SQFT 10-Q Quarterly Report Sept. 30, 2013

PRESIDIO PROPERTY TRUST, INC.

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10-Q 1 netr-10q_093013.htm QUARTERLY REPORT

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 September 30, 2013

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 (State or other jurisdiction of incorporation or organization		33-0841255 (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 x 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 November 12, 2013, registrant had issued and outstanding 16,313,829 shares of its common stock, $0.01 par value.

Index

		Page

Part I. FINANCIAL INFORMATION:

Item 1. FINANCIAL STATEMENTS:

	Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2013 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 3. Quantitative and Qualitative Disclosures about Market Risk		55
Item 4. Controls and Procedures		55

Part II. OTHER INFORMATION		57

	Item 1. Legal Proceedings	57
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	57
	Item 3. Defaults Upon Senior Securities	58
	Item 4. Mine Safety Disclosures	58
	Item 5. Other Information	58
	Item 6. Exhibits	58

	Signatures	59

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

NetREIT, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

	September 30,				December 31,
	2013				2012
	(Unaudited)
ASSETS
Real estate assets and lease intangibles, net		$	160,556,455			$	165,638,719
Mortgages receivable and interest			920,216				920,216
Cash and cash equivalents			8,611,182				10,746,536
Restricted cash			1,437,595				1,113,123
Other real estate owned			900,000				900,000
Other assets, net			8,490,789				5,813,399

TOTAL ASSETS		$	180,916,237			$	185,131,993

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable		$	89,248,344			$	92,480,363
Accounts payable and accrued liabilities			4,261,255				4,126,771
Dividends payable			1,229,328				1,142,191
Total liabilities			94,738,927				97,749,325

Commitments and contingencies

Stockholders’ equity:
Convertible series AA preferred stock, $0.01 par value, $25 liquidating preference, shares authorized: 1,000,000; no shares issued and outstanding at September 30, 2013 and December 31, 2012, 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 September 30, 2013 and December 31, 2012, respectively			16				16
Common stock series A, $0.01 par value, shares authorized: 100,000,000; 16,313,829 and 15,767,417 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively			163,139				157,674
Common stock series B, $0.01 par value, shares authorized: 1,000; no shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively			—				—
Additional paid-in capital			140,046,407				134,884,312
Dividends in excess of accumulated losses			(67,583,468	)			(58,337,457	)
Total stockholders’ equity before noncontrolling interest			72,626,094				76,704,545
Noncontrolling interest			13,551,216				10,678,123
Total stockholders’ equity			86,177,310				87,382,668

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	180,916,237			$	185,131,993

See Notes to Condensed Consolidated Financial Statements

NetREIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

	Three months ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Rental income	$	4,725,963		$	4,353,897		$	14,559,692		$	12,518,079
Fee and other income		63,404			247,844			255,540			444,993
		4,789,367			4,601,741			14,815,232			12,963,072

Costs and expenses:
Rental operating costs		1,691,280			1,502,140			4,841,809			4,167,180
General and administrative		1,166,374			980,508			3,606,963			3,176,778
Depreciation and amortization		1,353,612			1,219,925			3,994,350			3,610,813
Total costs and expenses		4,211,266			3,702,573			12,443,122			10,954,771

Income from operations		578,101			899,168			2,372,110			2,008,301

Other income (expense):
Interest expense		(1,247,604	)		(1,167,736	)		(3,800,959	)		(3,220,906	)
Interest and other income		16,609			22,276			108,304			62,760
Gain on sale of real estate		169,460			81,695			1,026,371			180,770
Gain on dissolution of partnerships		—			285,247			—			285,247
Asset impairments		(1,500,000	)		(358,000	)		(1,500,000	)		(358,000	)
Total other expense, net		(2,561,535	)		(1,136,518	)		(4,166,284	)		(3,050,129	)

Net loss before noncontrolling interests		(1,983,434	)		(237,350	)		(1,794,174	)		(1,041,828	)

Income attributable to noncontrolling interests		236,653			139,068			875,264			339,422

Net loss attributable to common stockholders	$	(2,220,087	)	$	(376,418	)	$	(2,669,438	)	$	(1,381,250	)

Loss per common share -
Basic and diluted:	$	(0.14	)	$	(0.02	)	$	(0.16	)	$	(0.09	)

Weighted average number of common shares outstanding - basic and diluted		16,210,755			15,503,302			16,186,962			15,435,746

See Notes to Condensed Consolidated Financial Statements.

NetREIT, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2013
(Unaudited)

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

Balance, December 31, 2012		1,649	$	16		15,767,417		$	157,674		$	134,884,312		$	(58,337,457	)	$	76,704,545		$	10,678,123	$	87,382,668

Net (loss) income															(2,669,438	)		(2,669,438	)		875,264		(1,794,174	)

Vesting of restricted stock awards						715			7			6,142						6,149			—		6,149

Stock issued for acquisition of NTR, Inc.						200,000			2,000			1,898,000						1,900,000			—		1,900,000

Common stock issued for acquisition of Dubose Model Homes USA						38,752			388			332,881						333,269			—		333,269

Common stock repurchased						(4,882	)		(49	)		(34,123	)					(34,172	)		—		(34,172	)

Dividends paid						208,752			2,088			1,982,461			(4,369,480	)		(2,384,931	)		—		(2,384,931	)

Dividends declared/reinvested						103,075			1,031			976,734			(2,207,093	)		(1,229,328	)		—		(1,229,328	)

Contributions received from noncontrolling interests net of distributions paid						—			—			—			—			—			1,997,829		1,997,829

Balance, September 30, 2013		1,649	$	16		16,313,829		$	163,139		$	140,046,407		$	(67,583,468	)	$	72,626,094		$	13,551,216	$	86,177,310

See Notes to Condensed Consolidated Financial Statements

NetREIT, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended			Nine Months Ended
	September 30,			September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(2,669,438	)	$	(1,381,250	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,057,956			3,660,692
Asset impairment		1,500,000			358,000
Stock compensation		390,342			365,056
Gain on sale of real estate assets		(1,026,371	)		(180,770	)
Bad debt expense		49,908			63,078
Income attributable to noncontrolling interests		875,264			339,422
Other assets		(124,080	)		(22,450	)
Accounts payable and accrued liabilities		83,560			434,823
Net cash provided by operating activities		3,137,141			3,636,601

Cash flows from investing activities:
Real estate acquisitions		(5,321,059	)		(21,052,518	)
Building and tenant improvements		(2,286,807	)		(872,074	)
Deferred leasing costs		(645,089	)		(70,314	)
Proceeds received from sale of real estate assets		8,450,159			6,503,816
Restricted cash		(324,472	)		127,142
Net repayments of notes receivable		—			111,866
Net cash used in investing activities		(127,268	)		(15,252,082	)

Cash flows from financing activities:
Proceeds from mortgage notes payable		23,052,635			16,122,341
Repayment of mortgage notes payable		(26,284,654	)		(4,076,843	)
Debt issuance costs		(349,743	)		(87,835	)
Deferred stock issuance costs		—			(18,895	)
Contributions received from noncontrolling interests in excess of distributions paid		1,997,829			2,075,547
Repurchase of common stock		(34,172	)		(15,660	)
Repurchase of common stock - related parties		—			(155,904	)
Dividends paid		(3,527,122	)		(3,166,063	)
Net cash (used in) provided by financing activities		(5,145,227	)		10,676,688

Net decrease in cash and cash equivalents		(2,135,354	)		(938,793	)

Cash and cash equivalents:
Beginning of year		10,746,536			4,872,081


End of period	$	8,611,182		$	3,933,288

Supplemental disclosure of cash flow information:
Interest paid	$	3,857,943		$	3,128,998
Non-cash investing and financing activities:
Shares issued in connection with Dubose Model Home USA acquisition	$	333,269		$	—
Issuance of common stock for acquisition of NTR Property Management	$	1,900,000		$	—
Conversion of partnership interests into common stock	$	—		$	143,905
Reinvestment of cash dividend	$	2,010,605		$	3,036,195
Accrual of dividends payable	$	1,204,753		$	1,104,427

See Notes to Condensed Consolidated Financial Statements

NetREIT, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2013

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 September 30, 2013, including a small number of model home properties held for sale, the Company owned or had an equity interest in eleven office buildings and one industrial building (“Office Properties”) which total approximately 786,000 rentable square feet, four retail shopping centers (“Retail Properties”) which total approximately 186,000 rentable square feet, seven self-storage facilities (“Self-Storage Properties”) which total approximately 652,000 square feet and 77 Model Homes owned by four limited partnerships (“Residential Properties”).

The Company is the sole 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 six 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”. During 2012, DAP III, Dubose Model Home Income Fund #3, Dubose Model Home Income Fund #4 and Dubose Model Home Income Fund #5 sold all their model home assets. DAP III and Dubose Model Home Income Fund #5 were dissolved before the end of 2012. Dubose Model Home Income Fund #3 and Dubose Model Home Income Fund #4 each has an investment in DAP II, its one remaining asset. Dubose Model Home Investors Fund #113, LP has one model home remaining as of September 30, 2013. The limited partnerships have been consolidated into the financial statements of the Company in accordance with guidelines attributable to variable interest entities.

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 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, in accordance with an earn out issued approximately 39,000 shares of the Company’s common stock, as a result of the level of production the Company achieved from new model home acquisitions over the three year period that ended February 28, 2013. The transaction was accounted for as a business combination. Management performed an analysis of intangible assets acquired and it was determined that $209,000 of the purchase price was attributable to customer relationships and is being amortized over 10 years. The Company had anticipated that the full earn-out would have been achieved and estimated a liability of $1,032,000 associated with the 120,000 shares that it believed would have been issued during the three year earn-out period. As a result, the total purchase price of $1,332,000 was allocated between goodwill of $1,123,000 and intangible assets of $209,000. In 2012, the Company reduced the liability by approximately $691,000 for the difference of the anticipated earn-out to the actual earn-out. The limited partnerships have been consolidated into the financial statements of the Company in accordance with guidelines attributable to variable interests entities since their acquisition.

