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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 MARCH 31, 2004
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 (I.R.S. Employer
incorporation or 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 May 10, 2004, Behringer Harvard REIT I, Inc. had 2,965,073 shares of
common stock, $.0001 par value, outstanding.
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BEHRINGER HARVARD REIT I, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
PART I
FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003.............................3
Consolidated Statements of Operations for the three months ended March 31, 2004 and March
31, 2003........................................................................................4
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and March
31, 2003........................................................................................5
Notes to Consolidated Financial Statements.........................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................18
ITEM 4. CONTROLS AND PROCEDURES...........................................................................18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................................................20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................20
ITEM 5. OTHER INFORMATION.................................................................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................21
SIGNATURE....................................................................................................22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEHRINGER HARVARD REIT I, INC.
Consolidated Balance Sheets
(Unaudited)
MARCH 31, DECEMBER 31,
2004 2003
--------------------- ---------------------
ASSETS
Cash and cash equivalents $ 11,182,117 $ 5,146,856
Restricted cash 5,397,838 10,492
Prepaid expenses and other assets 1,463,129 77,837
Investment in tenant in common interest 6,247,804 6,359,823
Deferred financing fees, net of accumulated amortization of
$6,005 and $2,730, respectively 86,258 89,533
--------------------- ---------------------
TOTAL ASSETS $ 24,377,146 $ 11,684,541
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage payable $ 4,320,700 $ 4,332,656
Accounts payable - 18,068
Payables to affiliates - 76,608
Dividends payable 113,047 41,994
Accrued liabilities 57,923 133,867
Subscriptions for common stock 2,896,563 9,977
--------------------- ---------------------
TOTAL LIABILITIES 7,388,233 4,613,170
COMMITMENTS AND CONTINGENCIES
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, 2,014,075 and
843,878 shares issued and outstanding at March 31,
2004 and December 31, 2003, respectively 201 84
Additional paid-in capital 17,786,399 7,454,733
Cumulative distributions in excess of net income (797,687) (383,446)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 16,988,913 7,071,371
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,377,146 $ 11,684,541
===================== =====================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------------------- --------------------------
Total revenues $ - $ -
Expenses
Interest 70,908 -
Property and asset management fees 14,131 -
General and administrative 122,521 1,596
-------------------------- --------------------------
Total expenses 207,560 1,596
-------------------------- --------------------------
Interest income 25,105 1,527
-------------------------- --------------------------
Net loss before equity in earnings of
investment in tenant in common interest (182,455) (69)
Equity in earnings of investment
in tenant in common interest 34,073 -
-------------------------- --------------------------
Net loss $ (148,382) $ (69)
========================== ==========================
Basic and diluted weighted
average shares outstanding 1,510,520 20,000
Basic and diluted loss per share $ $ (0.10) $ (0.00)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------------------- --------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (148,382) $ (69)
Adjustments to reconcile net loss to net cash
flows (used in) provided by operating activities
Amortization of deferred financing fees 3,275 -
Equity in earnings of investment in tenant in
common interest (34,073) -
Change in prepaid expenses and other assets 29,708 555
Change in accounts payable (18,068) -
Change in accrued liabilities (75,944) -
-------------------------- --------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (243,484) 486
-------------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Escrow deposits on properties to be acquired (1,415,000) -
Distributions from investments 146,092 -
-------------------------- --------------------------
CASH USED IN INVESTING ACTIVITIES (1,268,908) -
-------------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on mortgage notes (11,956) -
Issuance of common stock 11,398,471 -
Offering costs (1,150,049) -
Dividends (111,445) -
Change in subscriptions for common stock 2,886,586 -
Change in restricted cash (5,387,346) -
Change in payables to affiliates (76,608) -
-------------------------- --------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 7,547,653 -
-------------------------- --------------------------
Net change in cash and cash equivalents 6,035,261 486
Cash and cash equivalents at beginning of period 5,146,856 196,290
-------------------------- --------------------------
Cash and cash equivalents at end of period $ 11,182,117 $ 196,776
========================== ==========================
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 67,633 $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued in dividend reinvestment $ 83,363 $ -
Dividends payable in common stock under dividend
reinvestment program 44,187 -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
BEHRINGER HARVARD REIT I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Behringer Harvard REIT I, Inc. (the "Company") is a Maryland corporation
formed in June 2002, which intends to qualify as a real estate investment trust
("REIT"). The Company was organized to 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. The
Company is currently offering its common stock pursuant to the public offering
which commenced on February 19, 2003 (the "Offering") and is described below.
