10-Q 1 netr-10q_093012.htm QUARERLY 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, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from _____ to _____

000-53673

(Commission file No.)

NetREIT, Inc.

(Exact name of registrant as specified in its charter)

Maryland (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 þ No o.

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

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

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

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

At November 8, 2012, registrant had issued and outstanding 15,609,451 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 30,2012 (unaudited) and December 31, 2011 |  | 3
| Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 (unaudited) |  | 4
| Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2012 (unaudited) |  | 5
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (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 |  | 59
Item 4T. Controls and Procedures |  | 59
Part II. OTHER INFORMATION |  | 60
| Item 1. Legal Proceedings |  | 60
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |  | 60
| Item 3. Defaults Upon Senior Securities |  | 61
| Item 4. Mine Safety Disclosures |  | 61
| Item 5. Other Information |  | 61
| Item 6. Exhibits |  | 61
| Signatures |  | 62

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

NetREIT, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

|  | September 30, |  |  | December 31, |
|  | 2012 |  |  | 2011 |
|  | (Unaudited) |  |  |  |
ASSETS |  |  |  |  |  |
Real estate assets and lease intangibles, net |  | $ | 148,409,439 |  |  | $ | 133,336,214 |
Mortgages receivable and interest |  |  | 920,216 |  |  |  | 1,032,082 |
Cash and cash equivalents |  |  | 3,860,286 |  |  |  | 4,746,530 |
Restricted cash |  |  | 839,545 |  |  |  | 966,687 |
Assets held for sale |  |  | 11,052,063 |  |  |  | 14,736,462 |
Other real estate owned |  |  | 2,178,531 |  |  |  | 2,178,531 |
Other assets, net |  |  | 4,914,425 |  |  |  | 4,655,425 |
TOTAL ASSETS |  | $ | 172,174,505 |  |  | $ | 161,651,931 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |
Mortgage notes payable |  | $ | 72,748,381 |  |  | $ | 59,658,789 |
Accounts payable and accrued liabilities |  |  | 4,664,121 |  |  |  | 3,831,188 |
Liabililities related to assets held for sale |  |  | 5,321,321 |  |  |  | 6,440,875 |
Dividends payable |  |  | 1,104,427 |  |  |  | 1,008,699 |
Total liabilities |  |  | 83,838,250 |  |  |  | 70,939,551 |
Commitments and contingencies |  |  |  |  |  |  |  |
Shareholders’ 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, 2012 and December 31, 2011, respectively |  |  | — |  |  |  | — |
Convertible series 6.3% preferred stock, $0.01 par value, $1,000 liquidating preference, shares authorized: 10,000; 1,649 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively |  |  | 16 |  |  |  | 16 |
Common stock series A, $0.01 par value, shares authorized: 100,000,000; 15,609,451 and 15,287,998 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively |  |  | 156,095 |  |  |  | 152,881 |
Common stock series B, $0.01 par value, shares authorized: 1,000; no shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively |  |  | — |  |  |  | — |
Additional paid-in capital |  |  | 133,445,564 |  |  |  | 130,416,731 |
Dividends in excess of accumulated losses |  |  | (55,457,122 | ) |  |  | (47,777,886 | )
Total shareholders’ equity before noncontrolling interest |  |  | 78,144,553 |  |  |  | 82,791,742 |
Noncontrolling interest |  |  | 8,697,414 |  |  |  | 6,249,040 |
Noncontrolling interest related to assets held for sale |  |  | 1,494,288 |  |  |  | 1,671,598 |
Total shareholders’ equity |  |  | 88,336,255 |  |  |  | 90,712,380 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |  | $ | 172,174,505 |  |  | $ | 161,651,931 |

See notes to condensed consolidated financial statements.

3

NetREIT, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

|  | Three Months Ended, |  |  | Nine Months Ended, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Rental income |  | $ | 4,098,552 |  |  | $ | 3,221,345 |  |  | $ | 11,755,787 |  |  | $ | 9,021,727 |
Fee and other income |  |  | 245,939 |  |  |  | 122,955 |  |  |  | 436,422 |  |  |  | 473,751 |
|  |  | 4,344,491 |  |  |  | 3,344,300 |  |  |  | 12,192,209 |  |  |  | 9,495,478 |
Costs and expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rental operating costs |  |  | 1,433,570 |  |  |  | 1,237,491 |  |  |  | 3,955,280 |  |  |  | 3,447,532 |
General and administrative |  |  | 980,508 |  |  |  | 791,655 |  |  |  | 3,176,778 |  |  |  | 2,656,195 |
Depreciation and amortization |  |  | 1,178,239 |  |  |  | 995,946 |  |  |  | 3,446,529 |  |  |  | 2,858,802 |
Total costs and expenses |  |  | 3,592,317 |  |  |  | 3,025,092 |  |  |  | 10,578,587 |  |  |  | 8,962,529 |
Income from operations |  |  | 752,174 |  |  |  | 319,208 |  |  |  | 1,613,622 |  |  |  | 532,949 |
Other income (expense): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense |  |  | (1,106,966 | ) |  |  | (751,326 | ) |  |  | (3,037,641 | ) |  |  | (2,121,382 | )
Interest income |  |  | 22,277 |  |  |  | 54,605 |  |  |  | 62,761 |  |  |  | 102,196 |
Gain (loss) on sale of real estate |  |  | 81,695 |  |  |  | (32,424 | ) |  |  | 180,770 |  |  |  | (56,911 | )
Gain on dissolution of partnership interests |  |  | 285,247 |  |  |  | — |  |  |  | 285,247 |  |  |  | — |
Total other expense, net |  |  | (717,747 | ) |  |  | (729,145 | ) |  |  | (2,508,863 | ) |  |  | (2,076,097 | )
Net income (loss) from continuing operations |  |  | 34,427 |  |  |  | (409,937 | ) |  |  | (895,241 | ) |  |  | (1,543,148 | )
Discontinued operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income from discontinued operations |  |  | 61,206 |  |  |  | 50,080 |  |  |  | 149,150 |  |  |  | 115,084 |
Asset impairments |  |  | (358,000 | ) |  |  | — |  |  |  | (358,000 | ) |  |  | — |
(Loss) income from discontinued operations |  |  | (296,794 | ) |  |  | 50,080 |  |  |  | (208,850 | ) |  |  | 115,084 |
Net loss before noncontrolling interests |  |  | (262,367 | ) |  |  | (359,857 | ) |  |  | (1,104,091 | ) |  |  | (1,428,064 | )
Income attributable to noncontrolling interests |  |  | 114,051 |  |  |  | 57,740 |  |  |  | 277,159 |  |  |  | 258,737 |
Net loss attributable to common stockholders |  | $ | (376,418 | ) |  | $ | (417,597 | ) |  | $ | (1,381,250 | ) |  | $ | (1,686,801 | )
Basic and diluted (loss)/income per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Continuing operations |  | $ | — |  |  | $ | (0.03 | ) |  | $ | (0.08 | ) |  | $ | (0.13 | )
Discontinued operations |  |  | (0.02 | ) |  |  | — |  |  |  | (0.01 | ) |  |  | 0.01 |
Basic and diluted: |  | $ | (0.02 | ) |  | $ | (0.03 | ) |  | $ | (0.09 | ) |  | $ | (0.12 | )
Weighted average number of common shares outstanding - basic and diluted (1) |  |  | 15,503,302 |  |  |  | 14,080,428 |  |  |  | 15,435,746 |  |  |  | 13,678,716 |

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

See notes to condensed consolidated financial statements.

4

NetREIT, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

Nine Months Ended September 30, 2012

|  | Convertible Series 6.3% Preferred Stock |  |  | Common Stock |  |  | Additional Paid-in |  |  | Dividends In Excess of Accumlated |  |  | Total NetREIT, Inc Shareholders’ |  |  | Non- controlling |  |  | Non-cont- rolling Related to Assets Held for |  |  |  |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Losses |  |  | Equity |  |  | Interests |  |  | Sale |  |  | Total |
Balance, December 31, 2011 |  |  | 1,649 |  |  | $ | 16 |  |  |  | 15,287,998 |  |  | $ | 152,881 |  |  | $ | 130,416,731 |  |  | $ | (47,777,886 | ) |  | $ | 82,791,742 |  |  | $ | 6,249,040 |  |  | $ | 1,671,598 |  |  | $ | 90,712,380 |
Net (loss) income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (1,381,250 | ) |  |  | (1,381,250 | ) |  |  | 277,159 |  |  |  |  |  |  |  | (1,104,091 | )
Conversion of partnership interests to common stock |  |  |  |  |  |  |  |  |  |  | 17,060 |  |  |  | 171 |  |  |  | 143,734 |  |  |  |  |  |  |  | 143,905 |  |  |  |  |  |  |  | (143,905 | ) |  |  | — |
Repurchase of common stock - related parties |  |  |  |  |  |  |  |  |  |  | (18,455 | ) |  |  | (184 | ) |  |  | (155,720 | ) |  |  |  |  |  |  | (155,904 | ) |  |  |  |  |  |  |  |  |  |  | (155,904 | )
Repurchase of common stock |  |  |  |  |  |  |  |  |  |  | (1,955 | ) |  |  | (20 | ) |  |  | (15,640 | ) |  |  |  |  |  |  | (15,660 | ) |  |  |  |  |  |  |  |  |  |  | (15,660 | )
Dividends paid |  |  |  |  |  |  |  |  |  |  | 213,524 |  |  |  | 2,134 |  |  |  | 2,024,860 |  |  |  | (4,184,358 | ) |  |  | (2,157,364 | ) |  |  |  |  |  |  |  |  |  |  | (2,157,364 | )
Dividends declared |  |  |  |  |  |  |  |  |  |  | 106,149 |  |  |  | 1,062 |  |  |  | 1,008,139 |  |  |  | (2,113,628 | ) |  |  | (1,104,427 | ) |  |  |  |  |  |  |  |  |  |  | (1,104,427 | )
Issuance of vested restricted stock |  |  |  |  |  |  |  |  |  |  | 5,130 |  |  |  | 51 |  |  |  | 42,355 |  |  |  |  |  |  |  | 42,406 |  |  |  |  |  |  |  |  |  |  |  | 42,406 |
Contributions received from noncontrolling interests net of distributions paid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,171,215 |  |  |  | (33,405 | ) |  |  | 2,137,810 |
Stock issuance costs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (18,895 | ) |  |  |  |  |  |  | (18,895 | ) |  |  |  |  |  |  |  |  |  |  | (18,895 | )
Balance, September 30, 2012 |  |  | 1,649 |  |  | $ | 16 |  |  |  | 15,609,451 |  |  | $ | 156,095 |  |  | $ | 133,445,564 |  |  | $ | (55,457,122 | ) |  | $ | 78,144,553 |  |  | $ | 8,697,414 |  |  | $ | 1,494,288 |  |  | $ | 88,336,255 |

See notes to condensed consolidated financial statements.