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 its 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 September 30, 2013, NetREIT Dubose has raised approximately $3.8 million from outside investors. As of September 30, 2013, there were approximately 944,000 shares outstanding of which approximately 621,000 have been issued to parties other than NetREIT, Inc. However, NetREIT Dubose is consolidated into the financial statements of the Company in accordance with guidelines attributable to variable interest entities.

NetREIT Advisors, LLC also provides management services to one remaining Model Home Partnership, pursuant to rights under the management contracts assigned to it by DMHU. This partnership is 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. 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. Income Fund #5 sold its last model home in 2012 and the partnership was liquidated. Income Funds #3 and #4 have also sold all of their model homes by the end of 2012. These two funds only remaining asset is a minority ownership of DAP II.

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 sole 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 $3,000,000 in outside investor capital through the sale of 60 limited partner units at $50,000 per unit. As of September 30, 2013, the 201 Partnership has raised the maximum $3.0 million 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, as a result, the National City Partnership is included in the consolidated financial statements of the Company.

The Company has determined that the entities described above, where it owns less than 100%, meet the tests to be considered variable interest entities (“VIE’s”), as defined and, as a result of the Company being the primary beneficiary, all of these entities have been consolidated into the consolidated financial statements of the Company. In addition, the Company believes that it has significant control of these limited partnerships and directs the significant activities of the limited partnerships through NetREIT, the Parent Company. Noncontrolling interests in the condensed consolidated balance sheets and the condensed consolidated statement of shareholders’ equity represents unaffiliated ownership or investment in the entities of the Company discussed above. Income attributable to noncontrolling interests in the condensed consolidated statements of operations represents the net income attributable to the unaffiliated owners and investors of the entities discussed above.

Effective January 31, 2013, the Company entered into an Agreement and Plan of Merger to consummate the merger acquisition of CHG Properties, Inc. (“CHG”), a California corporation. The Company had the option to purchase CHG pursuant to a February 15, 2005, option agreement. The Company delivered the option exercise notice provided for in the option agreement to C I Holding Group, Inc. (“CIH”), the parent company of CHG, in November 2012. The President of CIH is Jack K. Heilbron and the Secretary of CIH is Mary Limoges. Mr. Heilbron is President and CEO of the Company, and Ms. Limoges is Mr. Heilbron’s spouse. The Company determined the fair market value of CHG to be $1.9 million and the transaction was reviewed and unanimously approved by the independent Directors of the Board.

Pursuant to the terms and conditions of the Agreement and Plan of Merger, the Company formed NTR Property Management, Inc. (“NTR”), a California corporation. The Company is NTR’s sole shareholder, and as such, owns one hundred percent (100%) of all of the issued and outstanding shares of NTR. The Agreement of Merger was executed by and between NTR, CIH, and the Company and provides that the outstanding shares of CIH will be cancelled upon the receipt by CIH shareholders of 200,000 shares of common stock of the Company using an agreed upon value of $9.50 per share for a total value of $1.9 million. NTR shall function as the sole in-house property manager for the Company after the merger, reducing the Company’s property management expense by the marked-up charges previously paid to CHG. The Company is acquiring the existing infrastructure, experienced personnel, and computer systems which will be assigned to and assumed by NTR. Management has determined that the transaction should be accounted for as a business combination. Of the $1.9 million purchase price, $600,000 has been allocated to customer contracts and/or relationships. This asset will be amortized over a ten year period. The remaining purchase price of approximately $1.3 million has been attributed to goodwill. Management will conduct an impairment review on an annual basis in connection with its properties impairment review. Both of these assets, net of amortization, are included in “Other assets, net” in the accompanying condensed consolidated balance sheets.

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 and nine months ended September 30, 2013 and 2012, respectively. 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, 2013. 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, 2012. The condensed consolidated balance sheet at year ended December 31, 2012 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, 2013.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation . The accompanying consolidated financial statements include the accounts of NetREIT and its subsidiaries, NetREIT Property Management, Inc., 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 (collectively “the Partnerships”) NetREIT Advisors, LLC (“Advisors”), NetREIT Dubose Model Home REIT, Inc. and its subsidiary, NetREIT Dubose Model Home LP, Dubose Advisors LLC, Model Home Income Funds 3, 4, 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. Dubose Acquisition Partners III and Model Home Income Fund 5 had operations in 2012 although they sold all of their assets and liquidated before the end of that year. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company classifies the noncontrolling interests in FMP, the Partnerships, and the Income Funds as part of consolidated net loss in 2013 and 2012 and includes the accumulated amount of noncontrolling interests as part of stockholders’ 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 stockholders 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 stockholders within the prescribed limits. However, taxes will be provided for those gains which are not anticipated to be distributed to stockholders 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 stockholders 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 nine months ended September 30, 2013 and 2012, because of net losses, all distributions were considered return of capital to the stockholders and therefore non-taxable.

The Company believes that it has met all of the REIT distribution and technical requirements for the nine months ended September 30, 2013 and 2012, respectively.

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 for tax positions 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 resulted in a net reduction in rental income of approximately $40,000 and $120,000 for the three months ended September 30, 2013 and 2012, respectively. Amortization of above and below market rents resulted in a net reduction in rental income of approximately $129,000 and $353,000 for the nine months ended September 30, 2013 and 2012, respectively.

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 $107,000 and $150,000 for the three months ended September 30, 2013 and 2012, respectively. Amortization expense related to these assets was approximately $356,000 and $456,000 for the nine months ended September 30, 2013 and 2012, respectively.

Capitalization Policy. The Company capitalizes any expenditure that replace, improve, or otherwise extend the economic life of an asset in excess of $5,000 for any given project. This includes tenant improvements and lease acquisition costs (leasing commissions, space planning fees, legal fees, etc) that are in excess of $5,000.

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 prices 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.

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 September 30, 2013 and 2012 was approximately $1,118,000 and $1,011,000, respectively. Depreciation expense for buildings and improvements for the nine months ended September 30, 2013 and 2012 was approximately $3,355,000 and $2,990,000, 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. In the quarter ended September 30, 2013, the Company determined that an additional impairment existed on its Havana Parker property and recorded an asset impairment of $1.5 million. The Company is attempting to have the terms of the loan modified by the lender. If successful, the debt service requirements may go down substantially and the Havana Parker loan term may be extended. In the quarter ended September 30, 2012, the Company listed several properties for sale. For certain properties, the proceeds less selling costs is expected to be less than the carrying value of the property which resulted in recording impairment expense related to discontinued operations of $358,000.

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, 2012 and, as of September 30, 2013, 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 as of December 31, 2012 and, as of September 30, 2013, 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 September 30, 2013 and December 31, 2012.

The Company receives transaction fees in connection with the acquisition and lease back of model homes. These fees are recognized as an increase to model home rental income over the contractual lease period.

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 and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Weighted average shares used for Basic EPS		16,210,755		15,303,302		16,186,962		15,435,746

Effect of dilutive securities (1):

Adjusted weighted average shares used for diluted EPS		16,210,755		15,303,302		16,186,962		15,435,746

(1)

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 1,381,556 for the three and nine months ended September 30, 2013 and 1,360,096 shares of common stock for the three and nine months ended September 30, 2012, 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 September 30, 2013 and December 31, 2012.

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 consolidated 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 “Segments”.

Square Footage, Occupancy and Other Measures. Square footage, occupancy and other measures used to describe real estate and real estate-related investments included in the Notes to Condensed Consolidated Financial Statements are presented on an unaudited basis.

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 September 30, 2013 is as follows:

Real estate

Date

Square

Property

assets, net

Property Name

Acquired

Location

Footage

Description

(in thousands)

Havana/Parker Complex

June 2006

Aurora, Colorado

114,000

Office

3,580.2

Garden Gateway Plaza

March 2007

Colorado Springs, Colorado

115,052

Office

12,189.7

World Plaza

September 2007

San Bernardino, California

55,098

Retail

6,730.9

Regatta Square

October 2007

Denver, Colorado

5,983

Retail

1,945.7

Sparky’s Palm Self-Storage

November 2007

Highland, California

50,250

Self-Storage

4,404.0

Sparky’s Joshua Self-Storage

December 2007

Hesperia, California

149,750

Self-Storage

6,858.4

Executive Office Park

July 2008

Colorado Springs, Colorado

65,084

Office

8,433.8

Waterman Plaza

August 2008

San Bernardino, California

21,170

Retail

6,165.6

Pacific Oaks Plaza

September 2008

Escondido, California

16,000

Office

4,379.9

Morena Office Center

January 2009

San Diego, California

26,784

Office

6,211.6

Fontana Medical Plaza

February 2009

Fontana, California

10,500

Office

1,996.1

Rangewood Medical Office Building

March 2009

Colorado Springs, Colorado

18,222

Office

2,275.3

Sparky’s Thousand Palms Self-Storage

August 2009

Thousand Palms, California

113,126

Self-Storage

5,580.9

Sparky’s Hesperia East Self-Storage

December 2009

Hesperia, California

72,940

Self-Storage

2,665.7

Sparky’s Rialto Self-Storage

May 2010

Rialto, California

101,343

Self-Storage

4,810.0

Genesis Plaza

August 2010

San Diego, California

57,685

Office

8,945.1

Dakota Bank Buildings

May 2011

Fargo, North Dakota

119,749

Office

9,711.9

Yucca Valley Retail Center

September 2011

Yucca Valley, California

103,596

Retail

7,248.8

Sparky’s Sunrise Self-Storage

December 2011

Hesperia, California

93,851

Self-Storage

2,173.1

Port of San Diego Complex

December 2011

San Diego, California

146,700

Industrial

14,211.4

Shoreline Medical Building

May 2012

Half Moon Bay, California

15,335

Office

6,168.5

The Presidio

November 2012

Aurora, Colorado

80,800

Office

6,936.4

Sparky’s Lancaster Self-Storage

May 2013

Lancaster, California

71,000

Self-Storage

3,639.9

NetREIT, Inc properties

137,262.9

Homes

Model Home properties

Various in

CA, AZ, TX, NC

held in limited partnerships

2009-2013

FL and NJ

Residential

17,471.9

Model Home properties

Various in

held in income and investment funds

2003-2008,

2010-2013

CA, AZ, TX, SC, PA, NJ

Residential

5,821.7

Model Home properties

23,293.6

Total real estate assets and lease intangibles, net

160,556.5

A summary of the properties owned by the Company as of December 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

