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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 333-91532 (1933 ACT)
BEHRINGER HARVARD REIT I, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 68-0509956
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1323 NORTH STEMMONS FREEWAY, SUITE 210, DALLAS, TEXAS 75207
(Address of principal executive offices)
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (866) 655-1605
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 10, 2003, Behringer Harvard REIT I, Inc. had 456,254 shares of
common stock, $.0001 par value, outstanding.
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BEHRINGER HARVARD REIT I, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
PART I
FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002...............3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2003, the three months ended September 30, 2002 and from inception
(June 28, 2002) through September 30, 2003 and 2002.............................................4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2003 and from inception (June 28, 2002) through September 30, 2003 and 2002.....................5
Notes to Condensed Consolidated Financial Statements...............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................16
ITEM 4. CONTROLS AND PROCEDURES...........................................................................16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................17
ITEM 5. OTHER INFORMATION.................................................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................18
SIGNATURE....................................................................................................19
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------------ ------------------
ASSETS
Cash and cash equivalents $ 186,257 $ 196,290
Restricted cash 2,696,081 -
Prepaid assets 6,225 1,005
------------------ ------------------
TOTAL ASSETS $ 2,888,563 $ 197,295
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to affiliates $ 35,347 $ -
Accrued liabilities 54,659 -
Subscriptions for common stock 2,696,081 -
------------------ ------------------
TOTAL LIABILITIES 2,786,087 -
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value per share;
50,000,000 shares authorized, none outstanding - -
Common stock, $.0001 par value per share;
350,000,000 shares authorized, 20,000
shares issued and outstanding 2 2
Additional paid-in capital 199,998 199,998
Deficit accumulated during the development stage (97,524) (2,705)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 102,476 197,295
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,888,563 $ 197,295
================== ==================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FROM INCEPTION FROM INCEPTION
THREE MONTHS THREE MONTHS NINE MONTHS (JUNE 28, 2002) (JUNE 28, 2002)
ENDED ENDED ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2003 2002
----------------- ----------------- ----------------- ----------------- -----------------
Total revenues $ - $ - $ - $ - $ -
Expenses
General and
administrative 92,938 - 94,824 98,629 -
----------------- ----------------- ----------------- ----------------- -----------------
Total expenses 92,938 - 94,824 98,629 -
----------------- ----------------- ----------------- ----------------- -----------------
Other income
Interest income 1 - 5 1,105 -
----------------- ----------------- ----------------- ----------------- -----------------
Total other income 1 - 5 1,105 -
----------------- ----------------- ----------------- ----------------- -----------------
Net loss $ (92,937) $ - $ (94,819) $ (97,524) $ -
================= ================= ================= ================= =================
Basic and diluted
weighted
average shares
outstanding 20,000 20,000 20,000 20,000 20,000
Basic and diluted loss per
share $ (4.65) $ - $ (4.74) $ (4.88) $ -
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM INCEPTION FROM INCEPTION
NINE MONTHS (JUNE 28, 2002) (JUNE 28, 2002)
ENDED THROUGH THROUGH
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------------ ------------------------ -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (94,819) $ (97,524) $ -
Adjustments to reconcile net loss to
net cash flows from operating activities
Change in prepaid assets (5,220) (6,225) -
Change in due to affiliates 35,347 35,347
Change in accrued liabilities 54,659 54,659
------------------------ ------------------------ -----------------------
CASH USED IN OPERATING ACTIVITIES (10,033) (13,743) -
------------------------ ------------------------ -----------------------
------------------------ ------------------------ -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES - - -
------------------------ ------------------------ -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 200,000 200,000
Proceeds from common stock subscriptions 2,696,081 2,696,081 -
Increase in restricted cash (2,696,081) (2,696,081) -
------------------------ ------------------------ -----------------------
CASH PROVIDED BY FINANCING ACTIVITIES - 200,000 200,000
------------------------ ------------------------ -----------------------
Net change in cash and cash equivalents (10,033) 186,257 200,000
Cash and cash equivalents at beginning of period 196,290 - -
------------------------ ------------------------ -----------------------
Cash and cash equivalents at end of period $ 186,257 $ 186,257 $ 200,000
======================== ======================== =======================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
BEHRINGER HARVARD REIT I, INC.