5

NetREIT, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

|  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2012 |  |  | 2011 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (1,381,250 | ) |  | $ | (1,686,801 | )
Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 3,660,692 |  |  |  | 3,106,614 |
Stock compensation |  |  | 365,056 |  |  |  | 274,852 |
(Gain) loss on sale of real estate assets |  |  | (180,770 | ) |  |  | 56,911 |
Bad debt expense |  |  | 63,078 |  |  |  | 51,429 |
Asset impairments |  |  | 358,000 |  |  |  | — |
Income attributable to noncontrolling interests |  |  | 277,159 |  |  |  | 258,737 |
Other assets |  |  | (180,599 | ) |  |  | (1,105,687 | )
Accounts payable and accrued liabilities |  |  | 434,823 |  |  |  | 65,111 |
Net cash provided by operating activities |  |  | 3,416,189 |  |  |  | 1,021,166 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Real estate acquisitions |  |  | (21,052,518 | ) |  |  | (22,404,080 | )
Building and tenant improvements |  |  | (872,074 | ) |  |  | (825,937 | )
Proceeds on sale of real estate assets |  |  | 6,503,816 |  |  |  | 6,566,951 |
Deposits on potential acquisitions |  |  | — |  |  |  | (150,000 | )
Net repayments (purchase) of notes receivable |  |  | 111,866 |  |  |  | (112,602 | )
Restricted cash |  |  | 127,142 |  |  |  | (391,162 | )
Net cash used in investing activities |  |  | (15,181,768 | ) |  |  | (17,316,830 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Proceeds from mortgage notes payable |  |  | 16,122,341 |  |  |  | 17,501,890 |
Repayment of mortgage notes payable |  |  | (4,076,843 | ) |  |  | (8,178,513 | )
Net proceeds from issuance of common stock |  |  | — |  |  |  | 7,993,768 |
Repurchase of common stock |  |  | (15,660 | ) |  |  | (302,075 | )
Repurchase of common stock - related parties |  |  | (155,904 | ) |  |  | (82,520 | )
Deferred stock issuance costs |  |  | — |  |  |  | (171,362 | )
Stock issuance costs |  |  | (18,895 | ) |  |  | — |
Contributions received from noncontrolling interests in excess of distributions paid |  |  | 2,137,810 |  |  |  | 354,696 |
Dividends paid |  |  | (3,166,063 | ) |  |  | (2,614,325 | )
Net cash provided by financing activities |  |  | 10,826,786 |  |  |  | 14,501,559 |
Net decrease in cash and cash equivalents |  |  | (938,793 | ) |  |  | (1,794,105 | )
Cash and cash equivalents: |  |  |  |  |  |  |  |
Beginning of year |  |  | 4,746,530 |  |  |  | 7,028,090 |
Change in cash of assets held for sale |  |  | 52,549 |  |  |  | — |
End of period |  | $ | 3,860,286 |  |  | $ | 5,233,985 |
Supplemental disclosure of cash flow information: |  |  |  |  |  |  |  |
Interest paid |  | $ | 3,128,998 |  |  | $ | 2,444,793 |
Non-cash investing and financing activities: |  |  |  |  |  |  |  |
Reclassification of assets held for sale |  | $ | 1,296,868 |  |  | $ | — |
Conversion of partnership interests into common stock |  | $ | 143,905 |  |  | $ | — |
Reinvestment of cash dividend |  | $ | 3,036,195 |  |  | $ | 2,867,241 |
Accrual of dividends payable |  | $ | 1,104,427 |  |  | $ | 967,927 |

See notes to condensed consolidated financial statements.

6

NetREIT, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

NetREIT (the “Company”) was incorporated in the State of California on January 28, 1999 for the purpose of investing in real estate properties. Effective August 4, 2010, NetREIT, a California Corporation, merged into NetREIT, Inc., a Maryland Corporation with NetREIT, Inc. becoming the surviving Corporation. As a result of the merger, NetREIT is now incorporated in the State of Maryland. The Company qualifies and operates as a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, (the “Code”) and commenced operations with capital provided by its private placement offering of its equity securities in 1999.

The Company invests in a diverse portfolio of real estate assets. The primary types of properties the Company invests in include office, retail, self-storage and residential properties located in the western United States. As of September 30, 2012, including properties held for sale, the Company owned or had an equity interest in ten office buildings and one industrial building (“Office Properties”) which total approximately 705,000 rentable square feet, four retail shopping centers and a 7-Eleven property (“Retail Properties”) which total approximately 189,000 rentable square feet, six self-storage facilities (“Self-Storage Properties”) which total approximately 581,000 rentable square feet, one 39 unit apartment building and 87 model homes investments owned by eight limited partnerships (“Residential Properties”).

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

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

7

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, 2012, NetREIT Dubose has raised approximately $3.8 million from outside investors.

As of September 30, 2012, there were approximately 735,000 shares outstanding of which approximately 412,000 have been issued to parties other than NetREIT, Inc.

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

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

In August 2011, the Company formed Dubose Advisors, LLC (“Dubose Advisors”) a wholly-owned Delaware limited liability company, and sponsored the formation of Dubose Model Home Investors #201, LP. (“201 Partnership”), a California limited partnership. Dubose Advisors is the general partner and advisor to the 201 partnership. The 201 Partnership invests in Model Homes it purchases from developers in transactions whereby the developer leases back the Model Home under a short term lease, typically one to three years in length similar to NetREIT Dubose. The Company has initially invested $250,000 to capitalize the 201 Partnership and has commenced raising $3,000,000 in outside investor capital through the sale of 60 limited partner units at $50,000 per unit. As of September 30, 2012, the 201 Partnership has raised approximately $2.2 million from outside investors.

8

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.

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, 2012 and 2011, 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, 2012. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements included in the Form 10-K filed with the Securities and Exchange Commission on March 28, 2012.

9

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of NetREIT and its subsidiaries, Fontana Medical Plaza, LLC (“FMP”), NetREIT 01 LP Partnership, NetREIT Casa Grande LP Partnership, NetREIT Palm Self-Storage LP Partnership, NetREIT Garden Gateway, LP and Dubose Acquisition Partners II and III (collectively “the Partnerships”) NetREIT Advisors, LLC (“Advisors”), NetREIT Dubose Model Home REIT, Inc. and its subsidiary, NetREIT Dubose Model Home LP, Dubose Advisors LLC, Model Home Income Funds 3, 4, 5, 113 LTD and Dubose Model Home Investors #201 LP (collectively, the “Income Funds”) and NetREIT National City Partners, LP. As used herein, the “Company” refers to NetREIT, FMP, Advisors and the Partnerships, Income Funds, and the NetREIT National City Partners, LP, collectively. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company classifies the noncontrolling interests in FMP, the Partnerships, and the Income Funds as part of consolidated net loss in 2012 and 2011 and includes the accumulated amount of noncontrolling interests as part of shareholders’ equity from the Partnerships inception in 2009 and 2010, the effective date that the Company assumed significant control of DAP II and III in February 2010, the Income Funds acquisitions in November 2010 and November 2011 as well as NetREIT National City Partners, LP in December 2011. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interest will be remeasured with the gain or loss reported in the statement of operations. Management has evaluated the noncontrolling interests and determined that they do not contain any redemption features.

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

Earnings and profits that determine the taxability of distributions to shareholders differ from net income reported for financial reporting purposes due to differences in estimated useful lives and methods used to compute depreciation and the carrying value (basis) on the investments in properties for tax purposes, among other things. During the nine months ended September 30, 2012 and the year ended December 31, 2011, all distributions were considered return of capital to the shareholders and therefore non-taxable.

The Company believes that it has met all of the REIT distribution and technical requirements for the three and nine months ended September 30, 2012 and the year ended December 31, 2011.

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

10

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 $120,000 and $106,000 for the three months ended September 30, 2012 and 2011, respectively. Amortization of above and below market rents resulted in a net reduction in rental income of approximately $353,000 and $195,000 for the nine months ended September 30, 2012 and 2011, 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 $150,000 and $109,000 for three months ended September 30, 2012 and 2011, respectively. Amortization expense related to these assets was approximately $456,000 and $293,000 for nine months ended September 30, 2012 and 2011, respectively.

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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, 2012 and 2011 was approximately $847,000 and $907,000, respectively. Depreciation expense for buildings and improvements for the nine months ended September 30, 2012 and 2011, was approximately $2,826,000 and $2,645,000, 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, 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. For the year ended December 31, 2011, the Company determined that an impairment existed in its model home properties not currently held for sale and, as a result, recorded an asset impairment of $30,000. As of September 30, 2012 and 2011, management does not believe indicators of impairment were evident for properties not held for sale and as such, no other impairment charges were recognized.

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Intangible Assets. Lease intangibles represents the allocation of a portion of the purchase price of a property acquisition representing the estimated value of in-place leases, unamortized lease origination costs, tenant relationships and a land purchase option. Intangible assets are comprised of finite-lived and indefinite-lived assets. Indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives.

The Company is required to perform a test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant. Based on the review, no impairment was deemed necessary at December 31, 2011 and, as of September 30, 2012, management does not believe that any indicators of impairment were evident.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, no impairment was deemed necessary as of December 31, 2011 and, as of September 30, 2012, management does not believe that any indicators of impairment were evident.

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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, 2012 and December 31, 2011.

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, 2012 and 2011:

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|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Weighted average shares used for Basic EPS |  |  | 15,503,302 |  |  |  | 13,409,931 |  |  |  | 15,435,746 |  |  |  | 13,027,349 |
Add: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
5% stock dividend issued in December 2011 |  |  | — |  |  |  | 670,497 |  |  |  | — |  |  |  | 651,367 |
Shares used for basic EPS |  |  | 15,503,302 |  |  |  | 14,080,428 |  |  |  | 15,435,746 |  |  |  | 13,678,716 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Incremental shares from share-based compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Incremental shares from conversion of: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NetREIT 01 LP Partnership |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
NetREIT Casa Grande LP Partnership |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
NetREIT Palm LP Partnership |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Garden Gateway LP Partnership |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
NetREIT National City Partners LP Partnership |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Incremental shares from warrants |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Adjusted weighted average shares used for diluted EPS |  |  | 15,503,302 |  |  |  | 14,080,428 |  |  |  | 15,435,746 |  |  |  | 13,678,716 |

Weighted average shares from share based compensation, shares from conversion of NetREIT 01 LP Partnership, Casa Grande LP Partnership, NetREIT Palm Self-Storage LP Partnership, NetREIT Garden Gateway LP Partnership, NetREIT National City Partners LP Partnership and shares from stock purchase warrants with respect to a total of 1,360,096 shares of common stock for the three and nine months ended September 30, 2012 and 974,292 shares of common stock for the three and nine months ended September 30, 2011, 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, based on the nature and term of the notes, the recorded and fair value of notes payable are approximately the same as of September 30, 2012 and December 31, 2011.

During 2011, the Company measured certain model homes at fair value after a determination was made that they were impaired. During 2010, the Company measured a real estate asset at fair value after a determination was made that it was impaired. During the periods ended September 30, 2012 and 2011, except for certain properties held for sale as previously discussed, there were no indicators of impairment requiring adjustment.

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As of September 30, 2012 and December 31, 2011, the Company does not have any other assets or any liabilities measured at fair value on a recurring or nonrecurring basis.

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

Segments. The Company acquires and operates income producing properties including office properties, residential properties, retail properties and self-storage properties and invests in real estate assets, including real estate loans and, as a result, the Company operates in five business segments. See Note 7 “Segment Information”.

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

Reclassifications. Certain reclassifications have been made to prior years consolidated financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of consolidated operations or stockholders’ equity. Assets sold or held for sale and associated liabilities have been reclassified on the condensed consolidated balance sheets and the related operating results reclassified from continuing to discontinued operations on the condensed consolidated income statements.