1,381.4

Havana/Parker Complex

June 2006

Aurora, Colorado

114,000

Office

5,262.9

Garden Gateway Plaza

March 2007

Colorado Springs, Colorado

115,052

Office

12,507.2

World Plaza

September 2007

San Bernardino, California

55,098

Retail

6,852.5

Regatta Square

October 2007

Denver, Colorado

5,983

Retail

1,977.6

Sparky’s Palm Self-Storage

November 2007

Highland, California

50,250

Self-Storage

4,486.8

Sparky’s Joshua Self-Storage

December 2007

Hesperia, California

149,750

Self-Storage

6,983.5

Executive Office Park

July 2008

Colorado Springs, Colorado

65,084

Office

8,544.2

Waterman Plaza

August 2008

San Bernardino, California

21,170

Retail

6,280.3

Pacific Oaks Plaza

September 2008

Escondido, California

16,000

Office

4,430.2

Morena Office Center

January 2009

San Diego, California

26,784

Office

5,887.0

Fontana Medical Plaza

February 2009

Fontana, California

10,500

Office

2,052.5

Rangewood Medical Office Building

March 2009

Colorado Springs, Colorado

18,222

Office

2,335.1

Sparky’s Thousand Palms Self-Storage

August 2009

Thousand Palms, California

113,126

Self-Storage

5,688.7

Sparky’s Hesperia East Self-Storage

December 2009

Hesperia, California

72,940

Self-Storage

2,693.6

Sparky’s Rialto Self-Storage

May 2010

Rialto, California

101,343

Self-Storage

4,882.0

Genesis Plaza

August 2010

San Diego, California

57,685

Office

9,161.5

Dakota Bank Buildings

May 2011

Fargo, North Dakota

119,749

Office

8,732.6

Yucca Valley Retail Center

September 2011

Yucca Valley, California

103,596

Retail

7,503.1

Sparky’s Sunrise Self-Storage

December 2011

Hesperia, California

93,851

Self-Storage

2,195.8

Port of San Diego Complex

December 2011

San Diego, California

146,700

Industrial

14,275.1

Shoreline Medical Building

May 2012

Half Moon Bay, California

15,335

Office

6,269.6

The Presidio

November 2012

Aurora, Colorado

80,800

Office

7,237.8

NetREIT, Inc properties

137,621.0

Homes

Model Home properties

Various in

CA, AZ, WA, TX, SC,

held in limited partnerships

2009-2012

NC and NJ

Residential

21,552.2

Model Home properties

Various in

held in income and investment funds

2003-2008,

2010 & 2011

CA, AZ, TX, SC, PA, NJ

Residential

6,465.5

Model Home properties

28,017.7

Total real estate assets and lease intangibles, net

165,638.7

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


	September 30,			December 31,
	2013			2012
Land	$	41,765,725		$	41,617,925
Buildings and other		128,347,781			130,471,526
Tenant improvements		7,297,825			7,112,494
Lease intangibles		4,569,864			4,569,854
		181,981,195			183,771,799
Less:
Accumulated depreciation and amortization		(21,424,740	)		(18,133,080	)
Real estate assets, net	$	160,556,455		$	165,638,719

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

The Company acquired the following properties in the nine months ended September 30, 2013:

In July 2013, NetREIT Dubose acquired 1 Model Home property in Texas and leased it back to the home builder. The purchase price for the properties was approximately $0.5 million. The purchase price paid was through a cash payment of approximately $0.2 million and promissory note of approximately $0.3 million.

The Company disposed of the following properties in the nine months ended September 30, 2013:

NetREIT Dubose and the other Model Home entities disposed of 24 Model Home properties. The sales price, net of selling costs, aggregated approximately $7.1 million and approximately $3.5 million in mortgage notes payable were retired in connection with these sales. The Company recognized a gain of $704,015 related to the sale of these Model Homes.

In May 2013, the Company sold its Casa Grande Apartments for a sales price of $1.8 million. The sale resulted in mortgage payoff of $ 1.3 million and a gain of $322,356.

The Company acquired the following properties in the nine months ended September 30, 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 price paid was through a cash payment of $0.15 million and a promissory note $0.23 million.

In April 2012, NetREIT Dubose and Dubose Model Home Investors #201 LP acquired 19 Model Home properties in California and Arizona and leased them back to the home builder. The purchase price for the properties was approximately $8.2 million. The purchase price paid was through a cash payment of approximately $3.7 million and promissory notes totaling approximately $4.5 million.

In May 2012, the Company acquired the former Rite Aid building in Yucca Valley, California, The building adjoins the Company’s Yucca Valley Retail Center purchased in September 2011. The building was purchased vacant as a result of the relocation of Rite Aid. In January 2013, Rite Aid and the Company agreed to cancel the remaining term of the lease through a cancellation fee of $345,000. The purchase price was approximately $1.1 million all paid in cash. The building consists of approximately 17,600 rentable square feet.

In June 2012, the Company acquired the Shoreline Medical Building for the purchase price of approximately $6.4 million. The Property is a two-story medical office building under a single tenant lease that was built in 1980. The land consists of approximately 38,600 square feet with a building on it of approximately15,335 rentable square feet in Half Moon Bay, California. Half Moon Bay is approximately 25 miles south of San Francisco and 10 miles west of San Mateo. The Company made a down payment of approximately $2.3 million and financed the remainder of the purchase price through a fixed rate mortgage with interest at 5.1%. The interest rate is subject to change at the third and sixth year anniversaries of the loan.

In June 2012, NetREIT Dubose and Dubose Model Home Investors #201 LP acquired 14 Model Home properties in New Jersey and Pennsylvania and leased them back to the home builder. The purchase price for the properties was approximately $5.0 million. The purchase price paid was through a cash payment of approximately $2.0 million and promissory notes totaling approximately $3.0 million.

In October 2012, Dubose Model Home Investors #201 LP acquired 1 Model Home property in Texas and leased it back to the home builder. The purchase price for the property was approximately $365,000. The purchase price paid was through a cash payment of approximately $146,000 and a promissory note of approximately $219,000.

In November 2012, NetREIT 01 LP acquired The Presidio for the purchase price of approximately $7.3 million. The Property is a four-story office building with of approximately 80,800 rentable square feet located in Colorado Springs, Colorado. The Company made a down payment of approximately $1.6 million and financed the remainder of the purchase price through a fixed rate mortgage with interest at 5.6%.

In December 2012, NetREIT Dubose and Dubose Model Home Investors #201 LP acquired 14 Model Home properties in Texas and leased them back to the home builder. The purchase price for the properties was approximately $3.9 million. The purchase price paid was through a cash payment of approximately $2.0 million and promissory notes totaling approximately $1.9 million.

The Company disposed of the following properties in 2012:

During the nine months ended September 30, 2012, NetREIT Dubose and the other Model Home entities disposed of thirty-five Model Home properties. The sales price, net of selling costs, aggregated approximately $8.9 million and approximately $1.5 million in mortgage notes payable were retired in connection with these sales. The Company recognized a gain of $260,360 related to the sale of these Model Homes.

In October 2012, the Company sold approximately 40.0% of vacant land adjacent to the Sparky’s Rialto Self-Storage. The sales price was $290,000 and after selling costs and the cost of the land, the Company recognized a gain of approximately $103,500.

In October 2012, NetREIT 01 LP sold the 7-Eleven located in Escondido, California. The sales price was approximately $1.9 Million and after selling costs and the net book value of the land and building, the Company recognized a gain of approximately $637,900.

The Company allocated the purchase price of the properties acquired during the nine months ended September 30, 2013 as follows:

					Total
			Buildings		Purchase
	Land		and other		Price

Sparky’s Lancaster
Self-Storage	$	949,000	$	2,701,000	$	3,650,000

Model Home
Properties		234,150		1,436,909		1,671,059

The Company allocation of the properties sold during the nine months ended September 30, 2013 is as follows:

			Buildings		Total
	Land		and other		Cost

Model Home
Properties	$	820,016	$	5,370,976	$	6,190,992

Casa Grande
Apartments		220,572		1,190,822		1,411,394

The Company allocated the purchase price of the properties acquired during the year ended December 31, 2012 as follows:

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

Rite Aid	$	366,000	$	759,000	$	—	$	—	$	—	$	1,125,000

Shoreline
Medical Building		1,820,000		4,311,000		—		83,000		136,000		6,350,000

The Presidio		1,325,000		4,969,400		816,500		27,400		136,700		7,275,000

Model Home
Properties		1,923,852		15,214,443		—		—		—		17,138,295

The Company allocation of the properties sold during the year ended December 31, 2012 is as follows:

			Buildings		Total
	Land		and other		Cost

Model Home
Properties	$	1,213,417	$	8,196,975	$	9,410,392

Rialto land		159,775		—		159,775

7-Eleven		553,359		714,680		1,268,039

Lease Intangibles

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

	September 30, 2013									December 31, 2012
							Lease									Lease
	Lease			Accumulated			intangibles,			Lease			Accumulated			intangibles,
	intangibles			amortization			net			intangibles			amortization			net
In-place leases	$	2,015,459		$	(1,435,123	)	$	580,336		$	2,015,459		$	(1,229,792	)	$	785,667
Leasing costs		1,448,985			(958,055	)		490,930			1,448,985			(807,816	)		641,169
Tenant relationships		332,721			(332,721	)		—			332,721			(332,721	)		—
Below-market leases		(841,425	)		58,451			(782,974	)		(841,425	)		37,415			(804,010	)
Above-market leases		1,614,124			(972,440	)		641,684			1,614,114			(821,947	)		792,167

	$	4,569,864		$	(3,639,888	)	$	929,976		$	4,569,854		$	(3,154,861	)	$	1,414,993

As of September 30, 2013, the estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

	Estimated
	Aggregate
	Amortization
	Expense
Three month period ending December 31, 2013	$	139,138
2014		532,314
2015		388,282
2016		157,215
2017		53,591
Thereafter (principally below market rent amortization)		(340,564	)
	$	929,976

The weighted average amortization period for the intangible assets, in-place leases, leasing costs, tenant relationships and below-market leases acquired as of September 30, 2013 was 14.2 years.