Substantially all of the Company's business is conducted through
Behringer Harvard Operating Partnership I LP ("Behringer OP I"), a Texas limited
partnership organized in 2002. The Company is the owner of a 0.1% interest in
Behringer OP I as its general partner. The remaining 99.9% of Behringer OP I is
held as a limited partner's interest by BHR Partners, LLC ("BHR Partners"), a
Delaware limited liability company which is a wholly owned subsidiary of the
Company.
The Company's advisor is Behringer Advisors LP ("Behringer Advisors"), a
Texas limited partnership formed in 2002. Behringer Advisors is an affiliate of
the Company. Behringer Advisors is responsible for managing the Company's
affairs on a day-to-day basis and for identifying and making acquisitions and
investments on behalf of the Company.
2. PUBLIC OFFERING
On February 19, 2003, the Company commenced the Offering of up to
80,000,000 shares of common stock offered at a price of $10 per share pursuant
to a Registration Statement on Form S-11 filed 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 ("Offering Warrants"). The Offering is a best
efforts continuous offering that terminates no later than February 19, 2005
(except for the offering of shares under the Company's dividend reinvestment
plan, which is anticipated to be extended).
As of March 31, 2004, the Company had accepted subscriptions for
2,014,075 shares of its common stock, including 20,000 shares owned by Behringer
Harvard Holdings, LLC. As of March 31, 2004, individual broker-dealers had the
right to acquire up to 79,763 Offering Warrants for a nominal fee, however, none
had been issued. These Offering Warrants allow the broker-dealer to purchase the
common stock at $12.00 per share and are effective at the time the Offering
Warrants are acquired. As of March 31, 2004, the Company had no shares of
preferred stock issued and outstanding and no stock options had been issued.
The Company admits new stockholders pursuant to the Offering at least
monthly. All subscription proceeds are held in escrow until the subscribing
investors are admitted as stockholders. Upon admission of new stockholders,
subscription proceeds are released to the Company from escrow and may be
utilized as consideration for investments and the payment or reimbursement of
dealer manager fees, selling commissions, organization and offering expenses and
operating expenses. Until required for such purposes, net offering proceeds are
held in short-term, liquid investments.
The Company's common stock is not currently listed on a national
exchange. However, management anticipates listing the common stock on a national
exchange on or before the twelfth anniversary of the termination
6
of the Offering. In the event the Company does not obtain its listing prior to
the twelfth anniversary of the termination of the Offering, the Company charter
requires the Company to begin the sale of its properties and liquidation of its
assets.
3. INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003, which was filed with the Securities and Exchange 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 periods shown in this report are not
necessarily indicative of future financial results. The accompanying
consolidated financial statements of the Company as of March 31, 2004 and March
31, 2003 have not been audited by independent accountants. In the opinion of
management, the accompanying unaudited consolidated financial statements include
all adjustments (of a normal recurring nature) necessary to present fairly the
consolidated financial position of the Company as of March 31, 2004 and December
31, 2003 and the consolidated results of its operations and cash flows for the
periods ended March 31, 2004 and 2003.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 (i) the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and (ii) the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its directly or indirectly wholly owned subsidiaries, including
Behringer OP I and BHR Partners. All intercompany transactions, balances and
profits have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly-liquid money market funds
with maturities of three months or less to be cash equivalents. The carrying
amount of cash and cash equivalents reported on the balance sheet approximates
fair value.
RESTRICTED CASH
Restricted cash includes subscription proceeds which are held in escrow
until investors are admitted as stockholders. The Company admits new
stockholders at least monthly. Upon acceptance of stockholders, shares of stock
are issued and subscription proceeds are released to the Company from escrow.
Restricted cash also includes $2,500,000 held in restricted money market
accounts as security for the Company's guarantee of funds borrowed by Behringer
Harvard Holdings, LLC.
INVESTMENT IN TENANT IN COMMON INTEREST
As of March 31, 2004, the "Investment in tenant in common interest" on
the Company's balance sheet consists of the Company's 14.4676% interest in the
Minnesota Center building in Bloomington, Minnesota acquired in October 2003.
Consolidation of this investment is not required as it does not qualify as a
variable interest entity as defined in FIN No. 46R.
