		(3,287,967	)
Proceeds on sale of real estate assets		2,192,083			1,215,119
Deposits on potential acquisitions		(291,365	)		(196,500	)
Net repayments (purchase) of notes receivable		775			(124,016	)
Restricted cash		281,916			41,322
Net cash provided by (used in) investing activities		1,309,769			(2,352,042	)

Cash flows from financing activities:
Proceeds from mortgage notes payable		226,082			1,469,890
Repayment of mortgage notes payable		(2,011,559	)		(2,230,547	)
Net proceeds from issuance of common stock		-			3,263,638
Repurchase of common stock		-			(158,386	)
Repurchase of common stock - related parties		(143,905	)		(82,520	)
Deferred stock issuance costs		-			305,050
Stock issuance costs		(18,895	)		-
Conversion of partnership interests into common stock		143,905			-
Distributions to noncontrolling interests in excess of contributions received		(50,888	)		-
Contributions received from noncontrolling interests in excess of distributions paid		-			255,481
Dividends paid		(1,008,699	)		(816,782	)
Net cash (used in) provided by financing activities		(2,863,959	)		2,005,824

Net decrease in cash and cash equivalents		(695,671	)		(406,328	)

Cash and cash equivalents:
Beginning of year		4,872,081			7,028,090

End of period	$	4,176,410		$	6,621,762

Supplemental disclosure of cash flow information:
Interest paid	$	930,094		$	636,743

Non-cash investing and financing activities:
Reinvestment of cash dividend	$	1,052,606		$	944,754
Accrual of dividends payable	$	1,034,558		$	880,666

See notes to condensed consolidated financial statements.

NetREIT, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

NetREIT (the “Company”) was incorporated in the State of California on January 28, 1999 for the purpose of investing in real estate properties. Effective August 4, 2010, NetREIT, a California Corporation, merged into NetREIT, Inc., a Maryland Corporation with NetREIT, Inc. becoming the surviving Corporation. As a result of the merger, NetREIT is now incorporated in the State of Maryland. 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 and residential properties located in the western United States. As of March 31, 2012, the Company owned or had an equity interest in nine office buildings and one industrial building (“Office Properties”) which total approximately 690,000 rentable square feet, four retail shopping centers and a 7-Eleven property (“Retail Properties”) which total approximately 171,000 rentable square feet, six self-storage facilities (“Self-Storage Properties”) which total approximately 581,000 rentable square feet, one 39 unit apartment building and 70 model homes investments owned by six limited partnerships (“Residential Properties”).

The Company is a General Partner in five limited partnerships (NetREIT 01 LP, NetREIT Palm Self-Storage LP, NetREIT Casa Grande LP, NetREIT Garden Gateway LP and NetREIT National City Partners, LP) and is the sole Managing Member in one limited liability company (Fontana Medical Plaza, LLC) all with ownership in real estate income producing properties. In addition, the Company is a limited partner in eight partnerships that purchase and leaseback model homes from developers (Dubose Acquisition Partners II and III or “DAP II and DAP III,” “Dubose Model Home Income Fund #3, LTD.,”, “Dubose Model Home Income Fund #4, LTD.,” “Dubose Model Home Income Fund #5, LTD.”, Dubose Model Home Investors Fund #113, LP, Dubose Model Home Investors #201, LP and NetREIT Dubose Model Home REIT, LP). We refer to these entities collectively, as the “Partnerships”.

In March 2010, the Company purchased certain tangible and intangible personal property from Dubose Model Homes USA (“DMHU”), including rights to certain names, trademarks and trade secrets, title to certain business equipment, furnishings and related personal property. DMHU had used these assets in its previous business of purchasing model homes for investment in new residential housing tracts and initially leasing the model homes back to their developer. In addition, the Company also acquired DMHU’s rights under certain contracts, including contracts to provide management services to 19 limited partnerships sponsored by DMHU and for which a DMHU affiliate serves as general partner (the “Model Home Partnerships”). These partnerships included DAP II and DAP III of which the Company was a 51% limited partner in each at the time of the acquisition. The Company paid the owners of DMHU $300,000 cash and agreed to issue up to 120,000 shares of the Company’s common stock, depending on the levels of production the Company achieves from its newly formed Model Home REIT over the next three years. The Company also agreed to employ three former DMHU employees and to pay certain obligations of DMHU, including its office lease which expired on September 30, 2010. As Mr. Dubose is a Company director and was the founder and former president and principal owner of DMHU and certain of its affiliates, this transaction was completed in compliance with the Company’s Board’s Related Party Transaction Policy. The transaction has been accounted for as a business combination. Management performed an analysis of intangible assets acquired with the assistance of an independent valuation specialist and it was determined that $209,000 of the purchase price is attributable to customer relationships which will be amortized over 10 years. The Company also estimated a liability of $1,032,000 associated with the 120,000 shares that it believes will be issued in the future. As a result of this acquisition, total goodwill of $1,123,000 was recorded. The Company’s investment in DAP II and DAP III have been consolidated in the accompanying financial statements of NetREIT effective March 1, 2010.

In 2010, the Company formed a new subsidiary, NetREIT Advisors, LLC, a wholly-owned Delaware limited liability company, and sponsored the formation of NetREIT Dubose Model Home REIT, Inc. (“NetREIT Dubose”), a Maryland corporation. NetREIT Dubose, a proposed REIT, invests in Model Homes it purchases from developers in transactions whereby the developer leases back the Model Home under a short term lease, typically one to three years in length. Upon expiration of the lease, NetREIT Dubose seeks to re-lease the Model Home until such time as it is able to sell the property. NetREIT Dubose owns substantially all of its assets and conduct its operations through a newly formed operating partnership called NetREIT Dubose Model Home REIT, LP (“Operating Partnership”) which is a wholly-owned Delaware limited partnership. NetREIT Advisors, LLC serves as advisor to NetREIT Dubose.

NetREIT Dubose is authorized to issue up to 25 million shares of $0.01 shares of stock. Of these authorized shares, 20 million are common stock and 5 million are preferred stock. The Company capitalized NetREIT Dubose with $1.2 million cash in exchange for a convertible promissory note, which was converted to NetREIT Dubose common stock on September 30, 2010. NetREIT Dubose has also commenced raising outside investor capital through a Private Placement Memorandum (“PPM”). NetREIT Dubose intends to sell 1 million shares of its common stock at $10.00 per share, or $10 million under the initial offering. The Company also has the option to increase the maximum offering amount to 2 million shares or $20 million. Through March 31, 2012, NetREIT Dubose has raised approximately $1.3 million from outside investors.

As of March 31, 2012, there were approximately 268,000 shares outstanding of which approximately 128,000 have been issued to parties other than NetREIT, Inc.

NetREIT Advisors, LLC also provides management services to the 19 Model Home Partnerships, pursuant to rights under the management contracts assigned to it by DMHU. These partnerships are in the process of liquidating assets towards an end of life. For these services, NetREIT Advisors, LLC receives ongoing management fees and has the right to receive certain other fees when the respective partnership sells or otherwise disposes of its properties.

In September 2010, the Company commenced three tender offers for the purchase of outstanding limited partnerships units of Dubose Model Home Income Funds #3, 4 & 5. The offerings closed effective November 30, 2010. The Company acquired approximately 74% of Income Fund #3 for $475,997 in cash and 39,827 shares for a total combined cost of $874,263. The Company acquired approximately 71% of Income Fund #4 for $343,074 in cash and 49,132 shares for a total combined cost of $834,394. The Company acquired approximately 67% of Income Fund #5 for $77,822 in cash and 23,931 shares for a total combined cost of $317,136. As a result of the Company acquiring control of these three limited partnerships, their financial statements have been included in the consolidated financial statements of the Company beginning in December 2010.

In August 2011, the Company formed Dubose Advisors, LLC (“Dubose Advisors”) a wholly-owned Delaware limited liability company, and sponsored the formation of Dubose Model Home Investors #201, LP. (“201 Partnership”), a California limited partnership. Dubose Advisors is the general partner and advisor to the 201 partnership. The 201 Partnership invests in Model Homes it purchases from developers in transactions whereby the developer leases back the Model Home under a short term lease, typically one to three years in length similar to NetREIT Dubose. The Company has initially invested $250,000 to capitalize the 201 Partnership and has commenced raising $1,750,000 in outside investor capital through the sale of 35 limited partner units at $50,000 per unit. As of March 31, 2012, the 201 Partnership has raised approximately $1,067,000 from outside investors.

In December 2011, the Company completed the formation of a California limited partnership, NetREIT National City Partners, LP (“National City Partnership”), whereby an unrelated limited partner contributed its fee interest in two adjacent multi-tenant industrial properties located in National City, California. The Company refers to the property as the Port of San Diego Complex. The Company contributed $465,975 cash and 1,649.266 shares of $1,000 liquidation value, 6.3% convertible preferred stock to capitalize the limited partnership. In addition, the Company contributed $2.9 million cash which was used to pay down the mortgage loan assumed by the Partnership to a balance of $9.5 million after the paydown. After completing the transactions discussed above, NetREIT has an approximate 75% interest in the National City Partnership as the sole general partner and will consolidate it into its consolidated financial statements.