4. MORTGAGE NOTES PAYABLE

Mortgage notes payable as of September 30, 2013 and December 31, 2012 consisted of the following:

	September 30,		December 31,
	2013		2012
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.	$	3,098,780	$	3,163,018

Mortgage note payable in monthly installments of $42,383 through April 5, 2020, including interest at a fixed rate of 5.00%; collateralized by the leases and office buildings of the Garden Gateway Plaza property. (1)		7,157,382		9,248,703

Mortgage note payable in monthly installments of $25,995 through September 1, 2015, including interest at a fixed rate of 6.50%; collateralized by the Waterman Plaza Property		3,479,533		3,542,157

Mortgage note payable in monthly installments of $28,865 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.		4,243,720		4,326,536

Mortgage note payable in monthly installments of $5,171 through December 18, 2022, including interest at a variable rate of currently of 4.75%; through December 20, 2020 indexed to the 5 year Interest Rate Swap rate; collateralized by the Sparky’s Hesperia East Self-Storage property. (2)		895,132		1,666,713

Mortgage note payable in monthly installments of $17,226 through May 3, 2012, including interest at a fixed rate of 5.00%; monthly installments of $19,323 from June 3, 2012, including interest at 4.75% to maturity, or May 15, 2023; collateralized by the Sparky’s Rialto Self-Storage property. (3)		2,178,159		2,512,003

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).		—		1,020,943

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.		4,648,880		4,738,967

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.		4,463,521		4,511,736

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% (current rate) and a ceiling of 9.75% through May 31, 2016; collateralized by the Dakota Bank Building property.		5,446,672		5,532,953

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.		3,123,489		3,203,262

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.		1,170,340		1,214,819

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.		1,251,713		1,272,994

Mortgage note payable in monthly installments of $61,573 through March 5, 2020, including interest at a fixed rate of 4.75%; collateralized by the Port of San Diego Complex. (1)	10,666,666	9,185,400

Mortgage note payable in monthly installments of $13,896 through June 1, 2021, including interest at a fixed rate of 4.5% subject to reseting at the 3rd and 6th anniversary to the lender’s current rate on similar loans; collateralized by the Morena Office Center.	2,425,513	2,468,148

Mortgage note payable in monthly installments of $9,450 through June 1, 2021, including interest at a fixed rate of 4.5% subject to reseting at the 3rd and 6th anniversary to the lender’s current rate on similar loans; collateralized by the Pacific Oaks Plaza.	1,649,337	1,678,335

Mortgage note payable in monthly installments of $26,043 through June 1, 2022, including interest at a fixed rate of 5.1% subject to reseting at the 3rd and 6th anniversary to the lender’s current rate on similar loans; collateralized by the Shoreline Medical Office Building.	3,986,908	4,067,514

Mortgage note payable in monthly installments of $42,788 through December 6, 2022, including interest at a fixed rate of 4.7%; collateralized by Sparky’s Palm, Joshua and Sunrise Self-Storage properties.	8,146,649	8,250,000

Mortgage note payable in monthly installments of $36,701 through January 6, 2015, including interest at a fixed rate of 5.6%; collateralized by The Presidio.	5,523,716	5,617,671

Mortgage note payable in monthly installments of $13,200 through June 1, 2020, including interest at a fixed rate of 5.0%; collateralized by Sparky ’ s Lancaster Self- Storage.	1,980,411	—

Mortgage note payable in monthly installments of $11,479 through August 28, 2019, including interest at a fixed rate of 4.75%; collateralized by the Fontana Medical Plaza	2,000,000	—

Subtotal, NetREIT, Inc. properties	77,536,521	77,221,872

Mortgage notes payable in monthly installments of $20,588; maturity date of February 10, 2014, including interest at a fixed rate of 5.50%; collateralized by 7 Model Home properties.	1,514,426	1,628,170

Mortgage notes payable in monthly installments of $2,250; maturity date of September 15, 2015, including interest at a fixed rate of 5.75%; collateralized by 2 Model Home properties.	—	407,480

Mortgage notes payable in monthly installments of $7,490 maturity date of December 15, 2015, including interest at a fixed rate of 5.75%; collateralized by 7 Model Home properties.	789,867	1,545,578

Mortgage notes payable in monthly installments of $6,016, maturities varying from February 15, 2016 to August 15, 2016, including interest at fixed rates from 5.75%, to 6.30%; collateralized by 7 Model Home properties.	647,684	1,723,047

Mortgage notes payable in monthly installments of $35,594; maturity dates of April 15, 2017 through June 15, 2017; including interest at fixed rate of 5.50%; collateralized by 16 Model Home properties.		3,425,997		4,238,005

Mortgage notes payable in monthly installments of $14,732; maturity dates of December 15, 2017; including interest at fixed rate of 5.00%; collateralized by 13 Model Home properties.		1,799,349		1,860,887

Mortgage notes payable in monthly installments of $31,494; maturity dates of June 30, 2013 through January 15, 2018; including interest at fixed rate of 5.50% to 5.84%; collateralized by 15 Model Home properties.		3,098,584		3,855,324

Mortgage notes payable in monthly installments of $2,864; maturity date of January 15, 2018; including interest at fixed rate of 5.00%; collateralized by 2 Model Home properties.		123,630		—

Mortgage notes payable in monthly installments of $2,642; maturity date of January 15, 2018; including interest at fixed rate of 5.00%; collateralized by 2 Model Home properties.		312,286		—

		11,711,823		15,258,491

	$	89,248,344	$	92,480,363

(1)	These notes were refinanced and extended in early 2013. The refinancings included a paydown on the Garden Gateway note and an increase in the mortgage note secured by the Port of San Diego Complex.

(2)	Paydown only.

(3)	Paydown, interest rate reduction, and an extended maturity date.

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

Scheduled principal payments of mortgage notes payable as of September 30, 2013 is as follows:


			Model Home
	NetREIT, Inc.		Properties		Scheduled
	Principal		Principal		Principal
Years Ending:	Payments		Payments		Payments
Three month period ending December 31, 2013	$	665,165	$	177,207	$	842,372
2014		1,865,107		2,165,623		4,030,730
2015		16,255,704		1,246,887		17,502,591
2016		9,402,784		1,215,117		10,617,901
2017		1,410,878		6,148,389		7,559,267
Thereafter		47,936,883		758,600		48,695,483
Total	$	77,536,521	$	11,711,823	$	89,248,344

5. RELATED PARTY TRANSACTIONS

The Company had 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. For the nine months ended September 30, 2013 and September 30, 2012, the Company paid CHG total management fees of approximately $113,000 and $491,000, respectively.

During the term of the property management agreement, the Company had an option to acquire the business conducted by CHG. The option was 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 to be paid in shares of the Company was 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. The Company has elected to exercise its option to purchase CHG. See Note 1, “Organization and Basis of Presentation” for further discussion.

The Company leases a portion of its corporate headquarters at Pacific Oaks Plaza in Escondido, California to an entity 100% owned by the Company’s Chairman and Chief Executive Officer and another related party. Total rents charged and paid by these affiliates was approximately $ 9,000 and $15,000 for the three months ended September 30, 2013 and 2012, respectively. Total rents charged and paid by these affiliates was approximately $31,000 and $43,000 for the nine months ended September 30, 2013 and 2012, respectively.

In January 2012, the limited partner of NetREIT 01, LP (the “Partnership”) that owned 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, was $8.44 per share. After conversion, our interest in the Partnership increased to approximately 77%. 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. In 2012, the 7-Eleven property was sold and the Partnership replaced that property by acquiring The Presidio property.

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.

6. STOCKHOLDERS’ EQUITY

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 the nine months ended September 30, 2013 totalled approximately $656,000 which was calculated using the most recent private placement offering of $10 adjusted for estimated selling costs. The value of granted nonvested restricted stock issued during the nine months ended September 30, 2012 totalled approximately $490,000. Compensation expense recorded was approximately $139,000 and $114,000 in the three months ended September 30, 2013 and 2012, respectively. Compensation expense recorded was approximately $390,000 and $365,000 in the nine months ended September 30, 2013 and 2012, respectively. The 136,643 nonvested restricted shares as of September 30, 2013 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, 2011 is as follows:


Balance, December 31, 2011	63,777
Granted	57,016
Vested	(57,577	)
Cancelled	(411	)
Balance, December 31, 2012	62,805
Granted	76,283
Vested	(1,661	)
Cancelled	(784	)
Balance, September 30, 2013	136,643

Cash Dividends. During the nine months ended September 30, 2013 and 2012, the Company paid cash dividends, net of reinvested stock dividends, of approximately $ 3,345,000, and $3,166,000, respectively, or at an annualized rate $0.543 per share. As the Company reported net losses in both of these periods, 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 of approximately $71,000 in the three and nine months ended September 30, 2013 and 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, other property income and impairment charges, if any.) less property and related expenses (property expenses, real estate taxes, ground leases and provisions for bad debts) and excludes other non-property income and expenses, interest expense, depreciation and amortization and general and administrative expenses. The accounting policies of the reportable segments are the same as those described in the Company’s significant accounting policies (see Note 2). There is no intersegment activity.

The following tables reconcile the Company’s segment activity to its results of operations and financial position as of and for the three and nine months ended September 30, 2013 and 2012, respectively.