(A DEVELOPMENT STAGE MARYLAND CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Behringer Harvard REIT I, Inc. (the "Company") was organized in
Maryland in June 2002 and intends to qualify as a real estate investment trust
("REIT") and invest in commercial real estate properties, generally
institutional quality office buildings and other commercial properties, and
lease each such property to one or more tenants. BHR Partners, LLC ("BHR
Partners") and Behringer Harvard Operating Partnership I LP ("Behringer Harvard
OP I") are directly or indirectly wholly owned subsidiaries of the Company,
organized in June 2002. BHR Partners is the limited partner and owner of 99.9%
of the limited partnership interest of Behringer Harvard OP I. The Company is
the general partner and owner of the remaining 0.1% of the limited partnership
interest of Behringer Harvard OP I.
The Company's advisor is Behringer Advisors LP ("Behringer Advisors"),
a Texas limited partnership formed in 2002, which is responsible for managing
the Company's affairs on a day-to-day basis and for identifying and making
acquisitions and investments on its behalf.
As of September 30, 2003, 20,000 shares of the Company's common stock
were issued and outstanding and owned by Behringer Harvard Holdings, LLC, the
Company's parent company, and no shares of preferred stock were issued and
outstanding. The Company currently has no common stock equivalents, such as
stock options, outstanding.
As of September 30, 2003, the Company was in the development stage and
had not begun real estate operations. During October 2003, the Company commenced
operations upon its initial acceptance of subscriptions and the purchase of a
14.4676% undivided tenant in common interest in a 14-story office building in
Bloomington, Minnesota. (See Note 6)
2. PUBLIC OFFERING
On February 19, 2003, the Company's Registration Statement on Form
S-11, covering a public offering (the "Offering") of up to 80,000,000 shares of
common stock to be offered at a price of $10 per share was declared effective
under the Securities Act of 1933. The Registration Statement also covers up to
8,000,000 shares available pursuant to the Company's dividend reinvestment plan
and up to 3,520,000 shares issuable to broker-dealers pursuant to warrants
whereby participating broker-dealers will have the right to purchase one share
for every 25 shares they sell pursuant to the Offering.
On October 1, 2003, the Company satisfied the minimum offering
requirement of $2,500,000 established for the Offering. (See Note 6) All
additional subscription proceeds will be held in escrow until investors are
admitted as stockholders. The Company intends to admit new stockholders at least
monthly. At that time, subscription proceeds may be released to the Company from
escrow and utilized as consideration for investments and the payment or
reimbursement of the dealer manager fee, selling commissions, organization and
offering expenses and operating expenses. Until required for such purposes, net
offering proceeds will be held in short-term, liquid investments.
3. INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements should be
read in conjunction with the Company's Registration Statement on Form S-11, as
amended, which was filed with the Securities and Exchange
6
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States of America ("GAAP"), have been
condensed or omitted in this report on Form 10-Q pursuant to the rules and
regulations of the SEC. In the opinion of management, the disclosures contained
in this report are adequate to make the information presented not misleading.
The results for the interim period shown in this report are not
necessarily indicative of future financial results. The accompanying condensed
consolidated financial statements of the Company as of September 30, 2003 have
not been audited by independent accountants. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments (of a normal recurring nature) necessary to present fairly the
consolidated financial position of the Company as of September 30, 2003 and the
consolidated results of its operations and cash flows for the periods then
ended.
Amounts in previous periods have been reclassified to conform to
current period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
was issued in April 2003 and is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. SFAS No. 149 amends and clarifies financial reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company believes adoption of
SFAS No. 149 will not have a material effect on the financial condition, results
of operations, or liquidity of the Company.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued in May 2003 and is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of SFAS No. 150 did
not have a material effect on the financial condition, results of operations, or
liquidity of the Company.
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities" was issued in January 2003 and FASB Staff Position ("FSP") No. FIN
46-6 "Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities" was issued in October 2003. This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" applies
immediately to variable interest entities created after January 31, 2003, and
applies to the first interim or annual period ending after December 15, 2003 for
entities acquired before February 1, 2003 (as deferred by FSP No. FIN 46-6).
This FIN requires the consolidation of results of variable interest entities in
which the Company is deemed to be the primary beneficiary, as defined. As of
September 30, 2003, the Company did not own an interest in a variable interest
entity and believes adoption of FIN No. 46 will not have a material effect on
the financial condition, results of operations, or liquidity of the Company.
Interests in entities acquired or created after September 30, 2003 will be
evaluated based on FIN No. 46 criteria and consolidation of these interests may
be required.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Below is a discussion of the accounting policies that the Company
considers to be critical in that they may require complex judgment in their
application or require estimates about matters that are inherently uncertain.
7
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions, balances, and profits have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and highly liquid
investments purchased with original maturities of three months or less.