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 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, 2012 and 2011. 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, 2012. 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, 2011. The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission on March 28, 2012.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of NetREIT and its subsidiaries, Fontana Medical Plaza, LLC (“FMP”), NetREIT 01 LP Partnership, NetREIT Casa Grande LP Partnership, NetREIT Palm Self-Storage LP Partnership, NetREIT Garden Gateway, LP and Dubose Acquisition Partners II and III (collectively “the Partnerships”) NetREIT Advisors, LLC (“Advisors”), NetREIT Dubose Model Home REIT, Inc. and its subsidiary, NetREIT Dubose Model Home LP, Dubose Dubose Advisors LLC, Model Home Income Funds 3, 4, 5, 113 LTD and Dubose Model Home Investors #201 LP (collectively, the “Income Funds”) and NetREIT National City Partners, LP. As used herein, the “Company” refers to NetREIT, FMP, Advisors and the Partnerships, Income Funds and the NetREIT National City Partners, LP, 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 (Note 4). Upon formation of the Partnerships in 2009 and 2010, 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 subsidiaries of the Company and are fully consolidated in the Company’s financial statements.

The Company classifies the noncontrolling interests in FMP, the Partnerships, and the Income Funds as part of consolidated net loss in 2012 and 2011 and includes the accumulated amount of noncontrolling interests as part of shareholders’ equity from the Partnerships inception in 2009 and 2010, the effective date that the Company assumed significant control of DAP II and III in February 2010, the Income Funds acquisitions in November 2010 and November 2011 as well as NetREIT National City Partners, LP in December 2011. 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 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 three months ended March 31, 2012 and the year ended December 31, 2011, 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, 2012 and the year ended December 31, 2011.

The Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. Neither the Company nor its subsidiaries have been assessed interest or penalties by any major tax jurisdictions.

Real Estate Asset 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 to 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 real estate assets and 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. Amortization of above and below market rents was a net reduction in rental income of approximately $112,000 for the three months ended March 31, 2012. Amortization of above and below market rents for the three months ended March 31, 2011 was a net reduction in rental income of approximately $32,000.

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 secure 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 approximately $150,000 and $91,000 for the three months ended March 31, 2012 and March 31, 2011, respectively.

Sales of Real Estate Assets. Gains from the sale of real estate assets will not be recognized under the full accrual method by the Company until certain criteria are met. Gain or loss (the difference between the sales value and the cost of the real estate 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; and

	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, 2012, management has concluded that there are 9 model home properties aggregating a net book value of approximately $2.3 million which are considered as held for sale and are included in real estate assets. These homes have mortgage notes payable of approximately $0.2 million.

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, 2012 and 2011, was approximately $974,000 and $859,000, 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 is written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows. For the year ended December 31, 2011, the Company determined that an impairment existed in its model home properties not currently held for sale and, as a result, recorded an asset impairment of $30,000. As of March 31, 2012 and 2011, management does not believe indicators of impairment were evident and as such, no impairment charges were recognized.

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, 2011 and, as of March 31, 2012, 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, 2011 and, as of March 31, 2012, management does not believe that any indicators of impairment were evident.

Other Real Estate Owned. The Company acquired a property consisting of undeveloped land in Escondido, CA through foreclosure proceedings in May 2009. At the time we acquired title to the property we entered into an exclusive option with the borrower to sell the property back at our investment plus additional expenditures and interest charges through the date the original borrower purchased back the property. The option expired in late 2010. The Company has not actively engaged in the attempted sale of the property while management studies the best use options for the property.

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

	a.	persuasive evidence of an arrangement exists;

	b.	delivery has occurred or services have been rendered;

	c.	the amount is fixed or determinable; and

	d.	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. Estimated recoveries from certain tenants for their pro rata share of real estate taxes, insurance and other operating expenses are recognized as revenues in the period the applicable expenses are incurred or as specified in the leases.

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, 2012 and December 31, 2011.

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:

	2012		2011
Weighted average shares used for Basic EPS		15,305,083		12,658,557

Add:
5% stock dividend issued in December 2011		-		632,928
		15,305,083		13,291,485

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 Garden Gateway LP Partnership		-		-
Incremental shares from conversion of NetREIT National City Partners LP Partnership
Incremental shares from warrants		-		-
Adjusted weighted average shares used for diluted EPS		15,305,083		13,291,485

____________

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, NetREIT National City Partners LP Partnership and shares from stock purchase warrants with respect to a total of 1,360,407 and 978,344 shares of common stock for the three months ended March 31, 2012 and 2011, respectively, were excluded from the computation of diluted earnings per share as their effect was anti-dilutive.

Fair Value Measurements. Certain assets and liabilities are required to be carried at fair value, or if long-lived assets are deemed to be impaired, to be adjusted to reflect this condition. The guidance requires disclosure of fair values calculated under each level of inputs within the following hierarchy:

Level 1	- Quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2	- Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3	- Unobservable inputs for the asset or liability.

Fair value is defined as the price at which an asset or liability is exchanged between market participants in an orderly transaction at the reporting date. The Company’s cash equivalents, mortgage notes receivable, accounts receivable and payables and accrued liabilities all approximate fair value due to their short term nature. Management believes that the recorded and fair value of notes payable are approximately the same as of March 31, 2012 and December 31, 2011.

During 2011, the Company measured certain model homes at fair value after a determination was made that they were impaired. During 2010, the Company measured a real estate asset at fair value after a determination was made that it was impaired. During the periods ended March 31, 2012 and 2011, there were no indicators of impairment requiring adjustment.

As of March 31, 2012 and December 31, 2011, the Company does not have any other assets or any liabilities 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; valuation of long-lived assets, and 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 7 “Segment Information”.

Subsequent Events. Management has evaluated subsequent events through the date that the accompanying financial statements were filed with the SEC for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

Reclassifications. Certain reclassifications have been made to prior years consolidated financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of consolidated operations or stockholders’ equity.

3. REAL ESTATE ASSETS AND LEASE INTANGIBLES

A summary of the properties owned by the Company as of March 31, 2012 is as follows:

					Real estate
	Date		Square	Property	assets, net
Property Name	Acquired	Location	Footage	Description	(in thousands)
Casa Grande Apartments	April 1999	Cheyenne, Wyoming	29,250	Residential	$	1,410.9
Havana/Parker Complex	June 2006	Aurora, Colorado	114,000	Office		5,385.7
7-Eleven	September 2006	Escondido, California	3,000	Retail		1,277.0
Garden Gateway Plaza	March 2007	Colorado Springs, Colorado	115,052	Office		12,861.4
World Plaza	September 2007	San Bernardino, California	55,098	Retail		7,014.8
Regatta Square	October 2007	Denver, Colorado	5,983	Retail		2,014.2
Sparky’s Palm Self-Storage	November 2007	Highland, California	50,250	Self-Storage		4,570.7
Sparky’s Joshua Self-Storage	December 2007	Hesperia, California	149,750	Self-Storage		7,112.6
Executive Office Park	July 2008	Colorado Springs, Colorado	65,084	Office		8,646.6
Waterman Plaza	August 2008	San Bernardino, California	21,170	Retail		6,678.7
Pacific Oaks Plaza	September 2008	Escondido, California	16,000	Office		4,512.4
Morena Office Center	January 2009	San Diego, California	26,784	Office		6,029.4
Fontana Medical Plaza	February 2009	Fontana, California	10,500	Office		2,108.8
Rangewood Medical Office Building	March 2009	Colorado Springs, Colorado	18,222	Office		2,392.0
Sparky’s Thousand Palms Self-Storage	August 2009	Thousand Palms, California	113,126	Self-Storage		5,796.5
Sparky’s Hesperia East Self-Storage	December 2009	Hesperia, California	72,940	Self-Storage		2,715.3
Sparky’s Rialto Self-Storage	May 2010	Rialto, California	101,343	Self-Storage		5,119.0
Genesis Plaza	August 2010	San Diego, California	57,685	Office		9,319.7
Dakota Bank Buildings	May 2011	Fargo, North Dakota	119,749	Office		9,135.5
Yucca Valley Retail Center	September 2011	Yucca Valley, California	85,996	Retail		6,622.7
Sparky’s Sunrise Self-Storage	December 2011	Hesperia, California	93,851	Self-Storage		2,206.7
Port of San Diego Complex	December 2011	San Diego, California	146,700	Industrial		14,505.6

NetREIT, Inc properties						127,436.2

Model home properties	Various in		Homes
held in limited partnerships	2009, 2010	CA, AZ, OR, WA, TX, SC,	57	Residential		14,568.0
	& 2011	NC, ID and FL