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3. REAL ESTATE ASSETS AND LEASE INTANGIBLES

A summary of the properties owned by the Company as of September 30, 2012 is as follows:

Property Name |  | Date Acquired |  | Location |  | Square Footage |  |  | Property Description |  |  | Real estate assets, net (in thousands) |
Havana/Parker Complex |  | June 2006 |  | Aurora, Colorado |  |  | 114,000 |  |  |  | Office |  |  |  | 5,268.1 |
Garden Gateway Plaza |  | March 2007 |  | Colorado Springs, Colorado |  |  | 115,052 |  |  |  | Office |  |  |  | 12,627.5 |
World Plaza |  | September 2007 |  | San Bernardino, California |  |  | 55,098 |  |  |  | Retail |  |  |  | 6,908.1 |
Regatta Square |  | October 2007 |  | Denver, Colorado |  |  | 5,983 |  |  |  | Retail |  |  |  | 1,989.0 |
Sparky’s Palm Self-Storage |  | November 2007 |  | Highland, California |  |  | 50,250 |  |  |  | Self-Storage |  |  |  | 4,514.6 |
Sparky’s Joshua Self-Storage |  | December 2007 |  | Hesperia, California |  |  | 149,750 |  |  |  | Self-Storage |  |  |  | 7,026.5 |
Executive Office Park |  | July 2008 |  | Colorado Springs, Colorado |  |  | 65,084 |  |  |  | Office |  |  |  | 8,568.6 |
Pacific Oaks Plaza |  | September 2008 |  | Escondido, California |  |  | 16,000 |  |  |  | Office |  |  |  | 4,458.3 |
Morena Office Center |  | January 2009 |  | San Diego, California |  |  | 26,784 |  |  |  | Office |  |  |  | 5,935.6 |
Fontana Medical Plaza |  | February 2009 |  | Fontana, California |  |  | 10,500 |  |  |  | Office |  |  |  | 2,071.2 |
Rangewood Medical Office Building |  | March 2009 |  | Colorado Springs, Colorado |  |  | 18,222 |  |  |  | Office |  |  |  | 2,361.4 |
Sparky’s Thousand Palms Self-Storage |  | August 2009 |  | Thousand Palms, California |  |  | 113,126 |  |  |  | Self-Storage |  |  |  | 5,724.6 |
Sparky’s Hesperia East Self-Storage |  | December 2009 |  | Hesperia, California |  |  | 72,940 |  |  |  | Self-Storage |  |  |  | 2,703.3 |
Sparky’s Rialto Self-Storage |  | May 2010 |  | Rialto, California |  |  | 101,343 |  |  |  | Self-Storage |  |  |  | 5,067.5 |
Genesis Plaza |  | August 2010 |  | San Diego, California |  |  | 57,685 |  |  |  | Office |  |  |  | 9,266.8 |
Dakota Bank Buildings |  | May 2011 |  | Fargo, North Dakota |  |  | 119,749 |  |  |  | Office |  |  |  | 8,823.3 |
Yucca Valley Retail Center |  | September 2011 |  | Yucca Valley, California |  |  | 103,596 |  |  |  | Retail |  |  |  | 7,591.2 |
Sparky’s Sunrise Self-Storage |  | December 2011 |  | Hesperia, California |  |  | 93,851 |  |  |  | Self-Storage |  |  |  | 2,203.3 |
Port of San Diego Complex |  | December 2011 |  | San Diego, California |  |  | 146,700 |  |  |  | Industrial |  |  |  | 14,351.9 |
Shoreline Medical Building |  | May 2012 |  | Half Moon Bay, California |  |  | 15,335 |  |  |  | Office |  |  |  | 6,304.0 |
NetREIT, Inc properties |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 123,764.8 |
|  |  |  |  |  |  | Homes |  |  |  |  |  |  |  |  |
Model home properties |  | Various in |  | CA, AZ, WA, TX, SC, |  |  |  |  |  |  |  |  |  |  |  |
held in limited partnerships |  | 2009-2012 |  | NC and NJ |  |  | 66 |  |  |  | Residential |  |  |  | 18,677.1 |
Model home properties |  | Various in |  |  |  |  |  |  |  |  |  |  |  |  |  |
held in income and investment funds |  | 2003-2008, |  | CA, AZ, TX, WA, OH, |  |  |  |  |  |  |  |  |  |  |  |
|  | 2010 & 2011 |  | NC, NV, NJ and MI |  |  | 21 |  |  |  | Residential |  |  |  | 5,967.5 |
Model home properties |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 24,644.6 |
|  |  |  | Total real estate assets and lease intangibles, net |  |  | $ | 148,409.4 |

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

Property Name |  | Date Acquired |  | Location |  | Square Footage |  |  | Property Description |  |  | Real estate assets, net (in thousands) |
Havana/Parker Complex |  | June 2006 |  | Aurora, Colorado |  |  | 114,000 |  |  |  | Office |  |  |  | 5,399.5 |
Garden Gateway Plaza |  | March 2007 |  | Colorado Springs, Colorado |  |  | 115,052 |  |  |  | Office |  |  |  | 13,008.6 |
World Plaza |  | September 2007 |  | San Bernardino, California |  |  | 55,098 |  |  |  | Retail |  |  |  | 6,933.7 |
Regatta Square |  | October 2007 |  | Denver, Colorado |  |  | 5,983 |  |  |  | Retail |  |  |  | 2,027.6 |
Sparky’s Palm Self-Storage |  | November 2007 |  | Highland, California |  |  | 50,250 |  |  |  | Self-Storage |  |  |  | 4,598.9 |
Sparky’s Joshua Self-Storage |  | December 2007 |  | Hesperia, California |  |  | 149,750 |  |  |  | Self-Storage |  |  |  | 7,155.8 |
Executive Office Park |  | July 2008 |  | Colorado Springs, Colorado |  |  | 65,084 |  |  |  | Office |  |  |  | 8,710.1 |
Pacific Oaks Plaza |  | September 2008 |  | Escondido, California |  |  | 16,000 |  |  |  | Office |  |  |  | 4,536.2 |
Morena Office Center |  | January 2009 |  | San Diego, California |  |  | 26,784 |  |  |  | Office |  |  |  | 5,918.8 |
Fontana Medical Plaza |  | February 2009 |  | Fontana, California |  |  | 10,500 |  |  |  | Office |  |  |  | 2,118.4 |
Rangewood Medical Office Building |  | March 2009 |  | Colorado Springs, Colorado |  |  | 18,222 |  |  |  | Office |  |  |  | 2,407.3 |
Sparky’s Thousand Palms Self-Storage |  | August 2009 |  | Thousand Palms, California |  |  | 113,126 |  |  |  | Self-Storage |  |  |  | 5,832.4 |
Sparky’s Hesperia East Self-Storage |  | December 2009 |  | Hesperia, California |  |  | 72,940 |  |  |  | Self-Storage |  |  |  | 2,724.8 |
Sparky’s Rialto Self-Storage |  | May 2010 |  | Rialto, California |  |  | 101,343 |  |  |  | Self-Storage |  |  |  | 5,144.7 |
Genesis Plaza |  | August 2010 |  | San Diego, California |  |  | 57,685 |  |  |  | Office |  |  |  | 9,428.2 |
Dakota Bank Buildings |  | May 2011 |  | Fargo, North Dakota |  |  | 119,749 |  |  |  | Office |  |  |  | 9,287.0 |
Yucca Valley Retail Center |  | September 2011 |  | Yucca Valley, California |  |  | 85,996 |  |  |  | Retail |  |  |  | 6,687.6 |
Sparky’s Sunrise Self-Storage |  | December 2011 |  | Hesperia, California |  |  | 93,851 |  |  |  | Self-Storage |  |  |  | 2,207.2 |
Port of San Diego Complex |  | December 2011 |  | San Diego, California |  |  | 146,700 |  |  |  | Industrial |  |  |  | 14,500.0 |
NetREIT, Inc properties |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 118,626.8 |
Model home properties |  | Various in |  |  |  |  | Homes |  |  |  |  |  |  |  |  |
held in limited partnerships |  | 2009, 2010 |  | CA, AZ, OR, WA, TX, SC, |  |  | 59 |  |  |  | Residential |  |  |  | 10,027.9 |
|  | & 2011 |  | NC, ID and FL |  |  |  |  |  |  |  |  |  |  |  |
Model home properties |  | Various in |  |  |  |  |  |  |  |  |  |  |  |  |  |
held in income and investment funds |  | 2003-2008, |  | TX, WA, OH, NC, |  |  |  |  |  |  |  |  |  |  |  |
|  | 2010 & 2011 |  | NV, CA, NJ and MI |  |  | 19 |  |  |  | Residential |  |  |  | 4,681.5 |
Model home properties |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 14,709.4 |
|  |  |  | Total real estate assets and lease intangibles, net |  |  | $ | 133,336.2 |

18

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

|  | September 30, |  |  | December 31, |
|  | 2012 |  |  | 2011 |
Land |  | $ | 37,075,489 |  |  | $ | 34,330,356 |
Buildings and other |  |  | 117,245,115 |  |  |  | 102,090,547 |
Tenant improvements |  |  | 6,025,708 |  |  |  | 5,547,091 |
Lease intangibles |  |  | 4,088,501 |  |  |  | 3,869,501 |
|  |  | 164,434,813 |  |  |  | 145,837,495 |
Less: |  |  |  |  |  |  |  |
Accumulated depreciation and amortization |  |  | (16,025,374 | ) |  |  | (12,501,281 | )
Real estate assets, net |  | $ | 148,409,439 |  |  | $ | 133,336,214 |

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, 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. However, the property remains 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 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.

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 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 $180,770 related to the sale of these model homes.

19

The Company acquired the following properties in 2011:

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

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

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

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

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

In June 2011, NetREIT Dubose acquired three model home properties in Texas and leased them back to the home builder. The purchase price for the properties was approximately $0.60 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $0.30 million and three promissory notes totaling approximately $0.30 million.

In August 2011, NetREIT Dubose acquired eight model home properties in Texas, Florida, North Carolina and South Carolina and leased them back to the home builder. The purchase price for the properties was approximately $1.9 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $1.0 million and eight promissory notes totaling approximately $0.90 million.

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

20

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

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

In December 2011, Dubose Model Home Investor Funds #201, LP acquired one model home properties in South Carolina and leased it back to the home builder. The purchase price for the property was approximately $0.3 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $0.1 million and a promissory note for the balance of the purchase price.

The Company disposed of the following properties in 2011:

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

21

The Company allocated the purchase price of the properties acquired during the nine months ended September 30, 2012 as follows:

|  |  |  |  |  |  |  |  |  |  |  |  |  | Total |
|  |  |  |  | Buildings |  |  | In-place |  |  | Leasing |  |  | Purchase |
|  | Land |  |  | and other |  |  | 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 |
Model Home Properties |  |  | 1,146,525 |  |  |  | 12,430,993 |  |  |  | — |  |  |  | — |  |  |  | 13,577,518 |

The Company allocation of the properties sold during the nine months ended September 30, 2012 as follows:

|  |  |  |  | Buildings |  |  | Total |
|  | Land |  |  | and other |  |  | Cost |
Model Home Properties |  | $ | 892,563 |  |  | $ | 6,100,079 |  |  | $ | 6,992,642 |

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

|  |  |  |  |  |  |  | Tenant |  |  |  |  |  |  |  |  | Above and Below |  |  | Total |
|  |  |  |  | Buildings |  |  | Improve- |  |  | In-place |  |  | Leasing |  |  | Market |  |  | Purchase |
|  | Land |  |  | and other |  |  | ments |  |  | Leases |  |  | Costs |  |  | Leases |  |  | Price |
Dakota Bank Buildings |  | $ | 832,000 |  |  | $ | 8,123,461 |  |  | $ | — |  |  | $ | 131,982 |  |  | $ | 45,186 |  |  | $ | 442,371 |  |  | $ | 9,575,000 |
Yucca Valley Retail Center |  |  | 2,445,331 |  |  |  | 3,549,162 |  |  |  | 520,485 |  |  |  | 819,979 |  |  |  | — |  |  |  | (567,257 | ) |  |  | 6,767,700 |
Sparky’s Sunrise Self-Storage |  |  | 1,123,000 |  |  |  | 1,077,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,200,000 |
Port of San Diego Complex |  |  | 9,613,000 |  |  |  | 4,078,816 |  |  |  | 141,373 |  |  |  | 29,470 |  |  |  | 128,448 |  |  |  | 508,893 |  |  |  | 14,500,000 |
Model Home Properties |  |  | 2,012,217 |  |  |  | 9,633,813 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 11,646,030 |

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

|  |  |  |  | Buildings |  |  | Total |
|  | Land |  |  | and other |  |  | Cost |
Model Home Properties |  | $ | 1,094,267 |  |  | $ | 7,331,915 |  |  | $ | 8,426,182 |