REAL ESTATE
As the Company commences its operations to acquire real estate,
management will continually monitor events and changes in circumstances
indicating that the carrying amounts of the real estate assets in which it
obtains an ownership interest, either directly or through investments in joint
ventures, may not be recoverable. When such events or changes in circumstances
are present, the Company will assess potential impairment by comparing estimated
future undiscounted operating cash flows expected to be generated over the life
of the asset and from its eventual disposition, to the carrying value of the
asset. In the event that the carrying amount exceeds the estimated future
undiscounted operating cash flows, the Company will recognize an impairment loss
to adjust the carrying amount of the asset to its estimated fair value.
REAL ESTATE PURCHASE PRICE ALLOCATION
The Company will record above-market and below-market in-place lease
values for acquired properties based on the present value (using an interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the respective leases. The Company will amortize any
capitalized above-market and below-market lease values as a reduction or
increase of rental income, respectively, over the remaining non-cancelable terms
of the respective leases.
The Company will measure the aggregate value of other real estate
related intangible assets acquired based on the difference between (i) the
property valued with existing in-place leases adjusted to market rental rates
and (ii) the property valued as if vacant. Management's estimates of value are
expected to be made using discounted cash flow analyses or similar methods.
Factors to be considered by management in its analysis include an estimate of
carrying costs during hypothetical expected lease-up periods considering current
market conditions, and costs to execute similar leases. Management will also
consider information obtained about each property as a result of pre-acquisition
due diligence, marketing and leasing activities in estimating the fair value of
the tangible and intangible assets acquired. In estimating carrying costs,
management will also include real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during the expected
lease-up periods. Management will also estimate costs to execute similar leases
including leasing commissions, legal and other related expenses to the extent
that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
8
The total amount of other real estate related intangible assets
acquired will be further allocated to in-place lease values and customer
relationship intangible values 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 to be considered by management in
allocating these values include the nature and extent of existing business
relationships with the tenant, growth prospects for developing new business with
the tenant, the tenant's credit quality and expectations of lease renewals
(including those existing under the terms of the lease agreement), among other
factors.
The Company will amortize the value of in-place leases to expense over
the initial term of the respective leases. The value of customer relationship
intangibles will be amortized to expense over the initial term and any renewal
periods in the respective leases, but in no event will the amortization period
for intangible assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of the in-place
lease value and customer relationship intangibles would be charged to expense.
INCOME TAXES
The Company currently accounts for income taxes in accordance with
Statement of Financial Accounting Standards 109, ACCOUNTING FOR INCOME TAXES
("SFAS 109"). Under the liability method of SFAS 109, deferred taxes are
determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect in the years
the differences are expected to reverse. Currently, the Company has a deferred
tax asset related to a loss carryforward of approximately $14,000. This deferred
tax asset has been fully reserved for as the Company anticipates qualifying as a
REIT.
The Company's management will evaluate plans to make an election to be
taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code,
effective for the Company's taxable year ending December 31, 2003 or 2004. The
Company believes that, commencing with the taxable year for which such election
is made, it will be organized and will operate in such a manner as to qualify
for taxation as a REIT under the Internal Revenue Code, and it intends to
continue to operate in such a manner, but no assurance can be given that it will
operate in a manner so as to qualify or remain qualified as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on income that it distributes
currently to its stockholders.
REVENUE RECOGNITION
The Company will recognize rental income generated from all leases on
real estate assets in which it will have an ownership interest, either directly
or through investments in joint ventures, on a straight-line basis over the
terms of the respective leases unless significant collection problems occur with
the lessee, at which time rents will be recognized on a cash basis. Contingent
rent will be recognized as revenue after the related lease sales targets are
achieved.
OPERATING COST REIMBURSEMENTS
The Company will bill tenants for operating cost reimbursements in
accordance with the respective lease terms, either directly or through
investments in joint ventures, on a monthly basis at amounts estimated largely
on actual prior period activity. Such billings will be adjusted on an annual
basis as necessary, based on the actual costs incurred during the period and the
respective lease terms.
DEFERRED PROJECT COSTS
The Company's advisor will be paid an acquisition and advisory fee of
3.0% of the contract price of each investment. In addition, the Company will
reimburse its advisor for investment acquisition expenses in an amount
9
of up to 0.5% of the contract price of the Company's investments (subject to
certain overall limitations described in the Company's Registration Statement on
Form S-11). Pending such reimbursement, the Company's advisor will bear such
expenses, and will bear such expense to the extent they exceed 0.5% of the
contract price of the Company's investments. As the Company invests its capital
proceeds, these costs will be capitalized to real estate assets, either directly
or through contributions to joint ventures, at an amount up to 3.5% of the
contract price of each investment in respect of the acquisition and advisory fee
and acquisition expenses and depreciated over the useful lives of the respective
real estate assets.