Model home properties	Various in
held in income and investment funds	2003-2008,	TX, WA, OH, NC,
	2010 & 2011	NV, CA, NJ and MI	13	Residential		3,240.3

Model home properties						17,808.3

		Total real estate assets and lease intangibles, net			$	145,244.5

A summary of the properties owned by the Company as of December 31, 2011 is as follows:

					Real estate
	Date		Square	Property	assets, net
Property Name	Acquired	Location	Footage	Description	(in thousands)
Casa Grande Apartments	April 1999	Cheyenne, Wyoming	29,250	Residential	$	1,428.5
Havana/Parker Complex	June 2006	Aurora, Colorado	114,000	Office		5,399.5
7-Eleven	September 2006	Escondido, California	3,000	Retail		1,282.4
Garden Gateway Plaza	March 2007	Colorado Springs, Colorado	115,052	Office		13,008.6
World Plaza	September 2007	San Bernardino, California	55,098	Retail		6,933.7
Regatta Square	October 2007	Denver, Colorado	5,983	Retail		2,027.6
Sparky’s Palm Self-Storage	November 2007	Highland, California	50,250	Self-Storage		4,598.9
Sparky’s Joshua Self-Storage	December 2007	Hesperia, California	149,750	Self-Storage		7,155.8
Executive Office Park	July 2008	Colorado Springs, Colorado	65,084	Office		8,710.1
Waterman Plaza	August 2008	San Bernardino, California	21,170	Retail		6,716.3
Pacific Oaks Plaza	September 2008	Escondido, California	16,000	Office		4,536.2
Morena Office Center	January 2009	San Diego, California	26,784	Office		5,918.8
Fontana Medical Plaza	February 2009	Fontana, California	10,500	Office		2,118.4
Rangewood Medical Office Building	March 2009	Colorado Springs, Colorado	18,222	Office		2,407.3
Sparky’s Thousand Palms Self-Storage	August 2009	Thousand Palms, California	113,126	Self-Storage		5,832.4
Sparky’s Hesperia East Self-Storage	December 2009	Hesperia, California	72,940	Self-Storage		2,724.8
Sparky’s Rialto Self-Storage	May 2010	Rialto, California	101,343	Self-Storage		5,144.7
Genesis Plaza	August 2010	San Diego, California	57,685	Office		9,428.2
Dakota Bank Buildings	May 2011	Fargo, North Dakota	119,749	Office		9,287.0
Yucca Valley Retail Center	September 2011	Yucca Valley, California	85,996	Retail		6,687.6
Sparky’s Sunrise Self-Storage	December 2011	Hesperia, California	93,851	Self-Storage		2,207.2
Port of San Diego Complex	December 2011	San Diego, California	146,700	Industrial		14,500.0

NetREIT, Inc properties						128,054.0

Model home properties	Various in		Homes
held in limited partnerships	2009, 2010	CA, AZ, OR, WA, TX, SC,	59	Residential		15,019.4
	& 2011	NC, ID and FL

Model home properties	Various in
held in income and investment funds	2003-2008,	TX, WA, OH, NC,
	2010 & 2011	NV, CA, NJ and MI	19	Residential		4,681.5

Model home properties						19,700.9

		Total real estate assets and lease intangibles, net			$	147,754.9

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

	March 31,			December 31,
	2012			2011
Land	$	37,911,698		$	38,109,616
Buildings and other		111,822,911			113,238,188
Tenant improvements		6,019,875			5,766,097
Lease intangibles		4,186,763			4,186,763
		159,941,247			161,300,664
Less:
Accumulated depreciation and amortization		(14,696,711	)		(13,545,777	)
Real estate assets, net	$	145,244,536		$	147,754,887

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

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

The Company acquired the following properties in the three month period ended March 31, 2012:

The Company disposed of the following properties in 2012:

During the three months ended March 31, 2012, NetREIT Dubose and the other model home entities disposed of nine model home properties. The sales price, net of selling costs, aggregated approximately $2.2 million and approximately $0.5 million in mortgage notes payable were retired in connection with these sales. The Company recognized a gain of $44,082 related to the sale of these model homes.

The Company acquired the following properties in 2011:

In January 2011, NetREIT Dubose acquired two model home properties in Texas and leased them back to the home builder. The purchase price for the properties was $0.45 million. NetREIT Dubose paid the purchase price through a cash payment of $0.23 million and two promissory notes totaling $0.22 million.

In February 2011, NetREIT Dubose acquired five model home properties in California and leased them back to the home builder. The purchase price for the properties was $1.5 million. NetREIT Dubose paid the purchase price through a cash payment of $0.75 million and five promissory notes totaling $0.75 million.

In March 2011, NetREIT Dubose acquired four model home properties in South Carolina, Florida and Texas and leased them back to the home builder. The purchase price for the properties was $1.0 million. NetREIT Dubose paid the purchase price through a cash payment of $0.50 million and four promissory notes totaling $0.50 million.

In May 2011, the Company acquired vacant land consisting of approximately 3 acres adjacent to its Sparky’s Rialto Self-Storage facility for approximately $0.4 million paid in cash. The Company intends to use the land for additional motor home parking or for other purposes.

In May 2011, the Company acquired the Dakota Bank Buildings for the purchase price of approximately $9.6 million. The Property is a six-story, two building office complex built in 1981 and 1986 located on 1.58 acres and consists of approximately120,000 rentable square feet in downtown Fargo, North Dakota. The Company made a down payment of approximately $3.875 million and financed the remainder of the purchase price through a monthly adjustable rate mortgage with interest at 3.0% over the one month Libor with an interest rate floor of 5.75% and ceiling of 9.75%.

In September 2011, the Company acquired the Yucca Valley Retail Center for the purchase price of approximately $6.8 million. The Property is a neighborhood shopping center complex built in approximately 1978 consisting of five separate parcels. The Property consists of approximately 86,000 rentable square feet and is currently 93% leased and anchored by a national chain grocery store. The Company paid the purchase price through a cash payment of approximately $3.5 million and assumed a loan secured by the property of approximately $3.3 million with an interest rate of 5.62%.

In December 2011, the Company acquired the Sunrise Self-Storage facility for the purchase price of $2.2 million. The Company paid the purchase price in an all cash transaction. The Property is located within a mixed commercial and industrial area of Hesperia, California. The Property was built in 1985 and 1989 and consists of fourteen (14) one and two-story buildings comprising approximately 93,851 square feet with approximately 737 storage units on a 4.93 acre parcel.

In December 2011, the Company completed the formation of a California limited partnership, NetREIT National City Partners, LP, (“NCP”) whereby a limited partner contributed its fee interest in two adjacent multi-tenant industrial properties located in National City, California. The Company contributed approximately $0.5 million cash and 1,649.266 shares of $1,000 liquidation value, 6.3% convertible preferred stock to capitalize the limited partnership. The agreed upon value of the Property was $14.5 million. The Company also contributed $2.9 million cash which was used to pay down the mortgage loan assumed by NCP to a balance of $9.5 million. After completing the transactions, NetREIT has an approximate 75% interest in the NCP and a single unrelated limited partner has an approximate 25% interest. The property, referred to by the Company as the “Port of San Diego Complex”, consists of two adjacent multi-tenant light industrial buildings built in 1971 and was renovated in 2008. The Property is comprised of 6.13 acres and the buildings have 146,700 rentable square feet. As of the date of acquisition, the Property was 51.7% occupied.

The Company disposed of the following properties in 2011:

During the twelve months ended December 31, 2011, NetREIT Dubose and the other model home entities disposed of twenty-two model home properties. The sales price, net of selling costs, aggregated approximately $8.5 million and approximately $5.7 million in mortgage notes payable were retired in connection with these sales.