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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, 2012 |  |  | December 31, 2011 |
|  |  |  |  |  |  |  | Lease |  |  |  |  |  |  |  |  | Lease |
|  | Lease |  |  | Accumulated |  |  | intangibles, |  |  | Lease |  |  | Accumulated |  |  | intangibles, |
|  | intangibles |  |  | amortization |  |  | net |  |  | intangibles |  |  | amortization |  |  | net |
In-place leases |  | $ | 1,852,897 |  |  | $ | (1,074,925 | ) |  | $ | 777,972 |  |  | $ | 1,769,897 |  |  | $ | (786,690 | ) |  | $ | 983,207 |
Leasing costs |  |  | 1,130,184 |  |  |  | (668,909 | ) |  |  | 461,275 |  |  |  | 994,184 |  |  |  | (274,414 | ) |  |  | 719,770 |
Tenant relationships |  |  | 332,721 |  |  |  | (332,721 | ) |  |  | — |  |  |  | 332,721 |  |  |  | (332,721 | ) |  |  | — |
Below-market leases |  |  | (841,425 | ) |  |  | 30,403 |  |  |  | (811,022 | ) |  |  | (841,425 | ) |  |  | 9,296 |  |  |  | (832,129 | )
Above-market leases |  |  | 1,614,124 |  |  |  | (721,206 | ) |  |  | 892,918 |  |  |  | 1,614,124 |  |  |  | (347,317 | ) |  |  | 1,266,807 |
|  | $ | 4,088,501 |  |  | $ | (2,767,358 | ) |  | $ | 1,321,143 |  |  | $ | 3,869,501 |  |  | $ | (1,731,846 | ) |  | $ | 2,137,655 |

As of September 30, 2012, the estimated aggregate amortization expense for three months ending December 31, 2012 and each of the five succeeding fiscal years and thereafter is as follows:

|  |  | Estimated
|  |  | Aggregate
|  |  | Amortization
|  |  | Expense
Three month period ending December 31, 2012 |  | $ | 238,741
2013 |  |  | 589,536
2014 |  |  | 512,357
2015 |  |  | 363,586
2016 |  |  | 107,636
Thereafter (principally below market rent amortization) |  |  | (490,713)
|  | $ | 1,321,143

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, 2012 was 19.5 years.

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4. MORTGAGE NOTES PAYABLE

Mortgage notes payable as of September 30, 2012 and December 31, 2011 consisted of the following:

|  | September 30, |  |  | December 31, |
|  | 2012 |  |  | 2011 |
Mortgage note payable in monthly installments of $24,330 through July 1, 2016, including interest at a fixed rate of 6.51%; collateralized by the Havana/Parker Complex property. |  | $ | 3,183,162 |  |  | $ | 3,242,767 |
Mortgage note payable in monthly installments of $71,412 through April 5, 2014, including interest at a fixed rate of 6.08%; collateralized by the leases and office buildings of the Garden Gateway Plaza property. Certain obligations under the note are guaranteed by the executive officers. |  |  | 9,321,619 |  |  |  | 9,533,849 |
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. |  |  | 4,353,391 |  |  |  | 4,431,783 |
Mortgage note payable in monthly installments of $10,764 through December 18, 2016, including interest at a fixed rate of 6.25%; collateralized by the Sparky’s Hesperia East Self-Storage property. |  |  | 1,673,767 |  |  |  | 1,690,301 |
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 6.25% to maturity, or May 15, 2015; collateralized by the Sparky’s Rialto Self-Storage property. |  |  | 2,785,127 |  |  |  | 2,820,793 |
Mortgage note payable in monthly installments of $28,219 through September 1, 2015, including interest at a fixed rate of 4.65%; collateralized by the Genesis Plaza property. |  |  | 4,768,306 |  |  |  | 4,854,307 |
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. |  |  | 4,526,811 |  |  |  | 4,572,161 |
Mortgage note payable in monthly installments sufficient to amortize the note on a 25 year schedule and the current month interest charge (currently, approximately $36,200), interest at a variable rate of 3.0% over the one month libor with a floor of 5.75% (current rate) and a ceiling of 9.75% through May 31, 2016; collateralized by the Dakota Bank Building property. |  |  | 5,560,002 |  |  |  | 5,640,568 |
Mortgage note payable in monthly installments of $23,919 through April 11, 2015, including interest at a fixed rate of 5.62%; collateralized by the Yucca Valley Retail Center. |  |  | 3,229,266 |  |  |  | 3,304,120 |
Mortgage note payable in monthly installments of $9,858 through January 1, 2019, including interest at a fixed rate of 4.95%; collateralized by the Rangewood Medical Office Building. |  |  | 1,229,158 |  |  |  | 1,150,000 |
Mortgage note payable in monthly installments of $7,562 through January 1, 2019, including interest at a fixed rate of 4.95%; collateralized by Regatta Square. |  |  | 1,279,784 |  |  |  | 1,300,000 |
Mortgage note payable in monthly installments of $82,537 through June 20, 2013, including interest at a variable rate of 1% over a published prime rate with no rate ceiling and a floor of 6% (the current rate);collateralized by the Port of San Diego Complex. |  |  | 9,233,238 |  |  |  | 9,500,000 |
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. |  |  | 2,481,814 |  |  |  | — |

24

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. |  |  | 1,687,631 |  |  |  | — |
Mortgage note payable in monthly installments of $26,043 through June 1, 2021, 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. |  |  | 4,094,127 |  |  |  | — |
Subtotal, NetREIT, Inc. properties |  |  | 59,407,203 |  |  |  | 52,040,649 |
Mortgage notes payable in monthly installments of $20,588 through February 10, 2014, including interest at a fixed rate of 5.50%; collateralized by 7 model home properties. |  |  | 1,666,083 |  |  |  | 1,779,823 |
Mortgage notes payable in monthly installments of $3,767 through September 15, 2012, including interest at a fixed rate of 5.75%; collateralized by 4 model home properties. (1) |  |  | 412,807 |  |  |  | 428,203 |
Mortgage notes payable in monthly installments of $13,273 through December 15, 2015, including interest at a fixed rate of 5.75%; collateralized by 14 model home properties. |  |  | 1,473,714 |  |  |  | 2,205,798 |
Mortgage notes payable in monthly installments of $1,357; maturity date of March 5, 2012; including interest at fixed rate of 2.55%; collateralized by 1 model home property. |  |  | — |  |  |  | 66,985 |
Mortgage notes payable in monthly installments of $20,507 maturities varying from February 15, 2016 to August 15, 2016, including interest at fixed rates from 5.75%, to 6.30%; collateralized by 19 model home properties. |  |  | 1,878,864 |  |  |  | 2,747,709 |
Mortgage notes payable in monthly installments of $31,064, maturities varying from June 30, 2012 to June 15, 2017, including interest at fixed rates from 5.50%, to 7.13%; collateralized by 16 model home properties. (1) |  |  | 3,624,377 |  |  |  | 389,622 |
Mortgage notes payable in monthly installments of $35,594, maturities varying from April 15, 2017 to June 15, 2017, including interest at a fixed rate of 5.50%; collateralized by 20 model home properties. |  |  | 4,285,333 |  |  |  | — |
Subtotal, model home properties |  |  | 13,341,178 |  |  |  | 7,618,140 |
|  | $ | 72,748,381 |  |  | $ | 59,658,789 |

| (1.) | The Company is working with the lender to extend the maturity dates of these loans. The Company anticipates that the lender will extend the due dates of these loans until such time as the model homes securing them are sold.

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

25

Scheduled principal payments of mortgage notes payable as of September 30, 2012 is as follows:

|  |  |  |  |  | Model Home |  |  |
|  |  | NetREIT, Inc. |  |  | Properties |  |  | Scheduled
|  |  | Principal |  |  | Principal |  |  | Principal
Years Ending: |  |  | Payments |  |  | Payments |  |  | Payments
Three month period ending December 31, 2012 |  | $ | 499,099 |  | $ | 354,977 |  | $ | 854,076
2013 |  |  | 10,337,165 |  |  | 697,649 |  |  | 11,034,814
2014 |  |  | 9,969,486 |  |  | 2,039,772 |  |  | 12,009,258
2015 |  |  | 10,867,662 |  |  | 2,155,302 |  |  | 13,022,964
2016 |  |  | 10,151,071 |  |  | 2,120,198 |  |  | 12,271,269
Thereafter |  |  | 17,582,720 |  |  | 5,973,280 |  |  | 23,556,000
Total |  | $ | 59,407,203 |  | $ | 13,341,178 |  | $ | 72,748,381

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5. RELATED PARTY TRANSACTIONS

The Company has entered into a property management agreement with CHG Properties, Inc. (“CHG”), a wholly-owned subsidiary of CI, to manage all of its properties at rates up to 5% of gross income. During the three months ended September 30, 2012 and 2011, respectively, the Company paid CHG total management fees of approximately $166,000 and $168,000, respectively. During the nine months ended September 30, 2012 and 2011, respectively, the Company paid CHG total management fees of approximately $491,000 and $375,000, respectively.

The Company leases a portion of its corporate headquarters at Pacific Oaks Plaza in Escondido, California to C.I. Holding Group, Inc. and Subsidiaries (“CI”), a small shareholder in the Company that is approximately 35% owned by the Company’s executive management. Total rents charged and paid by these affiliates was approximately $15,000 and $14,000 for the three months ended September 30, 2012 and 2011, respectively. Total rents charged and paid by these affiliates was approximately$44,000 and $43,000 for the nine months ended September 30, 2012 and 2011, respectively.

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

In March 2011, the Company purchased 9,560 shares of its vested restricted common stock from an independent member of its Board of Directors for a total of $82,520. The purchase price of approximately $8.60 per share was determined using the same value for the shares as reported as income to state and Federal income tax authorities.

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

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

In April 2012, the Company purchased 1,395 shares of its vested restricted common stock from an independent member of its Board of Directors for a total of $12,000. The shares purchased are in the process of transferring from the Director’s personal account to an Individual Retirement Account pending acceptance of the transaction by the custodian.

27

6. SHAREHOLDERS’ EQUITY

Employee Retirement and Share-Based Incentive Plans

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

The value of the nonvested shares was calculated based on the offering price of the shares in the most recent private placement offering of $10 adjusted for stock dividends since granted and assumed selling costs. The value of granted nonvested restricted stock issued during the nine months ended September 30, 2012 totalled approximately $490,000 which is 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, 2011 totalled approximately $448,000. Compensation expense recorded was approximately $114,000 and $93,000 in the three months ended September 30, 2012 and 2011, respectively. Compensation expense recorded was approximately $365,000 and $313,000 in the nine months ended September 30, 2012 and 2011, respectively. The 115,252 nonvested restricted shares as of September 30, 2012 will vest in equal instalments over the next two to four years.

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

Balance, December 31, 2010 |  |  | 61,642 |
Granted |  |  | 52,139 |
Vested |  |  | (49,805 | )
Cancelled |  |  | (5,504 | )
Stock dividend |  |  | 5,305 |
Balance, December 31, 2011 |  |  | 63,777 |
Granted |  |  | 57,012 |
Vested |  |  | (5,130 | )
Cancelled |  |  | (407 | )
Balance, September 30, 2012 |  |  | 115,252 |

Cash Dividends. During the nine months ended September 30, 2012 and 2011, the Company paid cash dividends, net of reinvested stock dividends, of $3,166,063, and $2,614,325, respectively, or at an annualized rate $0.543 and $0.572 per share, respectively per share on an annualized basis. 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 issued in December 2011 of approximately $79,000 in the nine months ended September 30, 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.