DEFERRED OFFERING COSTS
The Company's advisor expects to continue to fund, on the Company's
behalf, all of the organization and offering costs and will be reimbursed for
such organization and offering costs up to 2.5% of cumulative capital raised by
the Company in its current public offering. Organization and offering costs
include items such as legal and accounting fees, marketing, promotional and
printing costs, and specifically exclude selling commissions and the dealer
manager fee. The Company will be required to repay the Company's advisor, at an
amount equal to the lesser of 2.5% of cumulative capital raised or actual costs
incurred by third parties less previous reimbursements paid to the advisor. All
offering costs will be recorded as an offset to additional paid-in capital, and
all organization costs will be recorded as an expense when the Company becomes
liable for the payment of these amounts.
CONCENTRATION OF CREDIT RISK
At September 30, 2003, the Company had cash and cash equivalents and
restricted cash on deposit in two financial institutions in excess of federally
insured levels. The Company regularly monitors the financial stability of these
financial institutions and does not believe it is exposed to any significant
credit risk on cash and restricted cash.
5. RELATED PARTY ARRANGEMENTS
Certain affiliates of the Company will receive fees and compensation in
connection with the Offering, and the acquisition, management and sale of the
assets of the Company. Behringer Securities LP ("Behringer Securities"), the
affiliated dealer manager, will receive a commission of up to 7.0% of gross
offering proceeds before reallowance of commissions earned by participating
broker-dealers. In addition, up to 2.5% of gross proceeds before reallowance to
participating broker-dealers will be paid to Behringer Securities as a dealer
manager fee; provided that Behringer Securities will receive 1.0% of the gross
proceeds of purchases pursuant to the Company's dividend reinvestment plan.
Behringer Securities will reallow all of its commission of 7.0% of gross
offering proceeds to participating broker-dealers and may reallow a portion of
its dealer manager fee of up to 1.5% of the gross offering proceeds to be paid
to such participating broker-dealers as marketing fees, including bona fide
conference fees incurred, and due diligence expense reimbursement.
Behringer Advisors, the affiliated advisor for the Company, or its
affiliates, may receive up to 2.5% of gross offering proceeds for reimbursement
of organization and offering expenses. All organization and offering expenses
(excluding selling commissions and the dealer manager fee) are being funded by
Behringer Advisors or its affiliates and may be reimbursed by the Company for up
to 2.5% of gross offering proceeds. As of September 30, 2003, Behringer Advisors
or its affiliates had incurred $2,465,486 of organization and offering expenses
on behalf of the Company. Behringer Advisors or its affiliates determines the
amount of organization and offering expenses owed to Behringer Advisors based on
specific invoice identification as well as an allocation of costs to the Company
and Behringer Harvard Mid-Term Value Enhancement Fund I LP and Behringer Harvard
Short-Term Opportunity Fund I LP, affiliates of the Company, based on
anticipated equity offering size. Behringer Advisors or its affiliates also will
receive acquisition and advisory fees of up to 3.0% of the contract purchase
price of each asset for the acquisition, development or construction of real
property or, with respect to any mortgage loan, up to 3.0% of the funds advanced
for the purchase or making of a mortgage. Behringer Advisors or its affiliates
may also
10
receive up to 0.5% of the contract purchase price of each asset or, with respect
to the making or purchase of a mortgage loan, up to 0.5% of the funds advanced,
for reimbursement of expenses related to making investments.
The Company expects to pay HPT Management LP, its property manager,
fees for the management and leasing of the Company's properties. Such fees are
expected to equal 3.0% of gross revenues plus leasing commissions based upon the
customary leasing commission applicable to the geographic location of the
respective property.
The Company will pay Behringer Advisors an annual advisor asset
management fee of 0.5% of aggregate asset value. Any portion of the asset
management fee may be deferred and paid in a subsequent year.
Behringer Advisors or its affiliates also will be paid fees if the
advisor provides a substantial amount of services, as determined by the
Company's independent directors, in connection with the sale of one or more
properties. In such event, the Company will pay the advisor an amount not
exceeding the lesser of: (A) one-half of the brokerage commission paid, or (B)
3.0% of the sales price of each property sold, provided that such fee will be
subordinated to distributions to investors from sale proceeds of an amount
which, together with prior distributions to the investors, will equal (1) 100.0%
of their capital contributions plus (2) a 9.0% annual, cumulative,
non-compounded return on their capital contributions. Subordinated disposition
fees that are not payable at the date of sale, because investors have not yet
received their required minimum distributions, will be deferred and paid at such
time as these subordination conditions have been satisfied. In addition, after
investors have received a return on their net capital contributions and a 9.0%
annual, cumulative, non-compounded return, then Behringer Advisors is entitled
to 15.0% of remaining net sale proceeds. Subordinated participation in net sale
proceeds that are not payable at the date of sale, because investors have not
yet received their required minimum distribution, will be deferred and paid at
such times as the subordination conditions have been satisfied.