The Company allocated the purchase price of the properties acquired during the three months ended March 31, 2012 as follows:

						Total
			Buildings			Purchase
	Land		and other			Price

Model Home
Properties	$	88,000		$	287,760		$	375,760

The Company allocation of the properties sold during the three months ended March 31, 2012 as follows:

						Total
			Buildings			Purchase
	Land		and other			Price

Model Home
Properties	$	319,733		$	2,098,783		$	2,418,516

The Company allocated the purchase price of the properties acquired during the year ended December 31, 2011 as follows:

															Above
						Tenant									and Below				Total
			Buildings			Improve-			In-place			Leasing			Market				Purchase
	Land		and other			ments			Leases			Costs			Leases				Price

Dakota Bank
Buildings	$	832,000		$	8,123,461		$	-		$	131,982		$	45,186		$	442,371			$	9,575,000

Yucca Valley
Retail Center		2,445,331			3,549,162			520,485			819,979			-			(567,257	)			6,767,700

Sparky’s Sunrise
Self-Storage		1,123,000			1,077,000			-			-			-			-				2,200,000

Port of San Diego
Complex		9,613,000			4,078,816			141,373			29,470			128,448			508,893				14,500,000

Model Home
Properties		2,012,217			9,633,813			-			-			-			-				11,646,030

The Company allocation of the properties sold during the year ended December 31, 2011 as follows:

						Total
			Buildings			Purchase
	Land		and other			Price

Model Home
Properties	$	1,094,267		$	7,331,915		$	8,426,182

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, 2012									December 31, 2011
							Lease									Lease
	Lease			Accumulated			intangibles,			Lease			Accumulated			intangibles,
	intangibles			Amortization			net			intangibles			Amortization			net
In-place leases	$	1,905,059		$	(936,626	)	$	968,433		$	1,905,059		$	(838,512	)	$	1,066,547
Leasing costs		1,176,285			(647,418	)		528,867			1,176,285			(595,386	)		580,899
Tenant
relationships		332,721			(332,721	)		-			332,721			(332,721	)		-
Below-market
leases		(841,425	)		16,379			(825,046	)		(841,425	)		9,296			(832,129	)
Above-market
leases		1,614,124			(466,049	)		1,148,075			1,614,124			(347,317	)		1,266,807

	$	4,186,764		$	(2,366,435	)	$	1,820,329		$	4,186,764		$	(2,104,640	)	$	2,082,124

As of March 31, 2012, the estimated aggregate amortization expense for nine months ended December 31, 2012 and each of the five succeeding fiscal years and thereafter is as follows:

	Estimated
	Aggregate
	Amortization
	Expense
Nine month period ending December 31, 2012	$	844,741
2013		599,003
2014		516,452
2015		363,513
2016		106,222
Thereafter (principally below market rent amortization)		(609,602	)
	$	1,820,329

The weighted average amortization period for the intangible assets, in-place leases, leasing costs, tenant relationships and below-market leases acquired as of March 31, 2012 was 16.1 years.

4. MORTGAGE NOTES PAYABLE

Mortgage notes payable as of March 31, 2012 and December 31, 2011 consisted of the following:

	March 31,		December 31,
	2012		2011

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.	$	3,223,032	$	3,242,767

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.		9,464,176		9,533,849

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.		3,601,809		3,621,057

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 Sparky’s Thousand Palms Self-Storage property.		4,406,010		4,431,783

Mortgage note payable in monthly installments of $10,764 through December 18, 2016, including interest at a fixed rate of 6.25%; collateralized by the Sparky’s Hesperia East Self-Storage property.		1,684,687		1,690,301

Mortgage note payable in monthly installments of $17,226 through May 3, 2015, including interest at a fixed rate of 5.00%; monthly installments of $19,323 from June 3, 2012, including interest at 6.25% to maturity; collateralized by the Sparky’s Rialto Self-Storage property.		2,804,702		2,820,793

Mortgage note payable in monthly installments of $28,219 through September 1, 2015, including interest at a fixed rate of 4.65%; collateralized by the Genesis Plaza property.		4,825,972		4,854,307

Mortgage note payable in monthly installments of $6,638 through July 1, 2018, including interest at a fixed rate of 5.80%; collateralized by the Casa Grande Apartment property (1).		1,035,833		1,040,762

Mortgage note payable in monthly installments of $26,962 through July 1, 2025, including interest at a fixed rate of 5.79% through July 1, 2018; collateralized by the Executive Office Park property.		4,557,023		4,572,161

Mortgage note payable in monthly installments sufficient to amortize the note on a 25 year schedule and the current month interest charge (currently, approximately $36,200), interest at a variable rate of 3.0% over the one month libor with a floor of 5.75% and a ceiling of 9.75% through May 31, 2016; collateralized by the Dakota Bank Building property.		5,613,805		5,640,568

Mortgage note payable in monthly installments of $23,919 through April 11, 2015, including interest at a fixed rate of 5.62%; collateralized by the Yucca Valley Retail Center.		3,279,186		3,304,120

Mortgage note payable in monthly installments of $9,858 through January 1, 2019, including interest at a fixed rate of 4.95%; collateralized by the Rangewood Medical Office Building.		1,134,516		1,150,000

Mortgage note payable in monthly installments of $7,562 through January 1, 2019, including interest at a fixed rate of 4.95%; collateralized by Regatta Square.		1,293,286		1,300,000

Mortgage note payable in monthly installments of $82,537 through June 20, 2013, including interest at a variable rate of 1% over a published prime rate with a floor of 6% (the current rate); collateralized by the Port of San Diego Complex.		9,383,112		9,500,000

Subtotal, NetREIT, Inc. properties	$	56,307,149	$	56,702,468

Mortgage notes payable in monthly installments of $20,588 through February 10, 2014, including interest at a fixed rate of 5.50%; collateralized by 7 model home properties.		1,741,909		2,088,868

Mortgage notes payable in monthly installments of $3,767 through September 15, 2012, including interest at a fixed rate of 5.75%; collateralized by 4 model home properties.		423,102		428,203

Mortgage notes payable in monthly installments of $19,792 through December 15, 2015, including interest at a fixed rate of 5.75%; collateralized by 22 model home properties.		2,088,801		2,205,798

Mortgage notes payable in monthly installments of $4,308; maturity date of October 5, 2011, including interest at a fixed rate of 2.38%; collateralized by 1 model home property.		-		420,830

Mortgage notes payable in monthly installments of $3,985; maturity date of October 5, 2011; including interest at fixed rates from 2.38%; collateralized by 1 model home property. (2)		75,762		670,207

Mortgage notes payable in monthly installments of $1,798; maturity date of December 5, 2011, including interest at 7.16% collateralized by 1 model home properties.		-		89,811

Mortgage notes payable in monthly installments of $23,686 maturities varying from February 15, 2016 to August 15, 2016, including interest at fixed rates from 5.75%, to 6.30%; collateralized by 23 model home properties.		2,717,473		2,747,709

Mortgage notes payable in monthly installments of $7,934, maturities varying from June 30, 2012 to January 15, 2017, including interest at fixed rates from 5.50%, to 7.13%; collateralized by 4 model home properties.		790,124		575,903

Subtotal, model home properties		7,837,171		9,227,329

	$	64,144,320	$	65,929,797

1.	The Company established a separate purpose entity to be the legal borrower under this real estate note and mortgage security agreement. NetREIT has guaranteed this note with full recourse liability under the loan.

2.	The property secured by this mortgage note was sold in April 2012, and the note was paid off upon sale.

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, 2012 are as follows:

	NetREIT,		Model Home
	Inc.		Properties		Scheduled
	Principal		Principal		Principal
Years Ending:	Payments		Payments		Payments
Nine month period ending December 31, 2012	$	1,124,695	$	764,234	$	1,888,929
2013		10,267,873		433,212		10,701,085
2014		9,883,151		1,761,596		11,644,747
2015		14,072,638		2,324,337		16,396,975
2016		9,987,400		2,381,189		12,368,589
Thereafter		10,971,392		172,603		11,143,995
Total	$	56,307,149	$	7,837,171	$	64,144,320

5. 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. Total rents charged and paid by these affiliates was approximately $15,000 and $14,000 for the three months ended March 31, 2012 and 2011, respectively.

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, 2012 and 2011, the Company paid CHG total management fees of approximately $153,000 and $96,000, 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 March 2011, the Company purchased 9,560 shares of its vested restricted common stock compensation from its independent Board of Directors for a total of $82,520. The purchase price of approximately $8.60 per share was determined using the same value for the shares as reported as income to state and Federal income tax authorities.

In January 2012, the limited partner of NetREIT 01, LP (the “Partnership”) that owns the 7-Eleven property exercised its option to convert approximately 30.0% of its ownership interests in the Partnership in exchange for approximately 17,060 shares of Company common stock. In March 2012, the Company bought back all of these shares from the limited partner at a price per share that was determined when the partnership was formed, which, adjusted for stock dividends, is $8.44 per share. After conversion, our interest in the Partnership increased to approximately 77%.

The limited partner of NetREIT 01, LP is the Allen Trust DTD 7-9-1999. William H. Allen, a Director of the Company and Chairman of the Audit Committee, is a beneficiary and a trustee of the trust. The Partnership was formed approximately one year before Mr. Allen became a Board Member. The stock buy back transaction was subjected to the Company’s related party transaction policy which requires a review of the transaction by the uninterested parties of the Audit Committee and a subsequent vote by the Company’s Board of Directors.

6. SHAREHOLDERS’ EQUITY

Employee Retirement and Share-Based Incentive Plans

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 effective January 1 since the year of adoption. The nonvested shares have voting rights and are eligible for any dividends paid to common shares. The share awards vest in equal annual instalments 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 of $10 adjusted for stock dividends since granted and assumed selling costs. The value of granted nonvested restricted stock issued during three months ended March 31, 2012 totalled approximately $490,000 which is calculated using the current private placement offering of $10 adjusted for estimated selling costs. The value of granted nonvested restricted stock issued during the three months ended March 31, 2011 totalled approximately $444,000. During the three months ended March 31, 2012 and 2011, $166,787 and $109,620 were recorded as compensation expense. The remaining 115,559 nonvested restricted shares will vest in equal instalments over the next two to four years.