7
The Company accounts for this investment using the equity method of
accounting in accordance with Accounting Principles Board ("APB") Opinion No.
18, "The Equity Method of Accounting for Investments in Common Stock." The
equity method of accounting requires the investment initially to be recorded at
cost and subsequently increased (decreased) for the Company's share of net
income (loss), including eliminations for the Company's share of intercompany
transactions and reduced when distributions are received. The equity method of
accounting is utilized by the Company because the shared decision making
involved in a tenant in common interest investment creates an opportunity for
the Company to have some influence on the operating and financial decisions of
Minnesota Center and thereby creates some responsibility by the Company for a
return on its investment. Therefore, it is appropriate to include the results of
operations of Minnesota Center in the earnings or losses of the Company.
INVESTMENT IMPAIRMENTS
For real estate directly owned by the Company, management monitors
events and changes in circumstance indicating that the carrying amounts of the
real estate assets may not be recoverable. When such events or changes in
circumstances are present, the Company assesses 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 amount of the asset. In the event that the carrying amount exceeds the
estimated future undiscounted operating cash flows, the Company recognizes an
impairment loss to adjust the carrying amount of the asset to estimated fair
value.
For real estate owned by the Company through an investment in a joint
venture, tenant in common interest or other similar investment structure, at
each reporting date management will compare the estimated fair value of its
investment to the carrying value. An impairment charge is recorded to the extent
the fair value of its investment is less than the carrying amount and the
decline in value is determined to be other than a temporary decline.
PURCHASE PRICE ALLOCATION
Upon the acquisition of real estate properties, the Company allocates
the purchase price of those properties to the tangible assets acquired,
consisting of land and buildings, and identified intangible assets. Identified
intangible assets consist of the fair value of above-market and below-market
leases, in-place leases, in-place tenant improvements and tenant relationships.
The fair value of the tangible assets acquired, consisting of land and
buildings, is determined by valuing the property as if it were vacant, and the
"as-if-vacant" value is then allocated to land and buildings. Land values are
derived from appraisals and building values are calculated as replacement cost
less depreciation or management's estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The value of the
building is depreciated over the estimated useful life of 25 years using the
straight-line method.
The Company determines the value of above-market and below-market
in-place leases 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 current market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable terms of the respective leases. The fair value of above-market
and below-market leases are recorded by the Company as intangible assets and
amortized as an adjustment to rental income over the remaining non-cancelable
terms of the respective leases.
The total value of identified real estate intangible assets acquired are
further allocated to in-place lease values, in-place tenant improvements and
tenant relationships based on management's evaluation of the specific
characteristics of each tenant's lease and the Company's overall relationship
with that respective tenant. The aggregate value for tenant improvements and
leasing commissions are based on estimates of these costs incurred at inception
of the acquired leases, amortized through the date of acquisition. The aggregate
value of in-place leases acquired and tenant relationships is determined by
applying a fair value model. The estimates of fair value of in-place leases
includes an estimate of carrying costs during the expected lease-up periods for
the respective spaces considering current market conditions, and the costs to
execute similar leases. In estimating the carrying costs that would have
otherwise been incurred had the leases not been in place, management included
such items as real
8
estate taxes, insurance and other operating expenses as well as lost rental
revenue during the expected lease-up period based on current market conditions.
The estimates of fair value of tenant relationships also include costs to
execute similar leases including leasing commissions, legal and tenant
improvements as well as an estimate of the likelihood of renewal as determined
by management on a tenant-by-tenant basis.
The Company amortizes the value of in-place leases and in-place tenant
improvements to expense over the initial term of the respective leases. The
value of tenant relationship intangibles are amortized to expense over the
initial term and any anticipated renewal periods, but in no event does 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 tenant relationship intangibles would be charged to
expense.
DEFERRED OFFERING COSTS
The Company's advisor funds all of the organization and offering costs
on the Company's behalf and is 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 internal salaries. The Company is 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 are recorded as an offset to additional paid-in
capital, and all organization costs are recorded as an expense at the time the
Company becomes liable for the payment of these amounts.
CONCENTRATION OF CREDIT RISK
At March 31, 2004, the Company had cash and cash equivalents and
restricted cash on deposit in five financial institutions in excess of federally
insured levels. The Company regularly monitors the financial stability of these
financial institutions and believes that it is not exposed to any significant
credit risk in cash and cash equivalents or restricted cash.