	Three Months Ended						Nine Months Ended,
	September 30,						September 30,
	2013			2012			2013			2012
Industrial/Office Properties:
Rental income	$	2,638,194		$	2,350,032		$	7,848,551		$	6,499,299
Property and related expenses		880,108			806,940			2,537,538			2,204,997
Net operating income, as defined		1,758,086			1,543,092			5,311,013			4,294,302

Residential Properties:
Rental income		696,922			731,188			2,327,340			2,113,044
Property and related expenses		25,722			75,185			178,556			259,426
Net operating income, as defined		671,200			656,003			2,148,784			1,853,618

Retail Properties:
Rental income		614,979			789,580			2,255,351			2,161,924
Property and related expenses		234,942			260,294			622,246			620,263
Net operating income, as defined		380,037			529,286			1,633,105			1,541,661

Self-Storage Properties:
Rental income		839,272			730,947			2,383,990			2,188,805
Property and related expenses		466,697			359,722			1,276,518			1,082,494
Net operating income, as defined		372,575			371,225			1,107,472			1,106,311

Property management expenses (1)		83,811			—			226,951			—

Mortgage loan activity:
Interest income		14,901			21,010			44,215			57,533

Reconciliation to Net Loss Available to Common Shareholders:
Total net operating income, as defined, for reportable segments		3,112,988			3,120,616			10,017,638			8,853,425
Unallocated other income:
Total other income		1,708			286,508			64,089			290,474
Gain on sale of real estate		169,460			81,695			1,026,371			180,770
General and administrative expenses		1,166,374			980,508			3,606,963			3,176,778
Interest expense		1,247,604			1,167,736			3,800,959			3,220,906
Depreciation and amortization		1,353,612			1,219,925			3,994,350			3,610,813
Asset impairments		(1,500,000	)		(358,000	)		(1,500,000	)		(358,000	)
Net loss before noncontrolling interests		(1,983,434	)		(237,350	)		(1,794,174	)		(1,041,828	)
Noncontrolling interests		236,653			139,068			875,264			339,422
Net loss	$	(2,220,087	)	$	(376,418	)	$	(2,669,438	)	$	(1,381,250	)

	September 30,		December 31,
	2013		2012

Assets:
Industrial/Office Properties:
Land, buildings and improvements, net (1)	$	85,039,844	$	86,695,553
Total assets (2)		91,681,052		90,286,093

Residential Property:
Land, buildings and improvements, net (1)		23,293,730		29,399,405
Total assets (2)		23,619,550		31,869,016

Retail Properties:
Land, buildings and improvements, net (1)		22,090,970		22,613,528
Total assets (2)		23,457,174		23,913,305

Self-Storage Properties:
Land, buildings and improvements, net (1)		30,131,911		26,930,233
Total assets (2)		31,028,008		27,384,412

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

Reconciliation to Total Assets:
Total assets for reportable segments		170,706,000		174,373,042
Other unallocated assets:
Cash and cash equivalents		8,611,182		10,746,536
Other assets, net		1,599,055		12,415
Total Assets	$	180,916,237	$	185,131,993

(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.

	Nine Months Ended September 30,
	2013		2012
Capital Expenditures:(1)
Industrial/Office Properties:
Acquisition of operating properties	$	—	$	6,350,000
Capital expenditures and tenant improvements		2,219,666		693,105

Residential Property:
Acquisition of operating properties		1,671,059		13,577,518

Retail Properties:
Acquisition of operating properties		—		1,125,000
Capital expenditures and tenant improvements		45,000		158,005

Self Storage Properties:		3,650,000		—
Capital expenditures and tenant improvements		22,141		20,964
Total acquisition of operating properties, net		5,321,059		21,052,518
Total capital expenditures and tenant improvements		2,286,807		872,074
Total additions to real estate assets	$	7,607,866	$	21,924,592

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

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 Item 1A and Item 7 included in the Form 10-K as filed with the Securities and Exchange Commission.

OVERVIEW AND RECENT DEVELOPMENTS

Growth in Capital Resources. During the last five years our stockholders’ equity has increased from approximately $43.0 to $72.6 million at September 30, 2013. Our investment portfolio, consisting of real estate assets, lease intangibles, land purchase option and mortgages receivable, has increased by 162.7% to approximately $163.8 million at September 30, 2013 from $70.0 million at September 30, 2008. 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 $57.4 million and from proceeds from mortgage notes payable.

Expansion of Business Model. In addition to the increase in our investment portfolio, in March 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. During the first two years this business was hampered by the slow recovery of the residential building. The real estate market is recovering as housing prices have been increasing over the last few years and homebuilders are once again building homes at a greater rate than over the four previous years.

Acquisitions and sales during the nine months of 2013. During the first nine months of 2013, NDMHR and Dubose Model Homes #201 LP have acquired 5 model homes with an aggregate value of approximately $1.7 million. During the same period in 2012 they acquired 34 model homes with an aggregate value of approximately $13.6 million. We believe that the major home builders, from whom we buy the model homes, deferred selling model homes to us until the 4 th quarter. We anticipate acquisitions of approximately 30 to 50 homes at an investment of approximately $18 million during the fourth quarter.

During the first nine months of 2013 period those entities sold 23 model homes with a book value of $5.9 million for a gain of approximately $704,000. During the same period in 2012 we sold 25 model homes with a book value of $6.5 million for a gain of approximately $181,000. The increase of the gain was the result of the increase in value of single family homes during the last 18 months. We anticipate that the gain on sales will continue in the future.

Between these two entities, at September 30, 2013, we own 77 homes with a net book value of approximately $20.2 million compared to 87 homes with a net book value of approximately $24.6 million at September 30, 2012.

In May 2013, the Company acquired a self-storage facility in Lancaster, CA for the purchase price of approximately $3.7 million dollars. The purchase price was paid in cash. The facility is comprised of approximately 71,000 square feet of rentable area consisting of approximately 608 self-storage units. The facility was built in 1990 and was approximately 65 percent occupied at acquisition. Although the Company had equity funds available in April to acquire additional properties we had an opportunity to acquire a large portfolio of office buildings that would have used all of the equity funds plus additional funds. We were one of two finalist buyers and after six months the seller elected to go with the other buyer. Due to the size of that potential acquisition we put our acquisition efforts for other properties on hold. We now are in the talking stages with three buyers to acquire properties in the $15 to $20 million range. If successful we expect these acquisitions to close during the first part of 2014.

During the same period we sold Casa Grande apartments in Cheyenne, WY of a sales price of $1.825 million that had a book value of $1.4 million. There were no NetREIT property sales during the nine months of 2012.

Economic Environment

The current economic environment has been showing signs of slow recovery from the recession that began in late 2007. The uptick in the housing market activity and prices, driven by low mortgage rates, has improved with construction starts and declining foreclosures and delinquency rates. According to reports from the U.S. the unemployment rate has continued its downward improvement over the last couple years. In general, U.S. corporations’ net income and investments have shown improvement and the stock markets are at record level highs. Government policies and the Federal Reserve actions will continue to be an overhang on the economy.

We believe that the pace of the overall recovery will continue to be slow and disjointed. Full recovery is dependent on increasing job growth, but even then it will not be consistent across industries, geographies or periods of the year causing an uneven tempo of growth.

Recent U.S. debt size that is continuing to increase and approaching another debt ceiling and the slow economic recovery concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns. The possibility of 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 credit markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. Although the government’s current debt purchase stimulus plan, the appointment of a new head of the Federal Reserve and their intent to keep interest rates low through 2015, these developments and the government’s credit concerns in general, could cause interest rates and borrowing costs to eventually 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 non-stabilized 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.

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 September 30, 2013, including properties held for sale, the Company owned or had an equity interest in eleven office buildings and one industrial building (“Office Properties”) which total approximately 786,000 rentable square feet, four retail shopping centers (“Retail Properties”) which total approximately 186,000 rentable square feet, seven self-storage facilities (“Self-Storage Properties”) which total approximately 652,000 square feet and 77 Model Homes owned by four limited partnerships (“Residential 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 ten 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 or three 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, especially in the self-storage segment, 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 experienced decreases in rental rates in many of our submarkets due to recessionary conditions and other related factors when leases expire and are extended however during 2012 this has not been a significant factor. 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, or model home properties, typically lease for periods of 2 to 3 years. The model homes are leased to the developer on a triple net lease. Under a triple net lease the tenant is required to pay all operating, maintenance and insurance costs and real estate taxes with respect to the leased property.

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 websites, advertisements, flyers, etc. to secure new tenants to fill any vacancies.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 28, 2013.

For a discussion of significant accounting policies, see also footnote 2 to the condensed consolidated financial statements.

RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS

Company and 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, in accordance with an earn out issued approximately 39,000 shares of the Company’s common stock, as a result of the level of production the Company achieved from new model home acquisitions over the three year period that ended February 28, 2013. The transaction was accounted for as a business combination. Management performed an analysis of intangible assets acquired 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 had anticipated that the full earn-out would have been achieved and estimated a liability of $1,032,000 associated with the 120,000 shares that it believed would have been issued during the three year earn-out period. As a result, the total purchase price of $1,332,000 was allocated between goodwill of $1,123,000 and intangible assets of $209,000. In 2012, the Company reduced the liability by approximately $691,000 for the difference of the anticipated earn-out to the actual earn-out. As a result of this transaction, the Company’s investment in DAP II and DAP III have been consolidated into the financial statements of NetREIT effective March 1, 2010. The limited partnerships have been consolidated into the financial statements of the Company in accordance with guidelines attributable to variable interests entities.

The Company has formed a Model Homes Division that pursues investment activities based on DMHU’s business model. The Model Homes Division’s activities include the purchase and leaseback of Model Homes in new residential housing tract developments. To pursue this business, the Company formed a new subsidiary, NetREIT Advisors and sponsored the formation of NetREIT Dubose Model Home REIT, Inc. (“NetREIT Dubose”). NetREIT Dubose invests in Model Homes it purchases from home builders in transactions where the builder leases back the Model Home under a short term lease, typically one to three years in length on a triple net basis. Upon expiration of the lease, NetREIT Dubose typically extends the lease of the Model Home until such time the property is sold. NetREIT Dubose owns substantially all of its assets and conducts its operations through an Operating Partnership. NetREIT Advisors serves as the advisor to NetREIT Dubose.

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 sole 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 raised $3,000,000 in outside investor capital through the sale of limited partner units at $50,000 per unit. Earlier this year Dubose Advisors sponsored the formation of Dubose Model Home Investors #202, LP. (“ 202 Partnership ”), a California limited partnership. The 202 Partnership will conduct the same activities as the other Model Home Entities. As of September 30, 2013, the 202 Partnership did not have any operating activity.