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7. SEGMENTS

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

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

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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, 2012 and 2011.

|  | Three Months Ending |  |  | Nine Months Ending |
|  | September 30, |  |  | September 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Industrial/Office Properties: |  |  |  |  |  |  |  |  |  |  |  |
Rental income |  | $ | 2,350,032 |  |  | $ | 1,805,193 |  |  | $ | 6,499,299 |  |  | $ | 4,904,303 |
Property and related expenses |  |  | 806,940 |  |  |  | 742,206 |  |  |  | 2,204,997 |  |  |  | 1,983,374 |
Net operating income, as defined |  |  | 1,543,092 |  |  |  | 1,062,987 |  |  |  | 4,294,302 |  |  |  | 2,920,929 |
Residential Properties: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rental income |  |  | 731,188 |  |  |  | 674,740 |  |  |  | 1,902,971 |  |  |  | 2,116,978 |
Property and related expenses |  |  | 75,185 |  |  |  | 46,160 |  |  |  | 161,691 |  |  |  | 129,840 |
Net operating income, as defined |  |  | 656,003 |  |  |  | 628,580 |  |  |  | 1,741,280 |  |  |  | 1,987,138 |
Retail Properties: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rental income |  |  | 532,324 |  |  |  | 287,065 |  |  |  | 1,601,133 |  |  |  | 779,674 |
Property and related expenses |  |  | 191,723 |  |  |  | 109,354 |  |  |  | 506,101 |  |  |  | 287,350 |
Net operating income, as defined |  |  | 340,601 |  |  |  | 177,711 |  |  |  | 1,095,032 |  |  |  | 492,324 |
Self-Storage Properties: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Rental income |  |  | 730,947 |  |  |  | 577,302 |  |  |  | 2,188,806 |  |  |  | 1,694,523 |
Property and related expenses |  |  | 359,722 |  |  |  | 339,771 |  |  |  | 1,082,491 |  |  |  | 1,046,968 |
Net operating income, as defined |  |  | 371,225 |  |  |  | 237,531 |  |  |  | 1,106,315 |  |  |  | 647,555 |
Mortgage loan activity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  |  | 21,010 |  |  |  | 45,925 |  |  |  | 57,534 |  |  |  | 78,895 |
Reconciliation to Net Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available to Common Shareholders: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total net operating income, as defined, for reportable segments |  |  | 2,931,931 |  |  |  | 2,152,734 |  |  |  | 8,294,463 |  |  |  | 6,126,841 |
Unallocated other income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total other income |  |  | 286,514 |  |  |  | 8,680 |  |  |  | 290,474 |  |  |  | 23,301 |
Gain (loss) on sale of real estate |  |  | 81,695 |  |  |  | (32,424 | ) |  |  | 180,770 |  |  |  | (56,911 | )
General and administrative expenses |  |  | 980,508 |  |  |  | 791,655 |  |  |  | 3,176,778 |  |  |  | 2,656,195 |
Interest expense |  |  | 1,106,966 |  |  |  | 751,326 |  |  |  | 3,037,641 |  |  |  | 2,121,382 |
Depreciation and amortization |  |  | 1,178,239 |  |  |  | 995,946 |  |  |  | 3,446,529 |  |  |  | 2,858,802 |
Net loss before noncontrolling interests and discontinued operations |  |  | 34,427 |  |  |  | (409,937 | ) |  |  | (895,241 | ) |  |  | (1,543,148 | )
(Loss) income from discontinued operations |  |  | (296,794 | ) |  |  | 50,080 |  |  |  | (208,850 | ) |  |  | 115,084 |
Noncontrolling interests |  |  | 114,051 |  |  |  | 57,740 |  |  |  | 277,159 |  |  |  | 258,737 |
Net loss |  | $ | (376,418 | ) |  | $ | (417,597 | ) |  | $ | (1,381,250 | ) |  | $ | (1,686,801 | )

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|  | September 30, |  |  | December 31, |
|  | 2012 |  |  | 2011 |
Assets: |  |  |  |  |  |
Industrial/Office Properties: |  |  |  |  |  |
Land, buildings and improvements, net (1) |  | $ | 80,036,850 |  |  | $ | 75,314,093 |
Total assets (2) |  |  | 82,851,650 |  |  |  | 77,563,998 |
Residential Property: |  |  |  |  |  |  |  |
Land, buildings and improvements, net (1) |  |  | 24,644,719 |  |  |  | 14,709,491 |
Total assets (2) |  |  | 24,988,964 |  |  |  | 15,876,762 |
Retail Properties: |  |  |  |  |  |  |  |
Land, buildings and improvements, net (1) |  |  | 16,488,231 |  |  |  | 15,648,876 |
Total assets (2) |  |  | 17,666,895 |  |  |  | 16,714,138 |
Self Storage Properties: |  |  |  |  |  |  |  |
Land, buildings and improvements, net (1) |  |  | 27,239,639 |  |  |  | 27,663,755 |
Total assets (2) |  |  | 27,390,959 |  |  |  | 27,832,381 |
Mortgage loan activity: |  |  |  |  |  |  |  |
Mortgage receivable and accrued interest |  |  | 920,216 |  |  |  | 1,032,082 |
Total assets |  |  | 920,216 |  |  |  | 1,032,082 |
Reconciliation to Total Assets: |  |  |  |  |  |  |  |
Total assets for reportable segments |  |  | 153,818,684 |  |  |  | 139,019,361 |
Other unallocated assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 3,860,286 |  |  |  | 4,872,081 |
Assets held for sale |  |  | 11,052,063 |  |  |  | 14,736,462 |
Other assets, net |  |  | 3,443,472 |  |  |  | 3,024,027 |
Total Assets |  | $ | 172,174,505 |  |  | $ | 161,651,931 |

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

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

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|  | Nine Months Ended September 30, |
|  | 2012 |  |  | 2011 |
Capital Expenditures:(1) |  |  |  |  |  |
Industrial/Office Properties: |  |  |  |  |  |
Acquisition of operating properties |  | $ | 6,350,000 |  |  | $ | 9,575,000 |
Capital expenditures and tenant improvements |  |  | 693,105 |  |  |  | 766,751 |
Residential Property: |  |  |  |  |  |  |  |
Acquisition of operating properties |  |  | 13,577,518 |  |  |  | 5,646,380 |
Retail Properties: |  |  |  |  |  |  |  |
Acquisition of operating properties |  |  | 1,125,000 |  |  |  | 6,767,700 |
Capital expenditures and tenant improvements |  |  | 158,005 |  |  |  | 56,886 |
Self Storage Properties: |  |  |  |  |  |  |  |
Acquisition of operating properties |  |  | — |  |  |  | 415,000 |
Capital expenditures and tenant improvements |  |  | 20,964 |  |  |  | 2,300 |
Acquisition of operating properties, net |  |  | 21,052,518 |  |  |  | 22,404,080 |
Capital expenditures and tenant improvements |  |  | 872,074 |  |  |  | 825,937 |
Total real estate investments |  | $ | 21,924,592 |  |  | $ | 23,230,017 |

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

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8. DISCONTINUED OPERATIONS

In the third quarter of 2012, our Board of Directors authorized us to actively market the Waterman Plaza, 7-Eleven and Casa Grande Apartments. In addition, in the normal course of the model home business, there are several model homes also actively being marketed for sale.

The assets, liabilities and noncontrolling interests of these properties have been classified in their respective held for sale classifications on the condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011. The results of operations for these properties held for sale are presented in discontinued operations on the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2012 and 2011.

The following is a summary of the components of (loss) income from discontinued operations for the three and nine months ended September 30, 2012 and 2011:

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Rental income and other income |  | $ | 257,255 |  |  | $ | 258,492 |  |  | $ | 770,863 |  |  | $ | 731,767 |
Rental operating costs |  |  | 68,573 |  |  |  | 72,704 |  |  |  | 211,898 |  |  |  | 211,641 |
Interest expense |  |  | 60,770 |  |  |  | 59,182 |  |  |  | 183,265 |  |  |  | 185,213 |
Depreciation and amortization |  |  | 41,687 |  |  |  | 59,079 |  |  |  | 164,285 |  |  |  | 177,261 |
Asset impairment |  |  | 358,000 |  |  |  | — |  |  |  | 358,000 |  |  |  | — |
Noncontrolling interests share of earnings |  |  | 25,019 |  |  |  | 17,447 |  |  |  | 62,265 |  |  |  | 42,568 |
(Loss) income from discontinued operations |  | $ | (296,794 | ) |  | $ | 50,080 |  |  | $ | (208,850 | ) |  | $ | 115,084 |

Assets classified as held for sale are required to be carried at the lesser of the net book value of the property or the estimated fair value less selling costs, or net realizable value. Accordingly, we recorded an impairment charge of $358,000 in the quarter ended September 30, 2012.

The following table presents balance sheet information for the properties classified as held for sale as of September 30, 2012 and December 31, 2011:

|  | September 30, |  |  | December 31, |
|  | 2012 |  |  | 2011 |
Assets held for sale: |  |  |  |  |  |
Real estate assets and lease intangibles, net |  | $ | 10,790,139 |  |  | $ | 14,418,673 |
Cash and cash equivalents |  |  | 73,002 |  |  |  | 125,551 |
Other assets, net |  |  | 188,922 |  |  |  | 192,238 |
Assets held for sale |  | $ | 11,052,063 |  |  | $ | 14,736,462 |
Liabilities related to assets held for sale:: |  |  |  |  |  |  |  |
Mortgage notes payable |  | $ | 5,226,914 |  |  | $ | 6,271,008 |
Accounts payable and accrued liabilities |  |  | 94,407 |  |  |  | 169,867 |
Liabilities related to assets held for sale: |  | $ | 5,321,321 |  |  | $ | 6,440,875 |
Noncontrolling interests related to assets held for sale: |  |  |  |  |  |  |  |
Noncontrolling interests related to assets held for sale |  | $ | 1,494,288 |  |  | $ | 1,671,598 |

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9. SUBSEQUENT EVENTS

In October 2012, the Company, through its NetREIT 01 LP partnership, sold its 7-Eleven property to an unrelated buyer. The sales price was approximately $1.9 million resulting in a gain of approximately $0.5 million.

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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 $23.9 to $78.1 million at September 30, 2012. Our investment portfolio, consisting of real estate assets, lease intangibles, land purchase option and mortgages receivable, has increased by 384.1% to approximately $167.5 million at September 30, 2012 from $34.6 million at September 30, 2007. The primary source of funds for the growth in the portfolio during these five years was attributable to the issuance of common stock of approximately $76.5 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. NetREIT Advisors generated fees of approximately $406,000 and $330,000 during the years ended December 30, 2011 and 2010, respectively. During those years this business has been hampered by the slow recovery of the residential building. Housing starts rose in September 2012 to the highest level in four years and there are signs that the surplus in housing supply is dwindling. During 2012 we have seen increasing activity by residential developers and during the nine months ended September 30, 2012 fees generated aggregate approximately $700,000 compared to approximately $350,000 during the same period in 2011. NetREIT Dubose will continue to make additional property acquisitions and we expect revenues less rental operating costs to increase at a far greater rate than their general and administrative expenses.

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Acquisitions during the first nine months of 2012. During the first nine months of 2012 we acquired two net, net, net leased commercial properties with an aggregate value of approximately $7.5 million. In addition, NDMHR and Dubose Model Home #201 LP acquired 34 model homes with an aggregate value of approximately $13.6 million

Economic Environment

The current economic environment is still characterized by residential housing foreclosures and a shadow inventory, although both have decreased during 2012, and a decreasing supply of homes available for purchase, depressed commercial real estate valuations, slowly improving consumer spending, unemployment that has decreased over the last several months although its still remains higher than pre-recessionary levels. In general, U.S. corporations’ net income and investments has shown improvement. The housing sector has been the bright spot in the economy with increases in home sales and prices but has so far not significantly improved. We believe that the pace of the overall recovery will likely be slow and disjointed. Full recovery will need increasing job growth and the economy situation in Europe will need to stablize, 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 and continual increases and slow economic recovery concerns, together with signs of deteriorating sovereign debt conditions in Europe, 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 markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. Although the government announced a Q3 stimulus plan and they intend 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 are pleased that net operating income from our properties, from newly acquired properties, and from the model home division growth, is increasing at a faster rate, approximately 50%, than our general and administrative expenses (20%) due to efficiencies of scale. During the nine months ended September 30, 2012 general and administrative expense represented approximately 26% of total revenue compared to 28% during the same period in 2011. We believe that when all of our properties are operating at stabilized rates, the general and administrative percentage of revenues will continue to decrease.