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period. As of March 31, 2004, there
were no common stock equivalents outstanding. As of March 31, 2004, individual
broker-dealers had the right to acquire up to 79,763 Offering Warrants for a
nominal fee, however, none had been issued and no stock options were outstanding
as of March 31, 2004.
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
bases 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 of approximately $168,945. 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, 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.
9
5. INVESTMENT IN TENANT IN COMMON INTEREST
The following is a summary of the Company's tenant in common interest
investment as of March 31, 2004:
Tenant in Carrying
Common Value of Mortgage
Property Name Interest Investment Payable
------------------- -------------- ------------------ ------------------
Minnesota Center 14.4676% $6,247,804 $ 4,320,700
The Company's undivided 14.4676% tenant in common interest investment in
the Minnesota Center as of March 31, 2004 consists of its proportionate share of
the following assets and liabilities:
Land $ 3,500,000
Buildings, net 32,785,895
Real estate intangibles, net 6,567,815
Cash and cash equivalents 223,770
Restricted cash 2,592,228
Accounts receivable and other assets 396,483
---------------------
Total Assets $ 46,066,191
=====================
Total Liabilities $ 1,304,864
Equity 44,761,327
---------------------
Total Liabilities and Equity $ 46,066,191
=====================
The difference between the carrying value of the Company's investment in
tenant in common interest of $6,247,804 and 14.4676% of the underlying net
equity of $6,475,890 is a result of the fact that the Company's purchase price
differed from the other tenant in common interest holders.
In the three months ended March 31, 2004, the Company recorded $34,073
of equity in earnings from its undivided 14.4676% tenant in common interest
investment in the Minnesota Center. The Company's equity in earnings from this
tenant in common investment is its proportionate share of the following earnings
of the Minnesota Center for the three months ended March 31, 2004:
10
Revenue $ 1,631,701
Operating expenses:
Operating expenses 410,860
Property taxes 293,832
---------------------
Total operating expenses 704,692
---------------------
Operating income 927,009
---------------------
Non-operating (income) expenses
Depreciation and amortization 689,799
(Interest income)/bank fees, net 1,696
---------------------
Total non-operating (income) expenses 691,495
Net income $ 235,514
=====================
6. MORTGAGE PAYABLE
The Company partially financed its acquisition of its 14.4676% tenant in
common interest in Minnesota Center on October 15, 2003 with borrowings of
$4,340,280 (the "Minnesota Center Loan") under a non-recourse loan agreement
with Greenwich Capital Financial Products, Inc (the "Minnesota Center Loan
Agreement"). The Company, as well as the investors who purchased the remaining
tenant in common interests in Minnesota Center are each individually a party to
the Minnesota Center Loan Agreement. The original total borrowings of all tenant
in common interest holders under the Minnesota Center Loan Agreement was
$30,000,000. The Minnesota Center Loan accrues interest at 6.181%, and requires
principal and interest payments monthly based on a 30-year amortization period,
with any unamortized principal due at maturity on November 1, 2010. The
Minnesota Center Loan Agreement requires a minimum debt coverage ratio of not
less than 1.10 and permits no prepayment until the earlier of (i) 42 months
following inception of the Minnesota Center Loan or (ii) two years after
securitization ("Minnesota Center Lockout Period"). The Minnesota Center loan is
guaranteed by Robert M. Behringer and Behringer Harvard Holdings, LLC. The
Minnesota Center Loan may only be prepaid after the Minnesota Center Lockout
Period. As of March 31, 2004, the outstanding principal balance under the
Minnesota Center Loan Agreement was $4,320,700. As of March 31, 2004, the
Company was in compliance with all of its covenants under the Minnesota Center
Loan Agreement.
7. STOCKHOLDERS' EQUITY
CAPITALIZATION
As of March 31, 2004, the Company had accepted subscriptions for
2,014,075 shares of its common stock, including 20,000 shares owned by Behringer
Holdings. As of March 31, 2004, individual broker-dealers had the right to
acquire up to 79,763 of Offering Warrants for a nominal fee, however, none had
been issued. As of March 31, 2004, the Company had no shares of preferred stock
issued and outstanding and no stock options had been issued.
DIVIDENDS
The Company initiated the payment of monthly dividends in November 2003
in the amount of a 7.0% annualized rate of return, based on an investment in the
Company's common stock of $10 per share and calculated on a daily record basis
of $0.0019178 per share. On December 29, 2003, the board of directors declared
the same such dividends to be paid for the first quarter of 2004. The Company
has a Dividend Reinvestment Program ("DRIP") whereby stockholders may elect to
receive additional shares of common stock in lieu of a cash dividend.