Over the last three years, NetREIT Advisors provided management services to the 19 Model Home Partnerships, pursuant to the rights under the management contracts assigned to it by DMHU. As of September 30, 2013, one partnership remains under management. 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.

Effective January 31, 2013, the Company entered into an Agreement and Plan of Merger to consummate the merger acquisition of CHG Properties, Inc. (“CHG”), a California corporation. CHG was a related party as it was partially owned by senior executives of NetREIT. The Company had the option to purchase CHG pursuant to a February 15, 2005, option agreement. The transaction was reviewed and unanimously approved by the independent Directors of the NetREIT Board of Directors. With the existing properties formerly managed through CHG, the 100% owned subsidiary known as NTR Property Management, Inc. (“NTR”), is expected to save the Company approximately $300,000 annually. As the Company acquires more properties, the savings are expected to increase. The transaction was accounted for as a business combination. Management performed an analysis of intangible assets acquired and it was determined that $600,000 of the purchase price is attributable to customer relationships and will be amortized over 10 years. In addition, the remaining $1.3 million of the purchase price was recorded as goodwill.

The Company acquired the following properties in 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 price paid was through a cash payment of $0.15 million and a promissory note $0.23 million. There are eleven months results of operations included in the nine months ended September 30, 2012 and nine months results of operations included in the nine months ended September 30, 2013.

In April 2012, NetREIT Dubose and Dubose Model Home Investors #201 LP acquired 19 model home properties in California and Arizona and leased them back to the home builder. The purchase price for the properties was approximately $8.2 million. The purchase price paid was through a cash payment of approximately $3.7 million and promissory notes totaling approximately $4.5 million. There are approximately five months of operations included in the nine months ended September 30, 2012 and nine months results of operations included in the nine months ended September 30, 2013.

In May 2012, the Company acquired the former Rite Aid building in Yucca Valley, California, The building adjoins the Company’s Yucca Valley Retail Center purchased in September 2011. The building was purchased vacant as a result of the relocation of Rite Aid. However, the property remained under lease to the tenant for several more years. The purchase price was approximately $1.1 million all paid in cash. The building consists of approximately17,600 rentable square feet. There are approximately four month results of operations included in the nine months ended September 30, 2012 and in January 2013, Rite Aid paid off the remaining term of the lease through a cancellation agreement.

In June 2012, NetREIT Dubose and Dubose Model Home Investors #201 LP acquired 14 model home properties in New Jersey and Pennsylvania and leased them back to the home builder. The purchase price for the properties was approximately $5.0 million. The purchase price paid was through a cash payment of approximately $2.0 million and promissory notes totaling approximately $3.0 million. There are approximately three months results of operations included in the nine months ended September 30, 2012 and six months results of operations included in the nine months ended September 30, 2013.

The Company disposed of the following properties in 2012:

In 2012, NetREIT Dubose and the other model home entities disposed of twenty-five model home properties. The sales price, net of selling costs, aggregated approximately $6.5 million and approximately $1.5 million in mortgage notes payable were retired in connection with these sales. The Company recognized a gain of approximately $180,770 related to the sale of these model homes. The Company also sold its 7-Eleven property and some raw land in Rialto. The aggregate selling price was approximately $2.2 million and a total gain of approximately $638,000. Both properties were unencumbered.

The Company acquired the following properties in the nine months ended September 30, 2013:

In January 2013, NetREIT Dubose and Dubose Model Home Investors #201 LP acquired 4 Model Home properties in Texas and leased them back to the home builder. The purchase price for the properties was approximately $1.1 million. The purchase price paid was through a cash payment of approximately $0.5 million and promissory notes totaling approximately $0.6 million. There are no results of operations included in the nine months ended September 30, 2012 and approximately eight months results of operations included in the nine months ended September 30, 2013.

The Company disposed of the following properties in nine months ended September 30, 2013:

NetREIT Dubose and the other Model Home entities disposed of 23 Model Home properties including partial sales to individuals in tax deferred transactions. The sales price, net of selling costs, aggregated approximately $7,900,000 and approximately $4,100,000 in mortgage notes payable were retired in connection with these sales. The Company recognized a gain of $704,000 related to the sale of these Model Homes

In May 2013, the Company sold its Casa Grande Apartments for a sales price of $1,800,000. The sale resulted in mortgage payoff of $1,300,000 and a gain of $322,000.

THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012.

Revenues

Total revenue was $4,789,367 for the three months ended September 30, 2013, compared to $4,601,741 for the same period in 2012, an increase of $187,626, or 4.1%. The increase in rental income as reported in 2013 compared to 2012 is primarily attributable to:

●	The addition of three properties acquired in 2013 and 2012, reduced by two properties sold, as well as the addition of the model home properties which generated an additional $372,066 of rental income in the three months ended September 30, 2013 compared to the same period in 2012; offset by:

●	A decrease of fee and other income of $165,288 related to the recovery of a receivable that was deemed uncollectible and written-off in a previous period in three months ended September 30, 2012; and

●	A decrease in revenues of $25,337 from model home partnerships that have either liquidated or are in the process of winding operations down.

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 2013 and 2012 for an entire year and future acquisitions of real estate assets.

Interest and other income was $16,609 for the three months ended September 30, 2013, compared to $22,276 for the same period in 2012, an decrease of $5,667, or 25.4%. The decrease was attributable to interest income received from partnerships that liquidated prior to the three months ended September 30, 2013.

Rental Operating Expenses

Rental operating expenses were $1,691,280 for the three month period ended September 30, 2013 compared to $1,502,140 for the same period in 2012, an increase of $189,140, or 12.6%. The increase in operating expense year over year is primarily attributable to the same reasons that rental revenue increased except there are no increases in rental operating costs associated with the increase in model home rental income. Rental operating costs as a percentage of rental income was 35.3% and 32.6% for the three months ended September 30, 2013 and 2012, respectively.

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 $79,868, to $1,247,604, or 6.8% during the three month period ended September 30, 2013 compared to $1,167,736 for the same period in 2012. The primary reason for the increase is the mortgage debt additions related to acqusitions and new loans on existing properties, offset by restructuring existing loans.

The weighted average interest rate as of September 30, 2013 was 5.21% compared to 5.59% as of September 30, 2012. The decline in the weighted average interest rate was due to refinancing and modifying the terms of approximately $18.1 million in two loans that were coming due in early 2013 and 2014 at new interest rates that are between 1.00% and 1.25% lower than the loans that were refinanced in early 2013.

The following is a summary of our interest expense on loans by property for the three months ended September 30, 2013 and 2012:

	Date acquired
	financed
	or refinanced	2013		2012

Havana/Parker Complex	June 2006	$	51,793	$	53,182
Waterman Plaza	August 2008		56,773		58,104
Sparky’s Thousand Palms Self-Storage	August 2009		58,611		60,108
Sparky’s Hesperia East Self-Storage	December 2009		11,921		28,763
Dubose Acquisition Partners II, LP	March 2010		23,851		23,851
Sparky’s Rialto Self-Storage	May 2010		26,536		44,566
Genesis Plaza	August 2010		54,279		55,657
NetREIT Dubose Model Home REIT, Inc.	October 2010		102,877		124,283
Dakota Bank Buildings	May 2011		80,319		81,968
Casa Grande Apartments	June 2011		—		15,006
Executive Office Park	June 2011		65,297		66,032
Yucca Valley Retail Center	September 2011		45,112		46,617
Rangewood Medical Office Building	December 2011		14,727		14,891
Regatta Square	December 2011		15,677		15,981
Dubose Model Home Investor Fund #113, LP	December 2011		3,010		6,488
Dubose Model Home Investors #201, LP	December 2011		47,753		48,652
Morena Office Center	May 2012		27,620		28,177
Pacific Oaks Plaza	May 2012		18,781		19,160
Shoreline Medical Building	June 2012		51,483		52,696
The Presidio	November 2012		79,210		—
Sparky’s Joshua, Palm and Sunrise self-storage facilities	December 2012		97,812		—
Garden Gateway Plaza	February 2013		89,779		142,418
Port of San Diego Complex	March 2013		127,123		142,033
Sparky’s Lancaster Self-Storage	May 2013		24,878		—
Fontana Medical Plaza	September 2013		596		—
Amortization of deferred financing costs			71,786		39,103
		$	1,247,604	$	1,167,736

General and Administrative Expenses

General and administrative expenses increased by $185,866 to $1,166,374 for the three months ended September 30, 2013, compared to $980,508 for the same period in 2012. As a percentage of rental and fee income, general and administrative expenses were 24.4% and 21.3% for the three months ended September 30, 2013 and 2012, 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. We expect general and administrative expenses as a percentage of revenues to decline in the future as our revenues continue to increase at a faster rate than our expense.

For the three months ended September 30, 2013, our salaries and employee related expenses increased by approximately $132,000 to approximately $797,000 compared to approximately $665,000 for the same three months in 2012, an increase of 19.9%. The increase in salary and employee expenses in 2013 was primarily attributable to a 12% or $10,000 increase in employee benefit expenses, a reallocation of departmental costs, a true-up of the vacation accrual and annual increases in compensation levels .

Legal, accounting and public company related expenses decreased by approximately $15,000 to approximately $93,000 for the three months ended September 30, 2013, compared to approximately $108,000 during the same period in 2012. The decrease is due to legal costs incurred during the three months ended September 30, 2012 related to a quiet title action that a lender has required the Company to complete related to a property acquired in 2007.

Other increases to general and administrative costs are also attributable to the addition of a Director after the first quarter 2012, compensation changes to the Directors and an increase in income tax expense of a subsidiary in 2013.

Gain/Loss on Sale of Real Estate Assets

In the three month period ended September 30, 2013, the Company had a net gain on the sale of model home properties of $169,460 compared to a net gain of $81,695 for the same three months of 2012. Sales in the previous year were older model homes that had been affected by the downturn in real estate values.

Impairments In the quarter ended September 30, 2013, the Company determined that an additional impairment existed on its Havana Parker property and recorded an asset impairment of $1.5 million. The Company is attempting to have the terms of the loan modified by the lender. If successful, the debt service requirements may go down substantially and the Havana Parker loan term may be extended. In the quarter ended September 30, 2012, the Company listed several properties for sale. For certain properties, the proceeds less selling costs is expected to be less than the carrying value of the property which resulted in recording impairment expense related to discontinued operations of $358,000.