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.

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As of September 30, 2012, including properties held for sale, the Company owned or had an equity interest in ten office buildings and one industrial building (“Office Properties”) which total approximately 705,000 rentable square feet, four retail shopping centers and a 7-Eleven property (“Retail Properties”) which total approximately 189,000 rentable square feet, six self-storage facilities (“Self-Storage Properties”) which total approximately 581,000 rentable square feet, one 39 unit apartment building and 87 model homes investments owned by eight limited partnerships (“Residential Properties”).

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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 are leased on a six months and month to month basis thereafter for our apartment property and typically 2 to 3 years for our Model Home leases. 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, 2011, as filed with the SEC on March 28, 2012.

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

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RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS

Property Acquisitions

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

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

In January 2011, the Company acquired two model home properties in Texas and leased them back to the home builder. The purchase price for the properties was $0.45 million. The Company paid the purchase price through a cash payment of $.23 million and two promissory notes totaling $0.22 million. There are approximately nine months results of operations included for the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

In February 2011, the Company acquired five model home properties in California and leased them back to the home builder. The purchase price for the properties was $1.5 million. The Company paid the purchase price through a cash payment of $0.75 million and five promissory notes totaling $0.75 million. There are approximately seven months of results of operations included for the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

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In March 2011, the Company acquired four model home properties in South Carolina, Florida and Texas and leased them back to the home builder. The purchase price for the properties was $1.0 million. The Company paid the purchase price through a cash payment of $0.50 million and four promissory notes totaling $0.50 million. There are approximately six months of results of operations included for the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

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

In May 2011, the Company acquired the Dakota Bank Buildings for the purchase price of approximately $9.6 million. The Property is a six-story, two building office complex built in 1981 and 1986 located on 1.58 acres and consists of approximately120,000 rentable square feet in downtown Fargo, North Dakota. The Company made a down payment of approximately $3.875 million and financed the remainder of the purchase price through a monthly adjustable rate mortgage with interest at 3.0% over the one month Libor with an interest rate floor of 5.75% and ceiling of 9.75%. There are approximately four months of results of operations included for the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

In June 2011, NetREIT Dubose acquired three model home properties in Texas and leased them back to the home builder. The purchase price for the properties was approximately $0.60 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $0.30 million and three promissory notes totaling approximately $0.30 million. There are approximately four months of results of operations included for the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

In August 2011, NetREIT Dubose acquired eight model home properties in Texas, Florida, North Carolina and South Carolina and leased them back to the home builder. The purchase price for the properties was approximately $1.9 million. NetREIT Dubose paid the purchase price through a cash payment of approximately $1.0 million and eight promissory notes totaling approximately $0.90 million. There are approximately three results of operations included in the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

In September 2011, the Company acquired the Yucca Valley Retail Center for the purchase price of approximately $6.8 million. The Property is a neighborhood shopping center complex built in approximately 1978 consisting of five separate parcels. The Property consists of approximately 86,000 rentable square feet and is currently 93% leased and anchored by a national chain grocery store. The Company paid the purchase price through a cash payment of approximately $3.5 million and assumed a loan secured by the property of approximately $3.3 million with an interest rate of 5.62%. There are no results of operations included in the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

In December 2011, the Company acquired the Sunrise Self-Storage facility for the purchase price of $2.2 million. The Company paid the purchase price in an all cash transaction. The Property is located within a mixed commercial and industrial area of Hesperia, California. The Property was built in 1985 and 1989 and consists of fourteen (14) one and two-story buildings comprising approximately 93,851 square feet on a 4.93 acre parcel. There are no results of operations included in the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

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In December 2011, the Company completed the formation of a California limited partnership, NetREIT National City Partners, LP, (“NCP”) whereby a limited partner contributed its fee interest in two adjacent multi-tenant industrial properties located in National City, California. The Company contributed approximately $0.5 million cash and 1,649.266 shares of $1,000 liquidation value, 6.3% convertible preferred stock to capitalize the limited partnership. The agreed upon value of the Property was $14.5 million. The Company also contributed $2.9 million cash which was used to pay down the mortgage loan assumed by NCP to a balance of $9.5 million. After completing the transactions, NetREIT has an approximate 75% interest in the NCP and a single unrelated limited partner has an approximate 25% interest. The property, referred to by the Company as the “Port of San Diego Complex”, consists of two adjacent multi-tenant light industrial buildings built in 1971 and was renovated in 2008. The Property is comprised of 6.13 acres and the buildings have 146,700 rentable square feet. As of the date of acquisition, the Property was 51.7% occupied. There are no results of operations included in the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

In December 2011, Dubose Model Home Investor Funds #201, LP acquired one model home properties in South Carolina and leased it back to the home builder. The purchase price for the property was approximately $0.3 million. Dubose Model Home Investor Funds #201, LP paid the purchase price through a cash payment of approximately $0.1 million and promissory note for the balance of the purchase price. There are no results of operations included in the nine months ended September 30, 2011 and nine months results of operations in the nine months ended September 30, 2012.

The Company disposed of the following properties in 2011:

During the twelve months ended December 31, 2011, NetREIT Dubose and the other model home entities disposed of twenty-two model home properties. The sales price, net of selling costs, aggregated approximately $8.5 million and approximately $5.7 million in mortgage notes payable were retired in connection with these sales. The Company recognized a gain of $119,925 related to the sale of these model homes.

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. There are no results of operations included in the nine months ended September 30, 2011 and approximately eight months results of operations included in the nine months ended September 30, 2012.

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 no results of operations included in the nine months ended September 30, 2011 and approximately six months results of operations included in the nine months ended September 30, 2012.

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 remains 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 no results of operations included in the nine months ended September 30, 2011 and approximately five months results of operations included in the nine months ended September 30, 2012.

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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 3 and 6 year anniversaries of the loan. There are no results of operations included in the nine months ended September 30, 2011 and approximately three months results of operations included in the nine months ended September 30, 2012.

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 no results of operations included in the nine months ended September 30, 2011 and approximately three months results of operations included in the nine months ended September 30, 2012.

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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 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 $180,770 related to the sale of these model homes.

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THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011.

Revenues

Total revenue was $4,344,491 for the three months ended September 30, 2012, compared to $3,344,300 for the same period in 2011, an increase of $1,000,191, or 29.9%. The increase in rental income as reported in 2012 compared to 2011 is primarily attributable to:

• | The addition of the six properties acquired in 2011 and 2012 and the addition of the model home properties which generated an additional $783,558 of rent and fee income in the three months ended September 30, 2012 compared to the same period in 2011, including approximately $56,000 increase in rent and fee income from model homes; and
• | An increase of rental income of approximately $51,345 for properties owned for the full three months ended September 30, 2012; and
• | The partial recovery of an amount written off as uncollectible in 2008 of $165,288.

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 2012 and 2011 for an entire year and future acquisitions of real estate assets.

Interest income was $22,277 for the three months ended September 30, 2012, compared to $54,605 for the same period in 2011, a decrease of $32,328, or 59.2%. The decrease was primarily attributable to a decrease in cash balances in 2012 invested in interest bearing accounts.

Rental Operating Expenses

Rental operating expenses were $1,433,570 for the three month period ended September 30, 2012 compared to $1,237,491 for the same period in 2011, an increase of $196,079, or 15.8%. 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 33.0% and 37.0% for the three months ended September 30, 2012 and 2011, respectively. The decrease in operating costs as a percentage of revenue is primarily due to one-time property tax expense reductions resulting from the positive outcome of appealing assessed values.

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 $355,640, to $1,106,966, or 47.3% during the three month period ended September 30, 2012 compared to $751,326 for the same period in 2011. The primary reason for the increase is the mortgage debt additions related to the acquisitions after June 30, 2011 of Yucca Valley Retail Center, the Port of San Diego Complex, the Shoreline Medical Building and additional model home properties. In addition, the Company refinanced its Rangewood Medical Office Property, Regatta Square, Morena Office Center and Pacific Oaks Plaza properties to raise additional cash for anticipated acquisitions.

The weighted average interest rate as of September 30, 2012 was 5.59% compared to 5.64% as of September 30, 2011.

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The following is a summary of our interest expense on loans by property for the three months ended September 30, 2012 and 2011:

|  | Date Acquired |  |  |  |  |  |
|  | or financed |  | 2012 |  |  | 2011 |
Havana/Parker Complex |  | June 2006 |  | $ | 53,182 |  |  | $ | 54,472 |
Garden Gateway Plaza |  | March 2007 |  |  | 142,418 |  |  |  | 146,644 |
World Plaza |  | September 2007 |  |  | — |  |  |  | 41,521 |
Sparky’s Thousand Palms Self-Storage |  | August 2009 |  |  | 60,108 |  |  |  | 61,518 |
Sparky’s Hesperia East Self-Storage |  | December 2009 |  |  | 28,763 |  |  |  | 21,713 |
Dubose Acquisition Partners II, LP |  | March 2010 |  |  | 23,851 |  |  |  | 29,250 |
Dubose Acquisition Partners III, LP |  | March 2010 |  |  | — |  |  |  | 17,285 |
Sparky’s Rialto Self-Storage |  | May 2010 |  |  | 44,566 |  |  |  | 36,392 |
Genesis Plaza |  | August 2010 |  |  | 55,657 |  |  |  | 56,972 |
Dubose Model Home Income Fund #3, LTD (1) |  | December 2010 |  |  | — |  |  |  | (21,520 | )
Dubose Model Home Income Fund #4, LTD (1) |  | December 2010 |  |  | — |  |  |  | (11,186 | )
Dubose Model Home Income Fund #5, LTD |  | December 2010 |  |  | — |  |  |  | 30,465 |
NetREIT Dubose Model Home REIT, Inc. |  | October 2010 |  |  | 124,283 |  |  |  | 73,120 |
Dakota Bank Buildings |  | May 2011 |  |  | 81,968 |  |  |  | 83,512 |
Casa Grande Apartments |  | June 2011 |  |  | 15,006 |  |  |  | 18,165 |
Executive Office Park |  | June 2011 |  |  | 66,032 |  |  |  | 67,070 |
Yucca Valley Retail Center |  | September 2011 |  |  | 46,617 |  |  |  | 6,753 |
Rangewood Medical Office Building |  | December 2011 |  |  | 14,891 |  |  |  | — |
Regatta Square |  | December 2011 |  |  | 15,981 |  |  |  | — |
Dubose Model Home Investor Fund #113, LP |  | December 2011 |  |  | 6,488 |  |  |  | — |
Dubose Model Home Investors #201, LP |  | December 2011 |  |  | 48,652 |  |  |  | — |
Port of San Diego Complex |  | December 2011 |  |  | 142,033 |  |  |  | — |
Morena Office Center |  | May 2012 |  |  | 28,177 |  |  |  | — |
Pacific Oaks Plaza |  | May 2012 |  |  | 19,160 |  |  |  | — |
Shoreline Medical Building |  | June 2012 |  |  | 52,696 |  |  |  | — |
Amortization of deferred financing costs |  |  |  |  | 36,437 |  |  |  | 39,180 |
|  |  |  | $ | 1,106,966 |  |  | $ | 751,326 |

(1) Interest rates on several mortgage notes payable were reduced retroactively in the third quarter of 2011

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General and Administrative Expenses

General and administrative expenses increased by $188,853 to $980,508 for the three months ended September 30, 2012, compared to $791,655 for the same period in 2011. As a percentage of rental and fee income, general and administrative expenses were 22.6% and 23.7% for the three months ended September 30, 2012 and 2011, respectively. In comparing our general and administrative expenses with other REITs, you should take into consideration that we are a self-administered REIT, which means such expenses are greater for us than an advisory administered REIT. We expect general and administrative expenses as a percentage of revenues to continue 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, 2012, our salaries and employee related expenses increased $91,542 to $517,863 compared to $426,321 for the same three months in 2011, an increase of 21.5%. The increase in salary and employee expenses in 2012 was primarily attributable to the inclusion of marketing staff in 2012 whereas in 2011, our marketing staff and related costs were capitalized and amortized against stock issuance costs. This change is the result of NetREIT terminating its capital raising activities through its private placement at the end of 2011. In addition, the Company annually grants salary increases to employees effective January 1 each year. Further, on an annual basis, effective January 1 of each year, the Company grants shares of restricted stock that vest over 3 to 5 years. In the three month period ended September 30, 2012, amortization expense related to an increase in the awards increased by $23,661 to $59,961, compared to $36,300 in the same period last year.