11
The Company records all dividends when declared, except that the stock issued
through the DRIP program is recorded when the shares are actually issued. The
following are the dividends declared and the DRIP shares issued during the three
months ended March 31, 2004:
Month Dividends
Declared ---------------------------------------------- DRIP
in 2004 Total Cash DRIP Shares
- -------------- -------------- -------------- ------------- ------------
January $ 70,104 $ 41,492 $ 28,612 2,861
February 82,708 50,362 32,346 3,235
March 113,047 68,860 44,187 -
-------------- -------------- ------------- ------------
$ 265,859 $ 160,714 $ 105,145 6,096
============== ============== ============= ============
In January 2004, the Company issued 2,240 shares of common stock valued
at $22,403 to participants in the DRIP program in lieu of cash dividends
declared for December 2003. In April 2004, the Company issued 4,419 shares of
common stock valued at $44,187 to participants in the DRIP program in lieu of
cash dividends declared for March 2004.
8. RELATED PARTY ARRANGEMENTS
Certain affiliates of the Company receive fees and compensation in
connection with the Offering, and in connection with the acquisition, management
and sale of the assets of the Company.
Behringer Securities LP ("Behringer Securities"), the Company's
affiliated dealer manager for the Offering, receives commissions 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 are paid to Behringer Securities as
a dealer manager fee; except that this dealer manager fee is reduced to 1.0% of
the gross proceeds of purchases made pursuant to the Company's dividend
reinvestment plan. Behringer Securities reallows all of its commissions of up to
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. In
the three months ended March 31, 2004, Behringer Securities' commissions and
dealer manager fees totaled $613,707 and $276,577, respectively and were
capitalized as offering costs in "Additional paid-in capital" on the Company's
balance sheet.
Behringer Advisors, the affiliated advisor for the Company, or its
affiliates, receives up to 2.5% of gross offering proceeds for reimbursement of
organization and offering expenses. As of March 31, 2004, $3,072,149 of
organization and offering expenses had been incurred by Behringer Advisors on
behalf of the Company, of which $489,850 had been reimbursed by the Company and
the balance of $2,582,299 will be reimbursed at a rate of 2.5% of future equity
raised. Of the $489,850 of organization and offering expenses reimbursed by the
Company through March 31, 2004, $447,511 has been capitalized as offering costs
in "Additional paid-in capital" on the Company's balance sheet and $42,339 has
been expensed as organizational costs. Behringer Advisors or its affiliates
determines the amount of organization and offering expenses owed 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 respective equity offering sizes of those entities. Behringer
Advisors or its affiliates also receives 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
loan. Behringer Advisors or its affiliates also receive up to 0.5% of the
contract purchase price of the real estate assets acquired by the Company 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. In
12
the three months ended March 31, 2004, Behringer Advisors did not receive any
acquisition and advisory fees as the Company did not acquire any investments.
The Company pays HPT Management LP ("HPT Management"), its affiliated
property manager, fees for the management and leasing of the Company's
properties. Such fees are expected to equal 3.0% of gross revenues of the
respective property, plus leasing commissions based upon the customary leasing
commission applicable to the geographic location of the respective property. The
Company paid fees of $10,514 to HPT Management in the three months ended March
31, 2004 for the services they provided in connection with the Minnesota Center.
The Company pays 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. In the three months ended March
31, 2004, the Company paid $3,617 to Behringer Advisors for advisor asset
management fees.
Behringer Advisors or its affiliates will also 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 sales 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 of their net capital contributions and a 9.0%
annual, cumulative, non-compounded return, then Behringer Advisors is entitled
to 15.0% of remaining net sales proceeds. Subordinated participation in net
sales 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 time as the subordination conditions have been satisfied.
Upon listing of the Company's common stock on a national securities
exchange or inclusion for quotation on the Nasdaq Stock Market, a listing fee
will be paid to Behringer Advisors 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 (i) the total amount of capital
raised from investors and (ii) a 9.0% annual, cumulative, non-compounded return
to investors on their capital contributions. Upon termination of the Advisory
Agreement with Behringer Advisors, a performance fee will be paid to Behringer
Advisors 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. No performance
fee will be paid if the Company has already paid or becomes obligated to pay
Behringer Advisors a listing fee. Persons independent of the Company and
independent of its advisor will perform such appraisal of the Company asset
value.