A table of non-vested restricted shares granted and vested since December 31, 2010 is as follows:

Balance, December 31, 2010	61,642
Granted	52,139
Vested	(49,805	)
Cancelled	(5,504	)
Stock dividend	5,305
Balance, December 31, 2011	63,777
Granted	57,012
Vested	(5,130	)
Cancelled	(100	)
Balance, March 31, 2012	115,559

Cash Dividends. During the three months ended March 31, 2012 and 2011, the Company paid cash dividends, net of reinvested stock dividends, of $1,008,699 and $816,782, respectively, or $0.543 and $0.572 for the quarter ended March 31, 2012 and 2011, respectively per share on an annualized basis. As the Company reported net losses in both of these quarters, and on a cumulative basis, these cash dividends represent a return of capital to the stockholders rather than a distribution of earnings. The Company paid cash dividends on the Convertible Series 6.3% Preferred Stock issued in December 2011 of approximately $27,000 in the three month period ended March 31, 2012. The dividends were paid to a subsidiary that is consolidated into the condensed consolidated financial statements of the Company and, as a result, have been eliminated in consolidation.

7. 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, Industrial and 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 period ended March 31, 2012 and 2011.

	Period Ended March 31,
	2012			2011
Industrial/Office Properties:
Rental income	$	2,019,411		$	1,476,081
Property and related expenses		681,509			594,235
Net operating income, as defined		1,337,902			881,846

Residential Properties:
Rental income		654,181			862,417
Property and related expenses		75,943			52,137
Net operating income, as defined		578,238			810,280

Retail Properties:
Rental income		700,356			429,052
Property and related expenses		205,763			112,432
Net operating income, as defined		494,593			316,620

Self Storage Properties:
Rental income		714,238			559,680
Property and related expenses		369,916			348,655
Net operating income, as defined		344,322			211,025

Mortgage loan activity:
Interest income		18,190			15,734

Reconciliation to Net Income Available to Common Shareholders:
Total net operating income, as defined, for reportable segments		2,773,245			2,235,505
Unallocated other income:
Total other income		2,169			8,440
Gain (loss) on sale of real estate		44,082			(82,277	)
General and administrative expenses		1,124,718			917,702
Interest expense		981,484			728,364
Depreciation and amortization		1,176,738			978,486
Net loss before noncontrolling interests		(463,444	)		(462,884	)
Noncontrolling interests		108,167			75,915
Net loss	$	(571,611	)	$	(538,799	)

	March 31,		December 31,
	2012		2011
Assets:
Industrial/Office Properties:
Land, buildings and improvements, net (1)	$	74,895,989	$	75,314,093
Total assets (2)		77,217,660		77,563,998

Residential Property:
Land, buildings and improvements, net (1)		19,219,224		21,129,410
Total assets (2)		20,151,413		22,434,205

Retail Properties:
Land, buildings and improvements, net (1)		23,607,497		23,647,629
Total assets (2)		24,695,625		24,893,157

Self Storage Properties:
Land, buildings and improvements, net (1)		27,521,826		27,663,755
Total assets (2)		27,687,406		27,832,381

Mortgage loan activity:
Mortgage receivable and accrued interest		1,031,307		1,032,082
Total assets		1,031,307		1,032,082

Reconciliation to Total Assets:
Total assets for reportable segments		150,783,411		153,755,823

Other unallocated assets:
Cash and cash equivalents		4,176,410		4,872,081
Other assets, net		3,122,835		3,024,027

Total Assets	$	158,082,656	$	161,651,931

____________

(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,
	2012		2011
Capital Expenditures:(1)
Office Properties:
Capital expenditures and tenant improvements	$	357,971	$	313,712

Residential Property:
Acquisition of operating properties		375,760		2,939,780

Retail Properties:
Capital expenditures and tenant improvements		134,121		32,175

Self Storage Properties:
Capital expenditures and tenant improvements		5,788		2,300

Acquisition of operating properties, net		375,760		2,939,780
Capital expenditures and tenant improvements		497,880		348,187
Total real estate investments	$	873,640	$	3,287,967

____________

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

8. SUBSEQUENT EVENTS

In April 2012, NetREIT Dubose and the 201 Partnership completed a transaction for the purchase and lease back of 19 model home properties. The aggregate purchase price was approximately $8.2 million, paid in cash of approximately $3.7 and new mortgage notes payable of approximately $4.5 million. The homes are located in California and Arizona.

In May 2012, the Company raised $4.2 million through the financing of the Morena Office Building and the Pacific Oaks Plaza under two separate mortgage notes. The notes bear interest at 4.5%, with payments aggregating approximately $23,345, amortized over 25 years and maturing in 9 years.

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

The following discussion relates to our 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, 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. See Item 1A for a discussion of material risks.

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 RECENT DEVELOPMENTS

Growth and Expansion of Portfolio. During the last five years, we have completed the acquisition of nineteen income producing properties for approximately $136.5 million, and during the last three years we have completed the acquisition of fifty model home properties for approximately $11.2 million and invested in five income producing real estate partnerships with investments in model home properties.

Expansion of Business Model. On March 1, 2010, the Company acquired the assets and six employees of DMHU. Later that year, the Company formed NetREIT Advisors and transferred the four remaining DMHU employees to this newly formed LLC. NetREIT Advisors began managing and serving as external advisor to NetREIT Dubose. NetREIT Advisors’ general and administrative expenses are currently approximately $73,000 per month. NetREIT Advisors generated fees of approximately $406,000 and $330,000 during the years ended December 30, 2011 and 2010, respectively. NetREIT Dubose will continue to make additional property acquisitions and we expect revenues less rental operating costs to increase at a far greater rate than their general and administrative expenses. This business has been hampered by the slow recovery of the residential building. We have seen increasing activity by residential developers during the last six months and we anticipate this business to be a profit generator during the next 12 months.

Acquisitions during the First Three Months of 2012. During the first quarter of 2012 we did not acquire any non-model home properties and only acquired one model home property for approximately $375,000.

Acquisitions during the Second Quarter of 2012. Additionally, in April 2012, we announced that we acquired or entered into agreements to acquire properties during the second quarter of 2012 with an aggregate value of approximately $7.5 million. In addition, NDMHR and Dubose Model Home #201 LP acquired 19 model homes with an aggregate value of approximately $8.2 million on April 30, 2012.

Growth in Capital Resources. During the last five years having stockholders’ equity has increased from approximately$12.5 to $81.2 million at March 31, 2012. Our investment portfolio, consisting of real estate assets, lease intangibles, land purchase option and mortgages receivable, have increased by 241.3% to approximately $163.2 million at March 31, 2012 from $47.5 million at March 31, 2007. The primary source of funds for the growth in the portfolio during these five years was attributable to the issuance of common stock of approximately $88.3 million and from proceeds from mortgage notes payable.

Economic Environment

The current economic environment is still characterized by increased residential housing foreclosures and an oversupply of homes available for purchase, depressed commercial real estate valuations, slowly improving consumer spending, employment anxiety and concerns of inflation and higher interest rates. In general, US corporations’ net income and investments has shown improvement. However, the housing sector has so far not significantly improved. We believe that the pace of this recovery will likely be slow and disjointed. Full recovery will need increasing job growth, but it will not be consistent across industries, geographies or periods of the year causing an uneven tempo of growth.

Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+” in August 2011. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. Although the government announced they intend to keep interest rates low through 2014, these developments and the government’s credit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

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 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.

In light of the distressed nature of the commercial real estate economy in the past several years, we have 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 affected our current cash flow due to the very low yield on cash equivalents. Net operating income from our properties, from newly acquired properties and from the model home division growth, is increasing at a faster rate than our general and administrative expenses due to efficiencies of scale. We therefore believe that when most or all of our properties are operating at stabilized rates, and when excess available cash on hand is fully invested plus future acquisitions, we will be able to fund our future distributions to our shareholders from cash flow from operations.

We seek to diversify our portfolio by segments of commercial real estate segments to reduce the adverse effect of a single under-performing segment, geographic market and tenant industry.

As of March 31, 2012, we owned or had a controlling interest in nine Office Properties which total approximately 543,000 rentable square feet, five Retail Properties which total approximately 171,000 rentable square feet, six Self-Storage Properties which total approximately 581,000 rentable square feet, one Industrial property of approximately 146,700 rentable square feet, one Multi Residential Property and 70 model home properties.

NetREIT’s office, retail and industrial properties are located primarily in Southern California and Colorado, with a single property located in North Dakota and Wyoming. Our model home properties are located in fourteen states throughout the United States. 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.