Legal, accounting and public company related expenses and increased by $49,780 to $107,888 for the three months ended September 30, 2012, compared to $58,108 during the same period in 2011. The increase is due to a combination of costs in 2011 being lower than normal and a increase in transfer agent costs.

Insurance related expenses increased by $28,582 to $87,180 for the three months ended September 30, 2012 compared to $58,598 for the same period in 2011. The primary reason for the increase is due to increased group health benefit costs and increased directors and officers insurance premiums.

Other increases to general and administrative costs are also attributable to formerly capitalized costs associated with capital raising activities that are treated as expenses in the current period.

Gain/Loss on Sale of Real Estate Assets

In the three month period ended September 30, 2012, the Company had a net gain on the sale of model home properties of $81,695 compared to a net loss of $32,424 for the same three months of 2011.

Gain on Dissolution of Partnership Interests

DAP III sold its last model home in the period and is in the process of liquidation. The Company received $285,247 in excess of the original investment and has recognized this as income in the three month period ended September 30, 2012.

Discontinued Operations

During the third quarter of 2012, the Company put several of its properties up for sale resulting in the reclassification of operating income and expenses to discontinued operations and also causing the Company to evaluate the held for sale assets on a net realizable value basis resulting in the recognition of $358,000 in impairments in the quarter.

Net Loss

Net loss for the three months ended three months ended September 30, 2012, was $376,418, or $0.02 loss per share, compared to a net loss for the three months ended September 30, 2011 of $417,597, or $0.03 loss per share. The quarter over quarter improvement in the three months ended September 30, 2012was primarily attributable to an increase of rental income over rental operating costs of $804,112 for the three months ended September 30, 2012 compared to the same period last year, the one-time recognition of the gain on dissolution of partnership interests offset by an increase in interest expense of $355,640 and the asset impairment charges of $358,000.

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THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011.

Revenues

Total revenue was $12,192,209 for the nine months ended September 30, 2012, compared to $9,495,478 for the same period in 2011, an increase of $2,696,731, or 28.4%. The increase in rental income as reported in 2012 compared to 2011 is primarily attributable to:

• | The addition of the six properties acquired in 2011 and 2012 and the addition of the model home properties which generated an additional $2,516,872 of rent income in the nine months ended September 30, 2012 compared to the same period in 2011; and
• | An increase of rental of approximately $228,578 for properties owned for the full nine months ended September 30, 2012.
• | A decrease of approximately $214,007 in model home rental and fee income as the older partnerships that are winding down operations have been selling model home properties at a faster rate than we have been adding properties in the current partnerships.
• | The partial recovery of an amount written off as uncollectible in 2008 of $165,288.

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

Interest income was $62,761 for the nine months ended September 30, 2012, compared to $102,196 for the same period in 2011, a decrease of $39,435, or 38.6%. The decrease was primarily attributable to a decrease in 2012 cash balances invested in interest bearing accounts.

Rental Operating Expenses

Rental operating expenses were $3,955,280 for the nine months ended September 30, 2012 compared to $3,447,532 for the same period in 2011, an increase of $507,748, or 14.7%. 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 32.4% and 36.3% for the nine months ended September 30, 2012 and 2011, respectively. The decrease in operating costs as a percentage of revenue is primarily due to one-time property tax expense reductions resulting from the positive outcome of appealing assessed values.

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 $916,259, to $3,037,641 during the nine months ended September 30, 2012 compared $2,121,382 for the same period in 2011. The primary reason for the increase is the mortgage debt additions related to the acquisitions after June 30, 2011 of Yucca Valley Retail Center, the Port of San Diego Complex, the Shoreline Medical Building and additional model home properties. In addition, the Company refinanced its Rangewood Medical Office Property, Regatta Square, Morena Office Center and Pacific Oaks Plaza properties to raise additional cash for anticipated acquisitions.

The weighted average interest rate as of September 30, 2012 was 5.59% compared to 5.64% as of September 30, 2011.

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The following is a summary of our interest expense on loans by property for the nine months ended September 30, 2012 and 2011:

|  | Date Acquired |  |  |  |  |  |
|  | or financed |  | 2012 |  |  | 2011 |
Havana/Parker Complex |  | June 2006 |  | $ | 159,364 |  |  | $ | 162,553 |
Garden Gateway Plaza |  | March 2007 |  |  | 430,479 |  |  |  | 442,967 |
World Plaza |  | September 2007 |  |  | — |  |  |  | 126,124 |
Sparky’s Thousand Palms Self-Storage |  | August 2009 |  |  | 181,394 |  |  |  | 185,573 |
Sparky’s Hesperia East Self-Storage |  | December 2009 |  |  | 82,064 |  |  |  | 64,681 |
Dubose Acquisition Partners II, LP |  | March 2010 |  |  | 76,710 |  |  |  | 100,621 |
Dubose Acquisition Partners III, LP |  | March 2010 |  |  | — |  |  |  | 76,449 |
Sparky’s Rialto Self-Storage |  | May 2010 |  |  | 121,465 |  |  |  | 108,543 |
Genesis Plaza |  | August 2010 |  |  | 167,970 |  |  |  | 171,870 |
Dubose Model Home Income Fund #3, LTD |  | December 2010 |  |  | 1,308 |  |  |  | 49,843 |
Dubose Model Home Income Fund #4, LTD |  | December 2010 |  |  | 2,771 |  |  |  | 35,655 |
Dubose Model Home Income Fund #5, LTD |  | December 2010 |  |  | 349 |  |  |  | 102,988 |
NetREIT Dubose Model Home REIT, Inc. |  | October 2010 |  |  | 305,211 |  |  |  | 183,647 |
Dakota Bank Buildings |  | May 2011 |  |  | 245,287 |  |  |  | 116,287 |
Casa Grande Apartments |  | June 2011 |  |  | 44,904 |  |  |  | 18,165 |
Executive Office Park |  | June 2011 |  |  | 197,309 |  |  |  | 77,285 |
Yucca Valley Retail Center |  | September 2011 |  |  | 140,423 |  |  |  | 6,755 |
Rangewood Medical Office Building |  | December 2011 |  |  | 42,880 |  |  |  | — |
Regatta Square |  | December 2011 |  |  | 47,388 |  |  |  | — |
Dubose Model Home Investor Fund #113, LP |  | December 2011 |  |  | 19,465 |  |  |  | — |
Dubose Model Home Investors #201, LP |  | December 2011 |  |  | 80,314 |  |  |  | — |
Port of San Diego Complex |  | December 2011 |  |  | 424,985 |  |  |  | — |
Morena Office Center |  | May 2012 |  |  | 46,312 |  |  |  | — |
Pacific Oaks Plaza |  | May 2012 |  |  | 31,492 |  |  |  | — |
Shoreline Medical Building |  | June 2012 |  |  | 71,100 |  |  |  | — |
Amortization of deferred financing costs |  |  |  |  | 116,697 |  |  |  | 91,376 |
|  |  |  | $ | 3,037,641 |  |  | $ | 2,121,382 |

General and Administrative Expenses

General and administrative expenses increased by $520,583 to $3,176,778 for the nine months ended September 30, 2012, compared to $2,656,195 for the same period in 2011. As a percentage of rental and fee income, general and administrative expenses were 26.1% and 28.0% for the nine months ended September 30, 2012 and 2011, respectively. In comparing our general and administrative expenses with other REITs, you should take into consideration that we are a self- administered REIT, which means such expenses are greater for us than an advisory administered REIT.

For the nine months ended September 30, 2012, our salaries and employee related expenses increased $179,816 to $1,611,643 compared to $1,431,827 for the same nine months in 2011, an increase of 12.6%. The increase in salary and employee expenses in 2012 was primarily attributable to the inclusion of marketing staff in 2012 whereas in 2011, our marketing staff and related costs were capitalized and amortized against stock issuance costs. These costs include a one-time charge for a marketing staff reduction of $57,000 for severance costs. This change is the result of NetREIT terminating its capital raising activities through its private placement at the end of 2011. In addition, the Company annually grants salary increases to employees effective January 1 each year. Further, on an annual basis, effective January 1 of each year, the Company grants shares of restricted stock that vest over 3 to 5 years. In the nine month period ended September 30, 2012, amortization expense related to an increase in the awards increased by $62,637 to $202,489, compared to $139,852 in the same period last year.

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Legal, accounting and public company related expenses and increased by $50,307 to $367,473 for the nine months ended September 30, 2012, compared to $317,166 during the same period in 2011. The increase is due to our completion of an acquisition audit filing with the SEC and additional professional services for tax compliance for several of our partnerships.

Insurance related expenses increased by $65,238 to $202,489 for the nine months ended September 30, 2012 compared to $188,241 for the same period in 2011. The increase is primarily due to increased Directors and Officer liability premiums as well as increases in group health benefits.

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

Gain/Loss on Sale of Real Estate Assets

In the nine month period ended September 30, 2012, the Company had a net gain on the sale of model home properties of $180,770 compared to a net loss of $56,911 for the same nine months of 2011.

Gain on Dissolution of Partnership Interests

DAP III sold its last model home in the period and is in the process of liquidation. The Company received $285,247 in excess of the original investment and has recognized this as income in the nine months ended September 30, 2012.

Discontinued Operations

During the third quarter of 2012, the Company put several of its properties up for sale resulting in the reclassification of operating income and expenses to discontinued operations and also causing the Company to evaluate the held for sale assets on a net realizable value basis resulting in the recognition of $358,000 in impairments in the quarter.

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Net Loss

Net loss for the nine months ended September 30, 2012 was $1,381,250, or $0.09 loss per share, compared to a net loss for the nine months ended September 30, 2011 of $1,686,801, or $0.12 loss per share. The decrease in net loss of $305,551 in the nine month period ended September 30, 2012 was primarily attributable to an increase of approximately $2,188,983 in income from operations, the one-time recognition of gain on dissolution of partnership interests of $285,247 and an approximate increase of $238,000 gain on sale of real estate assets offset by an increase in interest expense of approximately $916,000 and the asset impairment charges of $358,000.

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LIQUIDITY AND CAPITAL RESOURCES

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

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

Overview

We actively seek investments that are likely to produce income in order to pay distributions as well as long-term gains for our stockholders. Our future sources of liquidity include cash and cash equivalents, cash flows from operations, new mortgages on our unencumbered properties, refinancing of existing mortgages and the possible sale of additional equity securities. Our available liquidity at September 30, 2012 was approximately $19.3 million, including $3.8 million in cash and cash equivalents and an estimated borrowing capacity of approximately $15.8 million from potential mortgages on unencumbered properties. 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. However, we expect to close $8.2 million debt financing during the month of November.