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 fiscal quarters immediately preceding the date reimbursement is sought
exceeds the greater of: (i) 2.0% of the Company's average invested assets, or
(ii) 25.0% of the Company's net income for that four quarter period 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.
The Company is dependent on Behringer Advisors, Behringer Securities and
HPT Management for certain services that are essential to the Company, including
the sale of the Company's shares of common stock, asset acquisition and
disposition decisions, property management and leasing services and other
general administrative responsibilities. In the event that these companies were
unable to provide the respective services to the Company, the Company would be
required to obtain such services from other sources.
13
9. SUBSEQUENT EVENTS
On April 12, 2004, the Company acquired an undivided 36.31276% tenant in
common interest in Enclave on the Lake, a 6-story office building containing
approximately 171,090 rentable square feet, located on approximately 6.75 acres
of land in Houston, Texas (the "Enclave Property"). The purchase price for the
Company's 36.31276% undivided tenant in common interest in the Enclave Property
was $10,403,606, plus its proportionate share of the closing costs. The Company
used borrowings of $7,262,552 under a loan agreement (the "Loan Agreement") with
State Farm Life Insurance Company (the "Lender") to pay a portion of such
purchase price and paid the remaining purchase price from proceeds of the
Company's offering of its common stock to the public. The Company's tenant in
common interest is held by Behringer Harvard Enclave H LP, which is wholly owned
by the Company's operating partnership, Behringer OP I.
The remaining tenant in common interests in the Enclave Property were
acquired by various investors who purchased their interests in a private
offering sponsored by the Company's affiliate, Behringer Harvard Holdings, LLC.
Each tenant in common investor, including the Company, is a party to the Loan
Agreement. The total borrowings (the "Loan") of all tenant in common interest
holders under the Loan Agreement was $20,000,000. The interest rate under the
Loan is fixed at 5.45% per annum. The Loan Agreement allows for prepayment of
the entire outstanding principal after 42 months from the date of the Loan
Agreement subject to a prepayment fee. No prepayment fee shall be payable after
81 months from the date of the Loan Agreement. The Loan has a seven year term.
10. COMMITMENTS AND CONTINGENCIES
On January 28, 2004, the Company and Behringer Harvard Holdings, LLC
entered into an agreement whereby the Company would provide loan guarantees to
Behringer Harvard Holdings, LLC, so that Behringer Harvard Holdings, LLC may use
such loan guarantees to secure short-term loans from lenders to fund acquisition
and syndication costs related to acquiring real estate projects for tenant in
common syndication. Each guaranty will be for a period not to exceed six months
and shall be limited to no more than $1,000,000. Behringer Harvard Holdings, LLC
must pay to the Company a 1% fee of any loan guaranteed by the Company for each
six-month period. Behringer Harvard Holdings, LLC has granted the Company a
security interest in each purchase agreement entered into with respect to a
project for which a guaranty is made by the Company. If Behringer Harvard
Holdings, LLC fails to acquire such project, they shall transfer all of their
rights under the purchase agreement to the Company and cooperate with the
Company to obtain an extension of the purchase agreement with the seller. During
February 2004, the Company placed $2,500,000 in restricted money market accounts
with lenders as security for funds advanced to Behringer Harvard Holdings, LLC.
As of March 31, 2004, the Company had guarantees of $105,000 outstanding on
borrowings by 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
14
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 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
Management's discussion and analysis of financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Company's management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. These estimates are
based on management's historical industry experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates. The Company's most sensitive estimates
involve evaluating its real estate related investments for impairment.
INVESTMENT IMPAIRMENTS
For real estate directly owned by the Company, management monitors
events and changes in circumstance indicating that the carrying amounts of the
real estate assets may not be recoverable. When such events or changes in
circumstances are present, the Company assesses 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 amount of the asset. In the event that the carrying amount exceeds the
estimated future undiscounted operating cash flows, the Company recognizes an
impairment loss to adjust the carrying amount of the asset to estimated fair
value.
For real estate owned by the Company through an investment in a joint
venture, tenant in common interest or other similar investment structure, at
each reporting date management will compare the estimated fair value of its
investment to the carrying value. An impairment charge is recorded to the extent
the fair value of its investment is less than the carrying amount and the
decline in value is determined to be other than a temporary decline.