Upon listing of the Company's common stock on a national securities
exchange or included for quotation on the Nasdaq Stock Market, a listing fee
equal to 15.0% of the amount by which the market value of the Company's
outstanding stock plus distributions paid by the Company prior to listing,
exceeds the sum of the total amount of capital raised from investors and the
amount of cash flow necessary to generate a 9.0% annual, cumulative,
non-compounded return to investors will be paid to Behringer Advisors. Upon
termination of the Advisory Agreement with Behringer Advisors, a performance fee
of 15.0% of the amount by which the Company's appraised asset value at the time
of such termination exceeds the aggregate capital contributions contributed by
investors plus payment to investors of a 9.0% annual, cumulative, non-compounded
return on the capital contributed by investors will be paid to Behringer
Advisors as a performance fee. No performance fee will be paid if the Company
has already paid or become obligated to pay Behringer Advisors a listing fee.
The Company will reimburse Behringer Advisors for all expenses it pays
or incurs in connection with the services it provides to the Company, subject to
the limitation that the Company will not reimburse for any amount by which the
advisor's operating expenses (including the asset management fee) at the end of
the four preceding fiscal quarters exceeds the greater of: (i) 2.0% of the
Company's average invested assets, or (ii) 25.0% of the Company's net income
other than any additions to reserves for depreciation, bad debts or other
similar non-cash reserves and any gain from the sale of the Company's assets for
that period.
6. SUBSEQUENT EVENTS
The Company commenced its initial public offering of shares of common
stock on February 19, 2003. Until subscriptions aggregating at least $2,500,000
were received and accepted, all subscription proceeds were placed in escrow
pursuant to the terms of an escrow agreement with Wells Fargo Bank Iowa, N.A.
The conditions of the escrow agreement were satisfied on October 1, 2003.
Through November 10, 2003, the Company has accepted subscriptions and issued
436,254 shares of its common stock to stockholders with gross proceeds of
$4,358,140 distributed to the Company. In addition, there are special escrow
accounts established under the escrow agreement for subscriptions from residents
of Nebraska and Pennsylvania. The conditions of these special escrow
11
accounts have not been satisfied as of November 10, 2003 and, therefore, the
Company has not accepted subscriptions from residents of those states. Of the
$4,358,140 distributed to the Company, $300,975 and $108,954 was paid to
Behringer Securities for commissions and dealer manager fees, respectively, and
$108,954 was paid to Behringer Advisors for reimbursement of organization and
offering expenses. Behringer Securities reallowed all of the commissions to
participating broker-dealers and reallowed $21,742 of the dealer manager fees to
participating broker-dealers as marketing fees, including bona fide conference
fees incurred, and due diligence expense reimbursement. Net proceeds to the
Company as of November 10, 2003 were $3,839,257 after payment of such fees and
expenses.
On October 1, 2003, the Company's board of directors declared a cash
dividend as of each day of the period commencing October 1, 2003 and ending on
December 31, 2003 (each a "record date"), with the amount of the dividend
payable on each record date to be equal to $.0019178 per common share, which is
equivalent to an annual dividend rate of 7.0%. The dividend will be paid on a
monthly basis on or before the 15th day of each month for dividends declared in
the preceding month.
On October 15, 2003, the Company acquired an undivided 14.4676% tenant in
common interest in Minnesota Center, a 14-story office building containing
approximately 276,425 rentable square feet and located on approximately four
acres of land in Bloomington, Minnesota. The total purchase price of Minnesota
Center was approximately $41,682,000, including preliminary closing costs of
approximately $921,800. The cost for the Company's interest was approximately
$6,500,000, including the Company's proportionate share of the preliminary
closing costs, loan fees, and the 3.5% aggregate of the acquisition fee and
acquisition reimbursment due to Behringer Advisors. The Company used borrowings
of $4,340,280 under a Loan Agreement (the "Loan Agreement") with Greenwich
Capital Financial Products, Inc. (the "Lender") to pay a portion of such
purchase price and paid the remaining purchase price from proceeds of the sale
of the Company's common stock in the Offering. The Company's tenant in common
interest is held by Behringer Harvard Minnesota Center TIC II, LLC, a new
special single purpose Delaware limited liability company wholly owned by the
Company's operating partnership, Behringer Harvard OP I. The remaining tenant in
common interests in Minnesota Center were acquired by various investors who
purchased their interests in a private offering sponsored by the Company's
affiliate, Behringer Harvard Holdings, LLC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the accompanying financial statements of the Company and the notes thereto:
FORWARD-LOOKING STATEMENTS
This section contains forward-looking statements, including discussion
and analysis of the Company's financial condition, anticipated capital
expenditures required to complete projects, amounts of anticipated cash
distributions to the Company's stockholders in the future and other matters.