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 office leases are for terms of 3 to 5 years with annual rental increases built into such leases. In general, we have been experiencing decreases in rental rates in many of our submarkets due to continuing recessionary conditions and other related factors when leases expire and are extended. We cannot give any assurance that as the older leases expire or as we add new tenants that rental rates will be equal to or above the current market rates. Also, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have a negative effect on our future financial condition, results of operations and cash flow.

The Residential Properties are rented on a short term basis of less than six months for our apartment property and typically 2 to 3 years for our model home leases. The Self-Storage Properties are rented pursuant to rental agreements that are 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.

The Company believes that it has met all of the REIT distribution and technical requirements for the three months ended March 31, 2012 and the year ended December 31, 2011.

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 to 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.

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.

a.	The buyer is independent of the seller;

b.	Collection of the sales price is reasonably assured; and

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.

As of March 31, 2012, management has concluded that there are 9 model home properties aggregating a net book value of approximately $2.3 million which are considered as held for sale and are included in real estate assets. These homes are encumbered by mortgage notes payable of approximately $0.2 million.

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, 2012 and 2011, was approximately $974,000 and $859,000, respectively

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, 2011 and, as of March 31, 2012, management does not believe that any indicators of impairment were evident.

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

a.	persuasive evidence of an arrangement exists;

b.	delivery has occurred or services have been rendered;

c.	the amount is fixed or determinable; and

d.	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 provision for uncollectible receivables related to deferred rents have been recorded as of March 31, 2012 and December 31, 2011.

Level 1	- Quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2	- Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3	- Unobservable inputs for the asset or liability.

As of March 31, 2012 and December 31, 2011, the Company does not have any other assets or any liabilities measured at fair value on a nonrecurring basis.

RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS

Property Acquisitions

In March 2010, the Company purchased certain tangible and intangible personal property from DMHU, including rights to certain names, trademarks and trade secrets, title to certain business equipment, furnishings and related personal property. DMHU had used these assets in its previous business of purchasing model homes for investment in new residential housing tracts and initially leasing the model homes back to their developer. In addition, the Company also acquired DMHU’s rights under certain contracts, including contracts to provide management services to 19 limited partnerships sponsored by DMHU and for which a DMHU affiliate serves as general partner (the “Model Home Partnerships”). These partnerships include DAP II and DAP III in each of which the Company was a 51% limited partner. In the DMHU Purchase, the Company paid the owners of DMHU $300,000 cash and agreed to issue up to 120,000 shares of the Company’s common stock, depending on the levels of production the Company achieves from its newly formed Model Homes Division over the next three years. The Company also agreed to continue to employ three former DMHU employees and to pay certain obligations of DMHU, including its office lease which expired on September 30, 2010. As Mr. Dubose is a Company director and was the founder and former president and principal owner of DMHU and certain of its affiliates, this transaction was completed in compliance with the Company’s Board’s Related Party Transaction Policy. The transaction has been accounted for as a business combination. Management performed an analysis of intangible assets acquired with the assistance of an independent valuation specialist and it was determined that $209,000 of the purchase price is attributable to customer relationships and will be amortized over 10 years. The Company also estimated a liability of $1,032,000 associated with the 120,000 shares that it believes will be issued in the future. As a result of the acquisition, the total purchase price of $1,332,000 was allocated between goodwill of $1,123,000 and intangible assets of $209,000. As a result of the transaction, the Company’s investment in DAP II and DAP III are consolidated into the financial statements of NetREIT effective March 1, 2010.

The Company has formed its Model Homes Division which will pursue investment activities based on DMHU’s business model. The Model Homes Division’s activities will initially include the purchase and leaseback of Model Homes in new residential housing tract developments and providing management services to the 19 Model Home Partnerships. To pursue this business, the Company formed a new subsidiary, NetREIT Advisors and is sponsoring the formation of NetREIT Dubose. NetREIT Dubose will invest in Model Homes it purchases from developers in transactions where the developer leases back the Model Home under a short term lease, typically one to three years in length. Upon expiration of the lease, NetREIT Dubose will seek to re-lease the Model Home until such time as it is able to sell the property. NetREIT Dubose will own substantially all of its assets and conduct its operations through the Operating Partnership. NetREIT Advisors serves as the advisor to NetREIT Dubose.

NetREIT Advisors will also provide management services to the 19 Model Home Partnerships, pursuant to the rights under the management contracts assigned to it by DMHU. For these services, NetREIT Advisors receives ongoing management fees and has the right to receive certain other fees when the respective partnership sells or otherwise disposes of its properties.

In January 2011, the Company acquired two model home properties in Texas and leased them back to the home builder. The purchase price for the properties was $0.45 million. The Company paid the purchase price through a cash payment of $.23 million and two promissory notes totaling $0.22 million. There are approximately two months results of operations included for the three months ended March 31, 2011 and three months results of operations in the three months ended March 31, 2012.

In February 2011, the Company acquired five model home properties in California and leased them back to the home builder. The purchase price for the properties was $1.5 million. The Company paid the purchase price through a cash payment of $0.75 million and five promissory notes totaling $0.75 million. There is approximately one month of results of operations included for the three months ended March 31, 2011 and three months results of operations in the three months ended March 31, 2012.

In March 2011, the Company acquired four model home properties in South Carolina, Florida and Texas and leased them back to the home builder. The purchase price for the properties was $1.0 million. The Company paid the purchase price through a cash payment of $0.50 million and four promissory notes totaling $0.50 million. There are no results of operations included in the three month period ended March 31, 2011 and three months results of operations in the three months ended March 31, 2012.

In June 2011, NetREIT Dubose acquired three model home properties in Texas and leased them back to the home builder. The purchase price for the properties was approximately $0.60 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $0.30 million and three promissory notes totaling approximately $0.30 million. There are no results of operations included in the three month period ended March 31, 2011 and three months results of operations in the three month period ended March 31, 2012.

In August 2011, NetREIT Dubose acquired eight model home properties in Texas, Florida, North Carolina and South Carolina and leased them back to the home builder. The purchase price for the properties was approximately $1.9 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $1.0 million and eight promissory notes totaling approximately $0.90 million. There are no results of operations included in the three month period ended March 31, 2011 and three months results of operations in the three month period ended March 31, 2012.

In December 2011, the Company acquired the Sunrise Self-Storage facility for the purchase price of $2.2 million. The Company paid the purchase price in an all cash transaction. The Property is located within a mixed commercial and industrial area of Hesperia, California. The Property was built in 1985 and 1989 and consists of fourteen (14) one and two-story buildings comprising approximately 93,851 square feet on a 4.93 acre parcel. There are no results of operations included in the three month period ended March 31, 2011 and three months results of operations in the three month period ended March 31, 2012.

In December 2011, Dubose Model Home Investor Funds #201, LP acquired one model home properties in South Carolina and leased it back to the home builder. The purchase price for the property was approximately $0.3 million. Dubose Model Home Investor Funds #201, LP paid the purchase price through a cash payment of approximately $0.1 million and promissory note for the balance of the purchase price. There are no results of operations included in the three month period ended March 31, 2011 and three months results of operations in the three months ended March 31, 2012.

The Company disposed of the following properties in 2011:

During the three months ended March 31, 2011, the company disposed of five model home properties. The sales price aggregated approximately $1.2 million and approximately $1.0 million in mortgage notes payable were retired in connection with the sale.

The Company acquired the following properties in the three month period ended March 31, 2012:

In January 2012, Dubose Model Home Investors #201 LP acquired one model home property in Texas and leased it back to the home builder. The purchase price for the property was $0.38 million. The purchase paid was through a cash payment of $0.15 million and a promissory note $0.23 million. There are no results of operations included in the three months ended March 31, 2011 and approximately two months results of operations included in the three months ended March 31, 2012.

The Company disposed of the following properties in 2012:

During the three months ended March 31, 2012, NetREIT Dubose and the other model home entities disposed of nine model home properties. The sales price aggregated approximately $2.2 million and approximately $0.5 million in mortgage notes payable were retired in connection with these sales.

THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011.

Revenues

Rental and fee income was $4,088,186 for the three months ended March 31, 2012, compared to $3,327,230 for the same period in 2011, an increase of $760,956, or 22.9%. The increase in rental income as reported in 2012 compared to 2011 is primarily attributable to:

•

The addition of the 4 properties acquired in 2011 which generated an additional $940,884 of rent and fee income in the three month period ended March 31, 2012 compared to the same period in 2011; and

•

An increase in the three month period ended March 31, 2012 of $32,760 for properties owned for the full three month periods in each year primarily due to increased occupancy rates at several of our properties; and

•

A decrease in revenue of $212,688 in model home revenues attributable to the older partnerships selling model home properties and a decline in transaction based fee revenue in the three months ended March 31, 2012 of approximately $128,000 compared to the three months ended March 31, 2011.

Overall rental and fee revenues are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during 2011 and 2012 for an entire year and future acquisitions of real estate assets.