PURCHASE PRICE ALLOCATION
Upon the acquisition of real estate properties, the Company allocates
the purchase price of those properties to the tangible assets acquired,
consisting of land and buildings, and identified intangible assets. Identified
intangible assets consist of the fair value of above-market and below-market
leases, in-place leases, in-place tenant improvements and tenant relationships.
The fair value of the tangible assets acquired, consisting of land and
buildings, is determined by valuing the property as if it were vacant, and the
"as-if-vacant" value is then allocated to land and buildings. Land values are
derived from appraisals and building values are calculated as replacement cost
less depreciation or management's estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The value of the
building is depreciated over the estimated useful life of 25 years using the
straight-line method.
The Company determines the value of above-market and below-market
in-place leases 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 current market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable terms of the respective leases. The fair value of above-market
and below-market leases are recorded by the Company as intangible assets and
amortized as an adjustment to rental income over the remaining non-cancelable
terms of the respective leases.
15
The total value of identified real estate intangible assets acquired are
further allocated to in-place lease values, in-place tenant improvements and
tenant relationships based on management's evaluation of the specific
characteristics of each tenant's lease and the Company's overall relationship
with that respective tenant. The aggregate value for tenant improvements and
leasing commissions are based on estimates of these costs incurred at inception
of the acquired leases, amortized through the date of acquisition. The aggregate
value of in-place leases acquired and tenant relationships is determined by
applying a fair value model. The estimates of fair value of in-place leases
includes an estimate of carrying costs during the expected lease-up periods for
the respective spaces considering current market conditions, and the costs to
execute similar leases. In estimating the carrying costs that would have
otherwise been incurred had the leases not been in place, management included
such items as real estate taxes, insurance and other operating expenses as well
as lost rental revenue during the expected lease-up period based on current
market conditions. The estimates of fair value of tenant relationships also
include costs to execute similar leases including leasing commissions, legal and
tenant improvements as wells as an estimate of the likelihood of renewal as
determined by management on a tenant-by-tenant basis.
The Company amortizes the value of in-place leases and in-place tenant
improvements to expense over the initial term of the respective leases. The
value of tenant relationship intangibles are amortized to expense over the
initial term and any anticipated renewal periods, but in no event does 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 tenant relationship intangibles would be charged to
expense.
RESULTS OF OPERATIONS
The Company commenced active operations when it received and accepted
subscriptions for a minimum of $2,500,000 pursuant to the Offering on October 1,
2003 and made its first real estate acquisition on October 15, 2003 with the
purchase of an undivided 14.4676% tenant in common interest in Minnesota Center.
As a result, the Company's results of operations for three months ended March
31, 2004 are not comparable to results for the three months ended March 31,
2003.
Interest expense for the three months ended March 31, 2004 was $70,908
and was comprised of interest expense and amortization of deferred financing
relating to the Company's mortgage associated with its tenant in common interest
investment in Minnesota Center. During the three months ended March 31, 2003,
the Company did not own any real estate investments and there was no outstanding
debt.
Property and asset management fees for the three months ended March 31,
2004 were $14,131 and were comprised of property management and asset management
fees associated with the Company's Minnesota Center tenant in common interest.
During the three months ended March 31, 2003, the Company did not own any real
estate investments.
General and administrative expense for the three months ended March 31,
2004 was $122,521 and was comprised of corporate general and administrative
expenses including directors' and officers' insurance premiums, organizational
expenses, transfer agent fees, auditing fees, and other administrative expenses.
During the three months ended March 31, 2003, these expenses totaled $1,596 due
to the lack of corporate activity.
Interest income for the three months ended March 31, 2004 was $25,105
and was comprised of interest income associated with funds on deposit with
banks. As the Company admits new stockholders, subscription proceeds are
released to the Company from escrow and may be utilized as consideration for
investments and the payment or reimbursement of dealer manager fees, selling
commissions, organization and offering expenses and operating expenses. Until
required for such purposes, net offering proceeds are held in short-term, liquid
investments and earn interest income.
Equity in earnings of investment in tenant in common interest for the
three months ended March 31, 2004 was $34,073 and was comprised of the Company's
share of net income from its investment in Minnesota Center. During the three
months ended March 31, 2003, the Company did not own any real estate
investments.