These forward-looking statements are not historical facts but are the intent,
belief or current expectations of the Company's business and industry. Words
such as "anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of
the future performance and are subject to risks, uncertainties and other
factors, some of which are beyond the Company's control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may
ultimately prove to be incorrect or false. You are cautioned to not place undue
reliance on forward-looking statements, which reflect the Company's management's
view only as of the date of this Form 10-Q. The Company undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any
forward-looking statements made in this Form 10-Q include changes in general
economic conditions, changes in real estate
12
conditions, construction costs which may exceed estimates, construction delays,
increases in interest rates, lease-up risks, inability to obtain new tenants
upon the expiration of existing leases, and the potential need to fund tenant
improvements or other capital expenditures out of operating cash flow. The
forward-looking statements should be read in light of these factors and the
factors identified in the "Risk Factors" section of the Company's Registration
Statement on Form S-11 filed with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Below is a discussion of the accounting policies that the Company
considers to be critical in that they may require complex judgment in their
application or require estimates about matters that are inherently uncertain.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
REAL ESTATE
As the Company commences its operations to acquire real estate,
management will continually monitor events and changes in circumstances
indicating that the carrying amounts of the real estate assets in which it
obtains an ownership interest, either directly or through investments in joint
ventures, may not be recoverable. When such events or changes in circumstances
are present, the Company will assess potential impairment by comparing estimated
future undiscounted operating cash flows expected to be generated over the life
of the asset and from its eventual disposition, to the carrying value of the
asset. In the event that the carrying amount exceeds the estimated future
undiscounted operating cash flows, the Company will recognize an impairment loss
to adjust the carrying amount of the asset to its estimated fair value.
REAL ESTATE PURCHASE PRICE ALLOCATION
The Company will record above-market and below-market in-place lease
values for acquired properties based on the present value (using an interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the respective leases. The Company will amortize any
capitalized above-market and below-market lease values as a reduction or
increase of rental income, respectively, over the remaining non-cancelable terms
of the respective leases.
The Company will measure the aggregate value of other real estate
related intangible assets acquired based on the difference between (i) the
property valued with existing in-place leases adjusted to market rental rates
and (ii) the property valued as if vacant. Management's estimates of value are
expected to be made using discounted cash flow analyses or similar methods.
Factors to be considered by management in its analysis include an estimate of
carrying costs during hypothetical expected lease-up periods considering current
market conditions, and costs to execute similar leases. Management will also
consider information obtained about each property as a result of pre-acquisition
due diligence, marketing and leasing activities in estimating the fair value of
the tangible and intangible assets acquired. In estimating carrying costs,
management will also include real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during the expected
lease-up periods. Management will also estimate costs to execute similar leases
including leasing commissions, legal and other related expenses to the extent
that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
13
The total amount of other real estate related intangible assets
acquired will be further allocated to in-place lease values and customer
relationship intangible values 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 to be considered by management in
allocating these values include the nature and extent of existing business
relationships with the tenant, growth prospects for developing new business with
the tenant, the tenant's credit quality and expectations of lease renewals
(including those existing under the terms of the lease agreement), among other
factors.
The Company will amortize the value of in-place leases to expense over
the initial term of the respective leases. The value of customer relationship
intangibles will be amortized to expense over the initial term and any renewal
periods in the respective leases, but in no event will the amortization period
for intangible assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of the in-place
lease value and customer relationship intangibles would be charged to expense.
INCOME TAXES
The Company currently accounts for income taxes in accordance with
Statement of Financial Accounting Standards 109, ACCOUNTING FOR INCOME TAXES
("SFAS 109"). Under the liability method of SFAS 109, deferred taxes are
determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect in the years
the differences are expected to reverse. Currently, the Company has a deferred
tax asset related to a loss carryforward of approximately $14,000. This deferred
tax asset has been fully reserved for as the Company anticipates qualifying as a
REIT.