Interest income was $20,359 for the three month period ended March 31, 2012, compared to $24,174 for the same period in 2011, a decrease of $3,815, or 15.8%. The decrease was primarily attributable to purchasing a note receivable at a discount in the prior year and a decrease in cash balances in 2012 that were invested in interest bearing accounts.

Rental Operating Expenses

Rental operating expenses were $1,333,131 for the three month period ended March 31, 2012 compared to $1,107,459 for the same period in 2011, an increase of $225,672, or 20.4%. The increase in operating expenses year over year is primarily attributable to the same reasons that rental revenue increased. Rental operating costs as a percentage of total income was 32.6% and 33.3% for the three months ended March 31, 2012 and 2011, respectively. The decrease in operating costs as a percentage of revenue is primarily due to the addition of the model home properties that are rented on a triple net basis.

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 $253,120, or 34.8% during the three month period ended March 31, 2012 compared to the same period in 2011. The primary reason for the increase is due to the mortgage debt additions related to the acquisition of the Dakota Bank Buildings, the Yucca Valley Retail Center and the Port of San Diego, which combined added approximately $285,000 in interest expense (including amortization of loan costs) in the three months ended March 31, 2012. In addition, the Company added four mortgage notes to previously unencumbered properties that contributed approximately $106,000 in interest expense in the three months ended March 31, 2012. These increases were partially offset by a reduction in interest expense of approximately $96,000 in the model home property loans and a decrease in interest of approximately $40,000 due to principal reductions on existing loans.

The weighted average interest rate as of March 31, 2012 was 5.73% compared to 5.65% as of March 31, 2011.

The following is a summary of our interest expense on loans by property for the three months ended March 31, 2012 and 2011:

	Date Acquired
	or financed	2012		2011

Havana/Parker Complex	June 2006	$	53,254	$	53,897
World Plaza	September 2007		-		42,560
Waterman Plaza	August 2008		58,284		59,946
Sparky’s Thousand Palms Self-Storage	August 2009		60,822		62,196
Sparky’s Hesperia East Self-Storage	December 2009		28,457		21,410
Garden Gateway Plaza	March 2007		144,563		148,663
Sparky’s Rialto Self-Storage	May 2010		35,586		35,978
Genesis Plaza	August 2010		56,322		57,604
Dubose Acquisition Partners II, LP	March 2010		29,057		37,873
Dubose Acquisition Partners III, LP	March 2010		-		27,123
Dubose Model Home Income Fund #3, LTD	December 2010		1,308		39,451
Dubose Model Home Income Fund #4, LTD	December 2010		3,159		25,924
Dubose Model Home Income Fund #5, LTD	December 2010		349		42,074
NetREIT Dubose Model Home REIT, Inc.	October 2010		79,403		47,864
Dakota Bank Buildings	May 2011		81,855		-
Casa Grande Apartments	June 2011		14,985		-
Executive Office Park	June 2011		65,748		-
Yucca Valley Retail Center	September 2011		46,828		-
Rangewood Medical Office Building	December 2011		14,090		-
Regatta Square	December 2011		15,972		-
Dubose Model Home Investor Fund #113, LP	December 2011		6,488
Dubose Model Home Investors #201, LP	December 2011		5,136		-
Port of San Diego Complex	December 2011		139,608		-
Amortization of deferred financing costs			40,210		25,801
		$	981,484	$	728,364

General and Administrative Expenses

General and administrative expenses increased by $207,016 to $1,124,718 for the three months ended March 31, 2012, compared to $917,702 for the same period in 2011. As a percentage of rental and fee income, general and administrative expenses were 27.5% and 27.6% for the three months ended March 31, 2012 and 2011, 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, 2012, our salaries and employee related expenses increased $62,339 to $653,897 compared to $591,558 for the same three months in 2011, an increase of 10.5%. The increase in salary and employee expenses in 2012 was primarily attributable to the inclusion of marketing staff in 2012 whereas in 2011, our marketing staff and related costs were capitalized and amortized against stock issuance costs. This change is the result of NetREIT terminating its capital raising activities through its private placement at the end of 2011. In addition, the Company annually grants salary increases to employees effective January 1 each year. Further, on an annual basis, effective January 1 of each year, the Company grants shares of restricted stock that vest over 3 to 5 years. In the three month period ended March 31, 2012, amortization expense related to an increase in the awards increased by $31,206 to $83,826, compared to $52,620 in the same period last year.

Legal, accounting and public company related expenses and increased by $81,934 to $159,534 for the three month period ended March 31, 2012, compared to $77,599 during the same period in 2011. The increase is due to our completion of an acquisition audit filing with the SEC and having tax returns prepared for several of our partnerships earlier this year than the prior year.

Insurance related expenses increased by $14,231 to $81,093 for the three month period ended March 31, 2012 compared to $66,862 for the same period in 2011. The increase is also attributable to the overall growth of the Company as well as general rate increases.

Other increases to general and administrative costs are also attributable to formerly capitalized costs associated with capital raising activities that are treated as expenses in the current period where they were capitalized and amortized as stock issuance costs in the prior year.

Gain/Loss on Sale of Real Estate Assets

In the three month period ended March 31, 2012, the Company had gains on the sale of model home properties of $44,082 compared to net losses of $82,277 for the same three months of 2011.

Net Loss

Net loss for the three months ended March 31, 2012 was $571,611, or $0.04 loss per share, compared to a net loss for the three months ended March 31, 2011 of $538,799, or $0.04 loss per share. The increase in net loss of $32,812 in the three month period ended March 31, 2012 was primarily attributable to increases in our general and administrative costs and interest expense offset by an increase in net operating income of our properties.

LIQUIDITY AND CAPITAL RESOURCES

As discussed above under Economic Environment, during 2012, there have been indications of economic improvement and stabilization in the equity markets. However, we expect the market turbulence could continue in the commercial real estate arena as mortgage financings originated over the past five to seven years mature.

We believe that as a result of these negative trends, new mortgage financing will remain less favorable as pre-recession days, which may negatively impact our ability to finance future acquisitions. Long-term interest rates remain relatively low by historical standards but we anticipate that interest rates will increase in the next couple of years. On the other hand, we believe the negative trends in the mortgage markets for smaller properties and in some geographic locations have reduced property prices and may, in certain cases, reduce competition for those properties.

Overview

We actively seek investments that are likely to produce income in order to pay distributions as well as long-term gains for our stockholders. Our future sources of liquidity include cash and cash equivalents, cash flows from operations, new mortgages on our unencumbered properties, refinancing of existing mortgages and the possible sale of additional equity securities. Our available liquidity at March 31, 2012 was approximately $24.2 million, including $4.2 million in cash and cash equivalents and an estimated borrowing capacity of approximately $20 million from potential mortgages on unencumbered properties.

Our future capital needs include the acquisition of additional properties as we as expand our investment portfolio into other real property sectors, pay down outstanding borrowings and the payment of a competitive distribution to our shareholders. To ensure that we are able to effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short term liquidity needs include proceeds necessary to pay the debt service on existing mortgages, fund our current operating costs and fund our distribution to stockholders. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments.

We believe that our available liquidity discussed is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing mortgages and fund our operating costs in the near term. We further believe that our cash flow from operations along with the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. However, we do not expect that our cash flow from operating activities will be totally sufficient to fund our short term liquidity needs, including the payment of cash dividends at current rates to our shareholders, and instead we expect to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness. We expect to obtain additional mortgages and assumption of existing debt collateralized by some or all of our real property in the future.

Equity Capital

On December 31, 2011 we terminated our ongoing private placement offering. On December 28, 2011, we issued $1.6 million of 6.3% Convertible Preferred equity in connection with the acquisition of a $14.5 million property in a DownREIT in December 2011. The Company is currently in the process of exploring alternatives to raise additional equity.

Debt Capital

We have arranged to borrow approximately $4.2 million during the second quarter of 2012 in the form of mortgage notes on two of our unencumbered properties at a rate of 4.5% interest. The proceeds of these notes will be used to acquire additional properties. We anticipate raising additional capital by obtaining loans on our other unencumbered properties without a material increase to our leverage percentage for the whole company.

Cash and Cash Equivalents

At March 31, 2012, we had approximately $4.2 million in cash and cash equivalents compared to approximately $4.9 million at March 31, 2012. We intend to use this cash for general corporate purposes, distributions to our stockholders and for additional acquisitions.

Our cash and cash equivalents are held in bank accounts at third party institutions and consist of invested cash and cash in our operating accounts. During 2012 or 2011, we did not experience any loss or lack of access to our cash or cash equivalents.