Net Loss

Net loss for the three months ended September 30, 2013, was $2,220,087, or $0.14 loss per share, compared to a net loss for the three months ended September 30, 2012 of $376,418, or $0.03 loss per share. The quarter over quarter decrease in the three months ended September 30, 2013 was primarily attributable to an increase in asset impairment charges of $1,142,000, an increase in operating costs of $509,000 for the three months ended September 30, 2013, and a one-time recognition of gain on dissolution of partnership interests of $285,000 for the three months ended September 30, 2012, offset by increases in total revenues and gains on sales of assets for the three months ended September 30, 2013.

THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012.

Revenues

Total revenue was $14,815,232 for the nine months ended September 30, 2013, compared to $12,963,072 for the same period in 2012, an increase of $1,852,160, or 14.3%. The increase in rental income as reported in 2013 compared to 2012 is primarily attributable to:

●

The addition of the properties acquired acquired during the period ending September 30, 2013 and September 30, 2012 and the addition of the model home properties which generated an additional $2,041,613 of rent income in the nine months ended September 30, 2013 compared to the same period in 2012; and

●	A decrease of fee income of approximately $136,859 the recovery of a receivable that was deemed uncollectible and written-off in a previous period in nine months ended September 30, 2012.

Overall rental and fee revenues are expected to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during September 30, 2012 and September 30, 2013 for an entire year and future acquisitions of real estate assets.

Interest and other income was $108,304 for the nine months ended September 30, 2013, compared to $62,760 for the same period in 2012, an increase of $45,544, or 72.6%. The increase was primarily attributable to reversal of a liability related to tenant improvement commitments of approximately $50,000 for the nine months ended September 30, 2013.

Rental Operating Expenses

Rental operating expenses were $4,841,809 for the nine months ended September 30, 2013 compared to $4,167,180 for the same period in September 30, 2012, an increase of $674,629, or 16.2%. The increase in operating expense year over year is primarily attributable to the same reasons that rental revenue increased. Rental operating costs as a percentage of rental and fee income was 32.7% and 32.1% for the nine months ended September 30, 2013 and 2012, respectively. While operating costs as a percentage of revenue remained consistent, there were increases in utility costs due to acquisitions. There was also an increase in real estate taxes in the nine months ended September 30, 2013 due to one-time property tax expense reductions resulting from the positive outcome of appealing assessed values during 2012 offset by decreases in property management fees due to the acquisition of NTR Property Management, Inc.

Interest Expense

Interest expense, including amortization of deferred finance charges, increased by $580,053, to $3,800,959 during the nine months ended September 30, 2013 compared $3,220,906 for the same period in September 30, 2012. The primary reason for the increase is the mortgage debt additions related to the acquisitions after June 30, 2012 of The Presidio, The Shoreline Medical Building (in June 2012), Sparky’s Self-Storage Lancaster and additional model home properties. In addition, the Company financed its Sparky’s Joshua, Palm and Sunrise Self-Storage properties. The refinancing of the Port of San Diego and Garden Gateway Plaza reduced interest expense by approximately $171,000 in the nine months ended September 30, 2013.

The following is a summary of our interest expense on loans by property for the nine months ended September 30, 2013 and 2012:

	Date acquired
	financed
	or refinanced	2013		2012

Havana/Parker Complex	June 2006	$	154,731	$	159,364
Waterman Plaza	August 2008		171,336		175,266
Sparky’s Thousand Palms Self-Storage	August 2009		176,970		181,394
Sparky’s Hesperia East Self-Storage	December 2009		46,103		82,064
Dubose Acquisition Partners II, LP	March 2010		69,729		76,710
Sparky’s Rialto Self—Storage	May 2010		97,999		121,465
Genesis Plaza	August 2010		163,884		167,970
Dubose Model Home Income Fund #3, LTD	December 2010		—		1,308
Dubose Model Home Income Fund #4, LTD	December 2010		—		2,771
Dubose Model Home Income Fund #5, LTD	December 2010		—		349
NetREIT Dubose Model Home REIT, Inc.	October 2010		350,375		305,211
Dakota Bank Buildings	May 2011		239,572		245,287
Casa Grande Apartments	June 2011		24,411		44,904
Executive Office Park	June 2011		194,443		197,309
Yucca Valley Retail Center	September 2011		135,498		140,423
Rangewood Medical Office Building	December 2011		44,243		42,880
Regatta Square	December 2011		46,777		47,388
Dubose Model Home Investor Fund #113, LP	December 2011		8,927		19,465
Dubose Model Home Investors #201, LP	December 2011		147,038		80,314
Morena Office Center	May 2012		82,429		46,312
Pacific Oaks Plaza	May 2012		56,052		31,492
Shoreline Medical Building	June 2012		153,781		71,100
The Presidio	November 2012		236,352		—
Sparky’s Joshua, Palm and Sunrise self—storage facilities	December 2012		290,837		—
Garden Gateway Plaza	February 2013		293,305		430,479
Port of San Diego Complex	March 2013		358,626		424,985
Sparky’s Lancaster Self—Storage	May 2013		33,211		—
Fontana Medical Plaza	September 2013		409		—
Amortization of deferred financing costs			223,921		124,696
		$	3,800,959	$	3,220,906

General and Administrative Expenses

General and administrative expenses increased by $430,185 to $3,606,963 for the nine months ended September 30, 2013, compared to $3,176,778 for the same period in September 30, 2012. As a percentage of rental and fee income, general and administrative expenses were 24.3% and 24.5% for the nine months ended September 30, 2013 and 2012, 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 nine months ended September 30, 2013, our salaries and employee related expenses increased $334,500 to $2,260,715 compared to $1,926,215 for the same nine months ended September 30, 2012, an increase of 17.3%. The increase in salary and employee expenses in September 30, 2013 was primarily attributable to a $96,000 increase in employee benefit expenses, as well as, annual increases in compensation levels.

Legal, accounting and public company related expenses and increased by $58,949 to $426,422 for the nine months ended September 30, 2013, compared to $367,473 during the same period in the September 30, 2012. The increase was due to higher than normal proxy related costs and a lender’s requirement to correct an error made by the title company on the property description when we acquired the property in 2007.

Directors fees increased by $84,277 to $246,844 for the nine months ended September 30, 2013 compared to $162,567 for the nine months ended September 30, 2012. The increase is due to the addition of a Director and an increase in Director fees.

Gain/Loss on Sale of Real Estate Assets

For the nine months ended September 30, 2013, the Company had a net gain on the sale of the Casa Grande Apartments and model home properties of $1,026,371 compared to a net gain of $180,770 for the same period in September 30, 2012.

Impairments In the nine months ended September 30, 2013, the Company determined that an additional impairment existed on its Havana Parker property and recorded an asset impairment of $1.5 million. The Company is attempting to have the terms of the loan modified by the lender. If successful, the debt service requirements may go down substantially and the Havana Parker loan term may be extended. In the quarter ended September 30, 2012, the Company listed several properties for sale. For certain properties, the proceeds less selling costs were expected to be less than the carrying value of the property which resulted in recording impairment expense related to discontinued operations of $358,000.

Net Loss

Net loss for the nine months ended September 30, 2013 was $2,669,438, or $0.16 loss per share, compared to a net loss for the nine months ended September 30, 2012 of $1,381,250, or $0.09 loss per share. The increase in net loss of $1,288,188 was primarily attributable to an increase in asset impairment charges of $1,142,000 for the nine months ended September 30, 2013 and a one-time recognition of gain on dissolution of partnership interests of $285,000 for the nine months ended September 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES

As discussed above under Economic Environment, during 2012 and early 2013, there have been indications of economic improvement and stabilization in the equity markets. In addition 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 the trends, new mortgage financing will remain less favorable in terms of loan amount to value as during 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 when the Federal Reserve tapers or ceases the stimulus plan.

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 debt or equity securities. Our available liquidity at September 30, 2013 is approximately $28 million, including $8 million in cash and cash equivalents and an estimated borrowing capacity of approximately $20 million from potential mortgages on unencumbered properties and refinancing of mortgages coming due in 2015. We do not have any arrangement with any financial institution to borrow any amount and therefore we cannot be certain a financial institution would loan that amount on the unencumbered properties or the timing of such borrowings.

At the current time, we do not have a revolving line of credit but we have been exploring the possibilities of obtaining such a line of credit. We cannot guarantee that we will be able to consummate a line of credit in the near future.

Our future capital needs include the acquisition of additional properties as we as expand our investment portfolio, pay down existing 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 cash flow from our existing portfolio when operational for the full term, and from financing activities, is sufficient to pay the debt service costs on our existing mortgages, fund our operating costs in the near term and fund the cash portion of our distribution to stockholders at the current rate. During the nine months ended September 30, 2013 our net cash provided by operating activities was approximately $3.1 million and our portion of net proceeds from our sales of estate assets was approximately $1.5 million while our cash portion of stockholder distributions was approximately $3.6 million.

In the future, if our cash flow from operating, investing and financing activities is not sufficient to fund our short term liquidity needs, including the payment of cash dividends at current rates to our shareholders, we will fund a portion of these needs from additional borrowings of secured or unsecured indebtedness or we will reduce the rate of distribution to the shareholders.

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. We are continually reviewing our existing portfolio for properties that have met maximized short and long term potential with the intent of selling those properties and reinvesting the proceeds in properties that have equivalent or better short term benefits and better long term potential. Under this mode of operation during the second quarter of 2013 we sold Casa Grande apartments and acquired the Lancaster self-storage facility that has substantially more opportunity for increased operating cash flow and potential gain. NDMH currently has 15 model home properties held for sale in the normal course of its business.