The Company's management will evaluate plans to make an election to be
taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code,
effective for the Company's taxable year ending December 31, 2003 or 2004. The
Company believes that, commencing with the taxable year for which such election
is made, it will be organized and will operate in such a manner as to qualify
for taxation as a REIT under the Internal Revenue Code, and it intends to
continue to operate in such a manner, but no assurance can be given that it will
operate in a manner so as to qualify or remain qualified as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on income that it distributes
currently to its stockholders.
REVENUE RECOGNITION
The Company will recognize rental income generated from all leases on
real estate assets in which it will have an ownership interest, either directly
or through investments in joint ventures, on a straight-line basis over the
terms of the respective leases unless significant collection problems occur with
the lessee, at which time rents will be recognized on a cash basis. Contingent
rent will be recognized as revenue after the related lease sales targets are
achieved.
OPERATING COST REIMBURSEMENTS
The Company will bill tenants for operating cost reimbursements in
accordance with the respective lease terms, either directly or through
investments in joint ventures, on a monthly basis at amounts estimated largely
on actual prior period activity. Such billings will be adjusted on an annual
basis as necessary, based on the actual costs incurred during the period and the
respective lease terms.
DEFERRED PROJECT COSTS
The Company's advisor will be paid an acquisition and advisory fee of
3.0% of the contract price of each investment. In addition, the Company will
reimburse its advisor for investment acquisition expenses in an amount
14
of up to 0.5% of the contract price of the Company's investments (subject to
certain overall limitations described in the Company's Registration Statement on
Form S-11). Pending such reimbursement, the Company's advisor will bear such
expenses, and will bear such expense to the extent they exceed 0.5% of the
contract price of the Company's investments. As the Company invests its capital
proceeds, these costs will be capitalized to real estate assets, either directly
or through contributions to joint ventures, at an amount up to 3.5% of the
contract price of each investment in respect of the acquisition and advisory fee
and acquisition expenses and depreciated over the useful lives of the respective
real estate assets.
DEFERRED OFFERING COSTS
The Company's advisor expects to continue to fund, on the Company's
behalf, all of the organization and offering costs and will be reimbursed for
such organization and offering costs up to 2.5% of cumulative capital raised by
the Company in its current public offering. Organization and offering costs
include items such as legal and accounting fees, marketing, promotional and
printing costs, and specifically exclude selling commissions and the dealer
manager fee. The Company will be required to repay the Company's advisor, at an
amount equal to the lesser of 2.5% of cumulative capital raised or actual costs
incurred by third parties less previous reimbursements paid to the advisor. All
offering costs paid by the Company will be recorded as an offset to additional
paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
The amount of dividends to be distributed to the Company's stockholders
will be determined by its board of directors and is dependent on a number of
factors, including funds available for payment of dividends, financial
condition, capital expenditure requirements and annual distribution requirements
needed to maintain the Company's status as a REIT under the Internal Revenue
Code. Operating cash flows are expected to increase as additional properties are
added to the Company's investment portfolio.
The Company's principal demands for funds will be for property
acquisitions, either directly or through investment interests, for mortgage loan
investments, for the payment of operating expenses and dividends, and for the
payment of interest on the Company's outstanding indebtedness and other
investments. Generally, cash needs for items other than property acquisitions
and mortgage loan investments are expected to be met from operations, and cash
needs for property acquisitions are expected be met from the Company's current
public offering of up to 88,000,000 shares of common stock at $10 per share.
However, there may be a delay between the sale of the Company's shares and its
purchase of properties and mortgage loan investments, which could result in a
delay in the benefits to its stockholders, if any, of returns generated from the
Company's operations. The Company expects that at least 84.2% of the money that
stockholders invest will be used to buy real estate, make or invest in mortgage
loans or make other investments and approximately 0.8% of the gross proceeds of
the offering will be set aside as initial working capital reserves for such
properties. The remaining 15.0% will be used to pay expenses and fees for
selling commissions and dealer manager fees, organization and offering expenses,
acquisition and advisory fees and acquisition expenses. The Company's advisor
evaluates potential property acquisitions and mortgage loan investments and
engages in negotiations with sellers and borrowers on the Company's behalf.
Investors should be aware that after a purchase contract is executed that
contains specific terms, the property will not be purchased until the successful
completion of due diligence and negotiation of final binding agreements. During
this period, the Company may decide to temporarily invest any unused proceeds
from the Offering in certain investments that could yield lower returns than the
properties. These lower returns may affect the Company's ability to make
distributions.