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 proceeds received on sales of properties, is sufficient to pay the debt service costs on our existing mortgages, fund our operating costs in the near term and fund our distribution to stockholders at the current rate. During the nine months ended September 30, 2012 our net cash provided by operating activities was approximately $3.4 million and our cash portion of stockholder distributions was approximately $3.2 million. In the future, if our cash flow from operating 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. During October 2012 we closed the sale of our 7-Eleven property located in Escondido at a gain of $0.5 million and net proceeds of $1.8 million. We intend to complete a 1031 exchange of the proceeds of the sale into an office building that will increase our cash flow as well as increase the potential for appreciation in value. We have identified two other properties and have listed them for sale at this time. We have also identified 10 model home properties held for sale in the normal course of business. We expect to obtain additional mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. 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.

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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 acquisition. The Company is currently in the process of exploring alternatives to raise additional equity. Our ability to access equity markets will be dependent on a number of factors including general market conditions for the REIT industry and market perception of our Company.

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Debt Capital

We obtained approximately $4.2 million during the nine months of 2012 from the proceeds of financing two previously unencumbered properties through mortgage notes with a 4.5% interest rate. The proceeds of these notes were used to acquire additional properties. We anticipate raising additional capital by obtaining loans on our other unencumbered properties without a material increase to our leverage percentage to 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 unencumbered properties and borrowing restrictions that may be imposed by a lender.

Cash and Cash Equivalents

At September 30, 2012, we had approximately $3.9 million in cash and cash equivalents compared to approximately $4.7 million at December 31, 2011. We intend to use this cash for general corporate purposes and distributions to our shareholders.

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

Debt

As of September 30, 2012, including properties held for sale, NetREIT had mortgage notes payable in the aggregate principal amount of $64.0 million, collateralized by a total of 17 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, 2012 was approximately 5.59%. Our debt to book value on these properties is approximately 59.0%. We do not have any mortgage debt balloon principal payments on these properties due during 2012 or 2013.

As of September 30, 2012, including properties held for sale, NetREIT Dubose had 59 fixed-rate mortgage notes payable in the aggregate principal amount of $8.5 million, collateralized by a total of 59 model home properties, an average of approximately $144,000 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, 2012 was 5.67%. Our debt to net book value on these properties is approximately 51%. The Company has guaranteed these promissory notes. The balloon principal payments on the notes payable are in 2015 and 2016 and are typically tied to the end of the lease and sale of the model home securing the debt.

As of September 30, 2012, limited partnerships that the Company has a limited partnership interest in had 23 fixed-rate mortgage note payables in the aggregate principal amount of $5.2 million, collateralized by a total of 23 model home properties, an average of $226,000 per home. The debt to book value on these properties is approximately 58%. All of the free cash flow on these limited partnerships is being held or applied to the loan balances with no distribution to the partners until all homes have been sold. All of the properties will be sold at the end of the lease agreements and we believe that all properties will be sold for more than the mortgage debt balloon amount.

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

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2012 was approximately $3.4 million compared to net cash provided by operating activities of approximately $1.0 for the nine months ended September 30, 2011. The increase of approximately $2.4 million was primarily due to an increase in net operating income of our properties of approximately $.9 million primarily due to the acquisitions acquired during the last nine months of 2011 and a $1.5 million decrease in cash used 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.

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Investing Activities

Net cash used in investing activities was approximately $15.2 million during the nine months ended September 30, 2012, compared to $17.3 million in the same period in 2011. Our acquisitions decreased during the 2012 period to approximately $21.1 million compared to $22.4 million in 2011.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2012 was approximately $10.8 million. The cash provided by financing activities was attributable to the proceeds from mortgage notes payable net of repayments of approximately $12.0 million and distributions on investments in real estate partnerships of $2.1 million. The Company paid approximately $3.2 million in cash distributions to shareholders during the nine months ended September 30, 2012. We do not anticipate the distributions from investments in real estate partnerships be as high as the last nine months. We do anticipate our proceeds from mortgage notes to increase due to financing of unencumbered existing properties and anticipated acquisitions.

Net cash provided by financing activities for the nine months ended September 30, 2011 was approximately $14.5 million, which consisted of approximately $7.8 million net proceeds from the sale and issuance of our common stock and proceeds from mortgage notes payable, net of repayments of approximately $9.3 million. The Company paid approximately $2.6 million in cash distributions to shareholders during the nine months ended September 30, 2011.

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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, 2012 and provides information about the minimum commitments due in connection with our ground lease obligation. Our secured debt agreements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Non-compliance with one or more of the covenants or restrictions could result in the full or partial principal balance of such debt becoming immediately due and payable.

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

|  | Less than |  |  |  |  |  |  |  |  | More than |  |  |  |
|  | a year |  |  | 1-3 Years |  |  | 3-5 Years |  |  | 5 Years |  |  |  |
|  | 2012 |  |  | (2013-2014) |  |  | (2015-2016) |  |  | (After 2016) |  |  | Total |
Principal payments - secured debt |  | $ | 457,621 |  |  | $ | 20,348,976 |  |  | $ | 21,018,727 |  |  | $ | 17,581,879 |  |  | $ | 59,407,203 |
Interest payments - fixed rate debt |  |  | 692,880 |  |  |  | 3,970,358 |  |  |  | 2,252,597 |  |  |  | 2,622,044 |  |  |  | 9,537,879 |
Interest payments - variable rate debt |  |  | 277,736 |  |  |  | 1,359,286 |  |  |  | 862,259 |  |  |  | 3,839,637 |  |  |  | 6,338,918 |
Model home properties - secured debt |  |  | 355,617 |  |  |  | 2,737,420 |  |  |  | 4,275,501 |  |  |  | 5,972,640 |  |  |  | 13,341,178 |
Model home properties - interest payments |  |  | 189,274 |  |  |  | 1,343,920 |  |  |  | 1,154,649 |  |  |  | 114,493 |  |  |  | 2,802,336 |
Ground lease obligation (1) |  |  | 10,955 |  |  |  | 43,820 |  |  |  | 43,820 |  |  |  | 1,271,220 |  |  |  | 1,369,815 |
|  | $ | 1,984,083 |  |  | $ | 29,803,780 |  |  | $ | 29,607,553 |  |  | $ | 31,401,913 |  |  | $ | 92,797,329 |

(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 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 2012. 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 2012. If our net cash provided by operating activities and gains on sale of real estate (assuming we are successful in selling any of our properties) do not exceed our intended distributions to our common shareholders, we would have to borrow funds to pay the distribution or reduce or eliminate the distribution. We consider market factors and our historical and anticipated performance in addition to REIT requirements in determining our distribution levels.

In addition, although U.S. economy has shown a slow recovery during 2012 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, 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.

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Our occupancy for same store, properties held for the total period of September 30, 2011 to September 30, 2012 increased as follows:

|  | 2012 |  |  | 2011 |  |  | Increase |
Office Properties |  |  | 84.1 | % |  |  | 82.5 | % |  |  | 1.6 | %
Retail Properties |  |  | 91.7 | % |  |  | 90.6 | % |  |  | 1.1 | %
Self-Storage Properties |  |  | 64.3 | % |  |  | 63.7 | % |  |  | .6 | %

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

Economic growth rates have shown trends of slow growth in recent periods and inflation rates in the United States have remained low. 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, 2012, we do not have any off-balance sheet arrangements or obligations, including contingent obligations.

Capital Expenditures, Tenant Improvements and Leasing Costs

We currently project that during 2012 we could spend an additional $200,000 to $800,000 in capital improvements, tenant improvements, and leasing costs for properties within our portfolio. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on gross capital expenditures during 2012 compared to 2011 due to rising construction costs, planned improvements on recent acquisitions and the anticipated increase in property acquisitions in 2012. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

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

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

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The following table presents our FFO for the three and nine months ended September 30, 2012 and 2011. FFO should not be considered an alternative to net income (loss), as an indication of our performance, nor is FFO indicative of funds available to fund our cash needs or our ability to make distributions to our shareholders. In addition, FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of debt, each of which may impact the amount of cash available for distribution to our shareholders.

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Net loss |  | $ | (376,418 | ) |  | $ | (417,597 | ) |  | $ | (1,381,250 | ) |  | $ | (1,686,801 | )
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income attributable to noncontrolling interests |  |  | (114,051 | ) |  |  | (57,740 | ) |  |  | (277,159 | ) |  |  | (258,737 | )
Depreciation and amortization |  |  | 1,044,033 |  |  |  | 985,092 |  |  |  | 3,329,026 |  |  |  | 2,937,770 |
Funds from operations adjustments related to discontinued operations (1) |  |  | 374,669 |  |  |  | 41,632 |  |  |  | 460,021 |  |  |  | 134,694 |
Gain on dissolution of partnership interests |  |  | (285,247 | ) |  |  | — |  |  |  | (285,247 | ) |  |  | — |
(Gain) loss on sale of real estate assets |  |  | (81,695 | ) |  |  | 32,424 |  |  |  | (180,770 | ) |  |  | 56,911 |
Funds from Operations |  | $ | 561,291 |  |  | $ | 583,811 |  |  | $ | 1,664,621 |  |  | $ | 1,183,837 |

| (1) | The three and nine months ended September 30, 2012 includes asset impairment charges of $358,000.

FFO decreased in the three month period ended September 30, 2012 by $22,520, or 3.9%, to $561,291 compared to $583,811 for the same period in 2011. For the nine months ended September 30, 2012, FFO increased by $480,784, or 40.6%, to $1,664,621 compared to $1,183,837 for the same period in 2011. The increase in FFO is due to the increase in the Company’s real estate portfolio and improving performance at some of the existing properties.

On a GAAP basis, cash flow provided by operating activities was $3,416,189 and $1,021,166 for the nine months ended September 30, 2012 and 2011, 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 investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

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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, 2012 and 2011.

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Funds from operations |  | $ | 561,291 |  |  | $ | 583,811 |  |  | $ | 1,692,621 |  |  | $ | 1,183,837 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Straight line rent adjustment |  |  | (91,285 | ) |  |  | (104,309 | ) |  |  | (244,337 | ) |  |  | (222,487 | )
Above and below market rents |  |  | 120,116 |  |  |  | 106,094 |  |  |  | 352,783 |  |  |  | 195,401 |
Acquisition costs |  |  | 6,688 |  |  |  | 46,607 |  |  |  | 121,907 |  |  |  | 91,614 |
Modified Funds from Operations |  | $ | 596,810 |  |  | $ | 632,203 |  |  | $ | 1,922,974 |  |  | $ | 1,248,365 |

MFFO decreased in the three month period ended September 30, 2012 by $35,393, or 5.6%, to $596,810 compared to $632,203 for the same period in 2011. For the nine months ended September 30, 2012, MFFO increased by $674,609, or 54.0%, to $1,922,974 compared to $1,248,365 for the same period in 2011. The increase in MFFO is due to the increase in the Company’s real estate portfolio and improving performance at some of the existing properties.

Inflation

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

Segments Disclosure

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4T. CONTROLS AND PROCEDURES

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

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, 2012, the Company also sold 319,270 shares of its common stock to certain of its existing shareholders under its dividend reinvestment plan. The shares were sold directly by the Company without underwriters to a total of 1,491 persons participating in the plan. The Company sold these shares under its registration statement on Form S-3 filed with the Securities and Exchange Commission on January 17, 2012 file number 333-179029.

Issuer Purchases of Equity Securities

There were no issuer purchases of equity securities in the current quarter.

| 1. | The Company does not have a formal policy with respect to a stock repurchase program and typically restricts repurchases to hardship cases only.

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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, 2012.
31.2 |  |  | Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
31.3 |  |  | Certification of the Company’s Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
32.1 |  |  | Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS |  | Instance Document
101.SCH |  | XBRL Taxonomy Extension Schema Document
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document

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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 9, 2012 | NetREIT, Inc. |
| By: | /s/ Jack K. Heilbron |
| Name: Jack K. Heilbron |
| Title: Chief Executive Officer |

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

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