Secured Debt Financing

We obtained approximately $22 million during the nine months of 2013 including a new mortgage for $2 million in connection with our purchase of Sparky’s Lancaster Self-Storage and $2 million on the previously unencumbered Fontana property. The majority of the proceeds were through the refinancing two largest mortgage loans with a balance at year-end of approximately $18.4 million. These loans of approximately $9.2 million each were scheduled to mature in June 2013 and April 2014 and had a weighted average interest rate of 6.04%. The new loans mature in 2020 and have a weighted average interest rate of 4.85%. The decrease in interest rates will save approximately $200,000 in interest expense in the first year. The annual reduction in debt service as a result of the new loans is approximately $600,000. We anticipate raising additional capital by refinancing of mortgages scheduled to mature in 2015 and obtaining loans on our other unencumbered properties without a material increase to our mortgage debt to estimated value percentage of the company as a whole.

However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the underwriting value of our refinancing and unencumbered properties and borrowing restrictions that may be imposed by a lender. If we are unable to arrange a line of credit, borrow on unencumbered properties, or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives.

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 subsidiary partnership to complete the acquisition of the Port of San Diego Complex. The Company is currently in the process of exploring the issuance of an Unsecured Debt or financing of Preferred Stock in the range of $35 to $50 million. We have received exploratory interest from a couple of institutional firms to provide such capital. Our ability to access the unsecured debt or equity markets will be dependent on a number of factors including general market conditions for the REIT industry and market perception of our Company.

Cash and Cash Equivalents

At September 30, 2013, we had approximately $8.6 million in cash and cash equivalents compared to approximately $10.7 million at December 31, 2012. We intend to use this cash for general corporate purposes, distributions to our shareholders and acquisition of additional properties.

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 2013 and 2012, we did not experience any loss or lack of access to our cash or cash equivalents.

Secured Debt

As of September 30, 2013, NetREIT had mortgage notes payable in the aggregate principal amount of approximately $77.7 million, collateralized by a total of 23 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 September 30, 2013 was approximately 5.21%. Our debt to book value on these properties is approximately 59%. We do not have any mortgage debt balloon principal payments on these properties due during 2013 or 2014.

As of September 30, 2013, NetREIT Dubose had 46 fixed-rate mortgage notes payable in the aggregate principal amount of $6.8 million, collateralized by a total of 46 model home properties, an average book value of approximately $319,000 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 September 30, 2013 was 5.12%. Our debt to net book value on these properties is approximately 46%. The Company has guaranteed substantially all of these promissory notes. The balloon principal payments on the notes payable are in 2014 through 2017 and are typically tied to the end of the lease and sale of the model home securing the debt.

As of September 30, 2013, limited partnerships that the Company has a limited partnership interest in had 16 fixed-rate mortgage note payables in the aggregate principal amount of $3.2 million, collateralized by a total of 16 model home properties, an average of $348,000 per home. The debt to book value on these properties is approximately 49%. Through September 30, 2013, all of the free cash flow on these limited partnerships was either accumulating as excess cash balances or used to reduce the related loan balances with no distribution to the partners. The Company has recently made a special distribution to the 201 investors of 3%. 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 and the current low leverage, 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 nine months ended September 30, 2013 was approximately $3.1 million compared to net cash provided by operating activities of approximately $3.6 million for the nine months ended September 30, 2012. The decrease of approximately $0.5 million was primarily due to an increase in use of funds for working capital. We anticipate that with the inclusion of the recent acquisitions and the anticipated acquisitions that the cash provided by operating activities will cover the cash portion of our distribution to shareholders in the future.

Investing Activities

Net cash used by investing activities was approximately $0.1 million during the nine months ended September 30, 2013, compared to net cash used in investing activities of $15.2 million in the same period in 2012. During 2013 we only acquired one property, Sparky’s Lancaster Self Storage for approximately $3.65 million, and 5 model homes for approximately $1.7 million. During 2012 we acquired two properties, Shoreline Medical and Rite-Aid for approximately $5.5 million, and 49 model homes for approximately $15.6 million. However due to some major renovation and tenant improvements to the Fargo and the Morena buildings these costs increased in 2013 by approximately 2.0 million over the 2012 real estate improvements.

The decrease in investing expenditures for investment was offset by an increase in the proceeds received from sales of real estate by approximately $1.9 million primarily due to the sale of the Casa Grande apartments for approximately $1.8 million.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2013 was approximately $5.1 million compared to net cash provided by financing activities of $10.7 million in the same period 2012 resulting in a total change of $15.8 million that was primarily due the net increase of approximately $15.3 million in the repayment of mortgages and the proceeds from mortgages.

The proceeds received from mortgage notes payable in 2013 was $18.1 million from refinanced notes, $4.0 million from the acquisition and new loan on the unencumbered property and $1.0 million from the acquisition of model homes. The increase of $6.9 million in proceeds received in 2013 over 2012 was primarily due to the decrease of model homes acquired in 2013.

During the nine months ending September 30, 2013 period the cash used to repay mortgage notes payable was unusually high due to the refinance payoffs of approximately $18.4 million, the payoff on model homes of approximately $2.8 million and the payoff on sale of Casa Grande apartments of approximately $1.0 million.

Contractual Obligations

The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and interest payments on our fixed and variable rate debt at September 30, 2013 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 a year 2013		1-3 Years (2014-2015)		3-5 Years (2015-2016)		More than 5 Years (After 2016)		Total
Principal payments - secured debt	$	665,165	$	18,110,878	$	10,813,661	$	47,946,817	$	77,536,521
Interest payments - fixed rate debt		1,242,906		7,519,853		5,399,648		18,939,725		33,102,132
Interest payments - variable rate debt		136,570		1,062,297		547,515		3,850,830		5,597,212
Model home properties - secured debt		177,207		3,412,511		7,363,506		758,599		11,711,823
Model home properties - interest payments		357,211		1,137,284		680,748		8,056		2,183,299
Ground lease obligation (1)		21,910		43,820		43,820		1,249,310		1,358,860
	$	2,600,969	$	31,286,643	$	24,848,898	$	72,753,337	$	131,489,847

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

Other Liquidity Needs

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify and maintain our qualification as a REIT for federal income tax purposes. Accordingly, we intend to continue to make regular quarterly distributions to our common shareholders from cash flow from operating, investing and financing activities. We are not contractually bound to make regular quarterly dividend distributions to our common stock holders since we have a net loss carry-forward that will offset any taxable income in 2013. In the past we have distributed cash amounts in excess of our taxable income resulting in a return of capital to our shareholders. We currently have the ability to decrease our distributions while still meeting our REIT requirement for 2013. If our net cash provided by operating, investing and financing activities, including proceed on sale of real estate in excess of any related indebtedness (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 and/or possibly 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, although U.S. economy has shown a slow recovery during 2012 and early 2013, the economic environment has and still 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. During 2012 and early this year, 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.

Economic growth rates have shown trends of slow growth in recent periods and inflation rates in the United States have remained low. We do not anticipate a sharp increase in inflation in the immediate future. Changes in inflation/deflation are sometimes associated with changes in long-term interest rates, which may have a negative impact on the value of the portfolio we own. To mitigate this risk, we will continue to 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 September 30, 2013, 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 2013 we could spend an additional $750,000 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 2013 compared to 2012 due to rising construction costs, planned improvements on recent acquisitions and the anticipated increase in property acquisitions in 2013. 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 and nine months ended September 30, 2013 and 2012. 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.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net loss	$	(2,220,087	)	$	(376,418	)	$	(2,669,438	)	$	(1,381,250	)
Adjustments:
Income attributable to noncontrolling interests		(236,653	)		(139,068	)		(875,264	)		(339,422	)
Gain on sale of real estate assets attributable to noncontrolling interests		181,886			30,949			689,077			84,785
Asset impairments		1,500,000			358,000			1,500,000			358,000
Gain on disolution of partnership interests		—			(285,247	)		—			(285,247	)
Depreciation and amortization		1,044,033			1,265,183			4,131,267			3,329,026
Gain on sale of real estate assets		(169,460	)		(81,695	)		(1,026,371	)		(180,770	)
	$	99,719		$	771,704		$	1,749,271		$	1,585,122

FFO decreased in the three months ended September 30, 2013 by $671,985, or 87.1%, to $99,719 compared to $771,704 for the same period in 2012. FFO increased in the nine months ended September 30, 2013 by $164,149, or 10.4%, to $1,749,271 compared to $1,585,122 for the same period in 2012. The decreased FFO in the quarter ended September 30, 2013 is primarily due an increase in net loss before the FFO adjustments offset by an increase on the gain on sale of real estate assets and the prior year quarter had a gain on the dissolution of partnership interests. The increase in FFO for the nine months ended September 30, 2013 is also attributable to a decrease in net loss adjusted for non-cash expenses such as depreciation and amortization and asset impairments.

On a GAAP basis, cash flow provided by operating activities was $3,137,141 and $3,636,601 for the nine months ended September 30, 2013 and 2012, respectively.

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 investmentsnonrecurring 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 and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Funds from operations	$	99,719		$	771,704		$	1,749,271			$	541,089
Adjustments:
Straight line rent adjustment		(61,075	)		(91,285	)		(216,451	)			(244,337	)
Above and below market rents		120,640			120,116			129,447				352,783
Acquisition costs		65,788			46,607			121,907				121,907
Modified Funds from Operations	$	225,072		$	847,142		$	1,784,174			$	771,442

MFFO was $225,072 in the three months ended September 30, 2013 compared to $847,122, a decrease of $622,070, or 73.4% for the same period in 2012. MFFO increased in the nine months ended September 30, 2013 by $1,012,732, or 131.3%, to $1,784,174 compared to $771,442 for the same period in 2012. The changes in MFFO are substantially the same as discussed in the FFO above.

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 4. 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 September 30, 2013 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 nine months ended September 30, 2013, the Company also sold 312,751 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 approximately 1,348 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.

The Company did not purchase any of its equity securities in the current period.

In addition, the Company does not have a formal policy with respect to a stock repurchase program and typically restricts repurchases to hardship cases only.

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 September 30, 2013.
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 September 30, 2013.
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 September 30, 2013.
32.1			Certification of principal executive officers 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: November 14, 2013	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: J. Bradford Hanson
	Title: Principal Financial and Accounting Officer

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

31.1 Certificate of the Companys Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. 31.2 Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. 31.3 Certification of the Companys Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. 32.1 Certification of principal executive officers and principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SQFT 10-Q Quarter ended Sept. 30, 2013

Exhibits