Debt

As of March 31, 2012, NetREIT had mortgage notes payable in the aggregate principal amount of $56.3 million, collateralized by a total of 14 non model home properties with terms at issuance ranging from 3 to 30 years. The weighted-average interest rate on the mortgage notes payable as of March 31, 2012 was approximately 5.73%. Our debt to book value on these properties is approximately 61.2% and we have eight non model home properties with a net book value of $34.8 million that are unencumbered. We do not have any mortgage debt balloon principal payments on these properties due during 2012 or 2013.

As of March 31, 2012, NetREIT Dubose had 49 fixed-rate mortgage notes payable in the aggregate principal amount of $5.6 million, collateralized by a total of 49 model home properties, an average of $115,200 per home. These loans generally have a term at issuance of five years. The weighted-average interest rate on these mortgage notes payable as of March 31, 2012 was 5.38%. Our debt to net book value on these properties is approximately 48.5%. The Company has guaranteed these promissory notes. The balloon principal payments on the notes payable are in 2015 and 2016 and are typically tied to the end of the lease and sale of the model home securing the debt.

As of March 31, 2012, limited partnerships that the Company has a limited partnership interest in had 10 fixed-rate mortgage note payables in the aggregate principal amount of $2.2 million, collateralized by a total of 10 model home properties, an average of $219,000 per home. The debt to book value on these properties is approximately 48.0%. All of these notes payable have mortgage debt balloon principal payments in 2012 or 2013. All of the free cash flow on these limited partnerships is being held or applied to the loan balances with no distribution to the partners until all homes have been sold. All of the properties will be sold at the end of the lease agreements and we believe that all properties will be sold for more than the mortgage debt balloon amount.

Despite the disruptions in the debt market discussed in “Overview” above, we believe that we will be able to refinance maturing debts on or before scheduled maturity dates.

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2012 was approximately $859,000 compared to net cash used in operating activities of approximately $60,000 for the three months ended March 31, 2011. The increase of approximately $919,000 was primarily due to an increase in net operating income of our properties of approximately $282,000 primarily due to the acquisitions acquired during the last nine months of 2011. The increase was also due to the decrease in working capital needs of approximately $431,000.

Although the cash from operating activities did not cover the cash portion of the distribution to our stockholders during the three months ended March 31, 2012 of approximately $1.0 million, taken together with the proceeds received from the sale of model homes the cash component of the dividend was adequately covered out of cash flow. We anticipate that with the inclusion of the recent acquisitions and the anticipated acquisitions during the next couple of years that the cash provided by operating activities will cover the cash distribution to shareholders in the future.

Investing Activities

Net cash provided by investing activities was approximately $1.3 million during the three months ended March 31, 2012. During the period nine model homes were sold for net sales proceeds of $2.2 million. During this period cash used in investing activities included the acquisition of two model homes for approximately $376,000 and approximately $498,000 on tenant improvements and capital expenses of existing properties.

Net cash used in investing activities for the three months ended March 31, 2011 was approximately $2.4 million, consisting primarily of $1.9 million net purchase and sales of model homes.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2012 was approximately $2.9 million. Net used in financing was primarily the repayment of mortgages was $1.6 million on model home mortgages and the normal payment amortization of other mortgages of approximately $0.4 million. In addition, net cash used includes distribution to stockholders of approximately $1.0 million.

Net cash provided by financing activities for the three months ended March 31, 2011 was approximately $2.0 million, which consisted of approximately $3.3 million net proceeds from the sale and issuance of our common stock and proceeds from mortgage notes of approximately $1.5 million in connection with the purchase of model homes. These proceeds were offset by payments on mortgage notes payable, and distributions to stockholders of approximately $2.2 and $0.8 million, respectively.

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 and variable rate debt at March 31, 2012 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.

We are in compliance with all conditions and covenants of our loans.

	Less than						More than
	a year		1-3 Years		3-5 Years		5 Years
	2012		(2013-2014)		(2015-2016)		(After 2016)		Total
Principal payments - secured debt	$	1,134,318	$	20,151,021	$	24,050,657	$	10,971,153	$	56,307,149
Interest payments - fixed rate debt		1,497,785		3,790,314		1,752,487		1,210,645		8,251,231
Interest payments - variable rate debt		925,380		1,360,329		863,422		2,335,246		5,484,377
Model home properties - secured debt		764,860		2,194,808		4,705,527		171,976		7,837,171
Model home properties - interest payments		396,804		636,061		557,612		10,160		1,600,637
Ground lease obligation (1)		16,144		43,820		43,820		942,571		1,046,355
	$	4,735,291	$	28,176,353	$	31,973,525	$	15,641,751	$	80,526,920

______________

(1) Ground lease obligation represents the ground lease payments due on our World Plaza Property.

Other Liquidity Needs

We are not contractually bound to make regular quarterly dividend distributions to our common share holder; however 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 from cash flow from operating activities. We are not contractually bound to make regular quarterly dividend distributions to our common stock holders. 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 decrease our distributions while still meeting our REIT requirement for 2012. If our net cash provided by operating 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 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.

In addition, this difficult economic environment could adversely affect our tenants’ financial condition and make it difficult for them to continue to meet their obligations to us. We have been successful maintaining relatively even levels of occupancy at our stabilized properties; however, overall progress to date in the office leasing velocity and pricing has been inconsistent both regionally and across assets of differing quality. Vacancy rates in our markets appear to have reached the top and are starting to descend at a slow pace. In the first quarter of 2012, we experienced the highest levels of new leasing activity since the beginning of the economic downturn. Several years may be required before vacancy rates decline sufficiently to support meaningful growth in rents.

Our involvement in retail properties has been limited, however, we are seeing more rental inquiries. Retail demand for space in our markets in 2012 is expected to be positive for the first time since 2007. Although the increase is expected to be modest we, expect that well situated properties, including ours, will benefit from the improving economy.

Economic growth rates have shown trends of slow growth in recent periods and inflation rates in the United States have remained low. 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 seek 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.

Off-Balance Sheet Arrangements

As of March 31, 2012 and 2011, 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 2012 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 2012 compared to 2011 due to rising construction costs, planned improvements on recent acquisitions and the anticipated increase in property acquisitions in 2012. 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”) and Modified Funds From Operations (“MFFO”)

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 that are significant economic costs and could materially impact our results from operations.

The following table presents our FFO for the three March 31, 2012 and 2011. 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.

	Period ended March 31,
	2012			2011
Net loss before noncontrolling interests	$	(463,444	)	$	(462,884	)
Adjustments:
Income attributable to noncontrolling interests		(108,167	)		(75,915	)
Depreciation and amortization		1,019,810			747,195
(Gain) loss on sale of real estate assets		(44,082	)		82,277
Funds from Operations	$	404,117		$	290,673

FFO increased in the three month period ended March 31, 2012 by $113,444, or 39.0%, to $404,117 compared to $290,673 for the same period in 2011 due to the increase in the Company’s real estate portfolio and improving performance at some of the existing properties.

We anticipate FFO to improve as we continue to acquire properties and earn rental revenues on properties recently acquired without substantial increases in general and administrative expenses.

We define MFFO, a non-GAAP measure, consistent with the Investment Program Association’s (“IPA”) Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REIT Modified Funds From Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to our stockholders. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

The following table presents our MFFO for the three March 31, 2012 and 2011.

	Period ended March 31,
	2012			2011
Funds from operations	$	404,117		$	290,673
Adjustments:
Straight line rent adjustment		(84,878	)		(45,322	)
Above and below market rents		150,145			32,366
Acquisition costs		33,717			19,324
Modified Funds from Operations	$	503,101		$	297,041

MFFO increased in the three month period ended March 31, 2012 by $206,060, or 69.4%, to $503,101 compared to $297,041 for the same period in 2011 due to the increase in the Company’s real estate portfolio and improving performance at some of the existing properties.

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, including Model Homes, 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, 2012 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, 2012, the Company also sold 110,688 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 1,536 persons participating in the plan. The Company sold these shares under its registration statement on Form S-3 filed with the Securities and Exchange Commission on January 17, 2012 file number 333-179029.

Issuer Purchases of Equity Securities
					(d)
					Maximum
					Number (or
				(c)	Approximate
				Total	Dollar
				Number of	Value) of
				Shares (or	Shares (or
				Units)	Units)
				Purchased	that May
	(a)			as Part of	Yet Be
	Total		(b)	Publicly	Purchased
	Number of		Average	Announced	Under
	Shares		Price Paid	Plans or	the Plans or
Period	Purchased		per Share	Programs (1)	Programs (1)

March 1 — March 31, 2012 (Related Parties) (2)	17,060	$	8.44
Total	17,060	$	8.44

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information.

None.

ITEM 6. EXHIBITS.

Exhibit
Number			Description

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, 2012.

31.2			Certification of the Company’s Chief Financial 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, 2012.
31.3			Certification of the Company’s 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, 2012.
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.

101.INS		Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

____________________

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 10, 2012	NetREIT, Inc.

	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
	By:	/s/ J. Bradford Hanson
	Name: Kenneth W. Elsberry
	Title: Principal Financial and Accounting Officer