Potential future sources of capital include proceeds from secured or
unsecured financings from banks or other lenders, proceeds from the sale of
properties and undistributed funds from operations. If necessary, the Company
may use financings or other sources of capital in the event of unforeseen
significant capital expenditures.
15
RESULTS OF OPERATIONS
As of the date of this Form 10-Q, no significant operations have
commenced because the Company is in its development stage. Operations commenced
in October 2003 with the Company's satisfaction of the minimum offering
requirement established for its Offering and the purchase of a 14.4676%
undivided tenant in common interest in a 14 story office building in
Bloomington, Minnesota. The Company's management is not aware of any material
trends or uncertainties, other than national economic conditions affecting real
estate generally, that may reasonably be expected to have a material impact,
favorable or unfavorable, on revenues from the acquisition and operations of
real properties and mortgage loans, other than those referred to in this Form
10-Q and the Company's Form S-11.
INFLATION
The real estate market has not been affected significantly by inflation
in the past several years due to the relatively low inflation rate. However, the
Company intends to include provisions in the majority of its tenant leases that
would protect it from the impact of inflation. These provisions include
reimbursement billings for common area maintenance charges, real estate tax and
insurance reimbursements on a per square foot basis, or in some cases, annual
reimbursement of operating expenses above a certain per square foot allowance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has limited exposure to financial market risks, including
changes in interest rates and other relevant market prices. The Company does not
have any foreign operations and is not exposed to foreign currency fluctuations.
Currently, the Company's cash and cash equivalents and restricted cash
balances at financial institutions represent the majority of the Company's
assets. A 10.0% increase or decrease in interest rates would have no material
affect on the Company's financial position and results of operations.
ITEM 4. CONTROLS AND PROCEDURES.
The Chief Executive Officer and Chief Financial Officer of the Company
have concluded, based on their evaluation as of the period ended September 30,
2003, that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
filed or submitted by it under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time period specified
in the SEC's rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the Company's internal controls
that could significantly affect these controls subsequent to the date of such
evaluation.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by this report that would
require a response to this item.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 19, 2003, the Company's Registration Statement on Form
S-11, covering a public offering (the "Offering") of up to 80,000,000 shares of
common stock to be offered at a price of $10 per share was declared effective
under the Securities Act of 1933. The Registration Statement also covers up to
8,000,000 shares available pursuant to the Company's dividend reinvestment plan
and up to 3,520,000 shares issuable to broker-dealers pursuant to warrants
whereby participating broker-dealers will have the right to purchase one share
for every 25 shares they sell pursuant to the Offering. The Offering is a best
efforts continuous offering which terminates no later than February 18, 2005.
From the effective date of the Offering through September 30, 2003, the
Company incurred costs of $317,105 in connection with the issuance and
distribution of shares of common stock in the Offering, including fees and
commissions.
On October 1, 2003, the Company satisfied the minimum offering
requirement of $2,500,000 established for the Offering. All additional
subscription proceeds will be held in escrow until investors are admitted as
stockholders. The Company intends to continue to admit new stockholders at least
monthly. At that time, subscription proceeds may be released to the Company from
escrow and utilized as consideration for investments and the payment or
reimbursement of the dealer manager fee, selling commissions and other
organization and offering expenses. Until required for such purposes, net
offering proceeds will be held in short-term, liquid investments. Amounts
associated with non-admitted subscriptions are reflected in Restricted cash and
Subscriptions for common stock on the Company's balance sheets.
Through November 10, 2003, the Company has accepted subscriptions and
issued 436,254 shares of its common stock to stockholders with gross proceeds of
$4,358,140 distributed to the Company. Of the $4,358,140 distributed to the
Company, $300,975 and $108,954 was paid to Behringer Securities for commissions
and dealer manager fees, respectively, and $108,954 was paid to Behringer
Advisors for reimbursement of organization and offering costs. Behringer
Securities reallowed all of the commissions to participating broker-dealers and
reallowed $21,742 of the dealer manager fees to participating broker-dealers as
marketing fees, including bona fide conference fees incurred, and due diligence
expense reimbursement. Net proceeds to the Company as of November 10, 2003 were
$3,839,257 after payment of such fees and expenses.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by this report that would
require a response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No events occurred during the quarter covered by this report that would
require a response to this item.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by this report that would
require a response to this item.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 31.1 - Certification of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 - Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 - Certificate of Chief Executive and Financial
Officers
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2003.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEHRINGER HARVARD REIT I, INC.
Dated: November 14, 2003. By: /s/ Gary S. Bresky
-------------------------------------
Gary S. Bresky
Chief Financial Officer and Treasurer
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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive and Financial Officers
20