16
CASH FLOW ANALYSIS
The Company commenced active operations when it received and accepted
subscriptions for a minimum of $2,500,000 pursuant to the Offering on October 1,
2003 and made its first real estate acquisition on October 15, 2003 with the
purchase of an undivided 14.4676% tenant in common interest in Minnesota Center.
As a result, the Company's cash flows for three months ended March 31, 2004 are
not comparable to the cash flows for the three months ended March 31, 2003.
Cash flows from operating activities for the three months ended March
31, 2004 were $(243,484) and wereprimarily comprised of the net loss of
$(148,382) and changes in working capital accounts of $(64,304). During the
three months ended March 31, 2003 cash flows from operating activities was $486,
primarily due to the lack of investments and corporate activity.
Cash flows from investing activities for the three months ended March
31, 2004 were $(1,268,908) and were comprised of distributions from the
Company's investment in Minnesota Center of $146,092 and deposits of
$(1,415,000) for the purchase of a tenant in common interest in an office
building located in Houston, Texas which closed on April 12, 2004. During the
three months ended March 31, 2003, there were no cash flows from investing
activities.
Cash flows from financing activities for the three months ended March
31, 2004 were $7,547,653 and were comprised primarily of funds received from the
issuance of stock less a $2,500,000 increase in restricted cash associated with
the loan guarantees for Behringer Harvard Holdings, as discussed in liquidity
and capital resources. During the three months ended March 31, 2003, there were
no cash flows from financing activities.
LIQUIDITY AND CAPITAL RESOURCES
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. 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 net proceeds of the Offering and other offerings of
the Company's securities. However, there may be a delay between the sale of the
Company's shares and its purchase of properties or 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 in the Offering 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 contract for the purchase of a property is executed, the property
generally will not be purchased until the successful completion of due
diligence. During this period, the Company may decide to temporarily invest any
unused proceeds from the Offering in investments that could yield lower returns
than the properties. These lower returns may affect the Company's ability to
make distributions.
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.
The Company partially financed its acquisition of its tenant in common
interest in Minnesota Center on October 15, 2003 with borrowings of $4,340,280
under a loan agreement (the "Minnesota Center Loan Agreement") with Greenwich
Capital Financial Products, Inc. The Company, as well as the investors who
purchased the remaining tenant in common interests in Minnesota Center are each
individually a party to the Minnesota Center Loan Agreement. The total
borrowings (the "Minnesota Center Loan") of all tenant in common interest
holders under the Minnesota Center Loan Agreement was $30,000,000. The Minnesota
Center Loan
17
accrues interest at 6.181%, and requires principal and interest payments monthly
based on a 30-year amortization period, with any unamortized principal due at
maturity on November 1, 2010. The Minnesota Center Loan Agreement requires a
minimum debt coverage ratio of not less than 1.10 and permits no prepayment
until the earlier of (i) 42 months following inception of the loan or (ii) two
years after securitization (the "Lockout Period"). The Minnesota Center Loan may
only be prepaid after the Lockout Period. As of March 31, 2004, the Company's
outstanding principal balance under the Minnesota Center Loan Agreement was
$4,320,700.
As of March 31, 2004, Behringer OP I made deposits in the amount of
$1,415,000 for the purchase of a tenant in common interest in an office building
located in Houston, Texas that closed on April 12, 2004. During April 2004
Behringer OP I made a deposit of $1,000,000 for the future purchase of a tenant
in common interest in an office building in St. Louis, Missouri, which is
expected to close in the second quarter of 2004.
The Company expects to meet its future short-term operating liquidity
requirements through net cash provided by its current property operations and
the operations of properties to be acquired in the future. Management also
expects that the Company's properties will generate sufficient cash flow to
cover operating expenses plus pay a monthly dividend. Operating cash flows are
expected to increase as additional properties are added to the portfolio. Other
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.
OFF-BALANCE SHEET ARRANGEMENTS
On January 28, 2004, the Company and Behringer Harvard Holdings, LLC
entered into an agreement whereby the Company would provide loan guarantees to
Behringer Harvard Holdings, LLC, so that Behringer Harvard Holdings, LLC may use
such loan guarantees to secure short-term loans from lenders to fund acquisition
and syndication costs related to acquiring real estate projects for tenant in
common syndication. Each guaranty will be for a period not to exceed six months
and shall be limited to no more than $1,000,000. Behringer Harvard Holdings, LLC
must pay to the Company a 1% fee of any loan guaranteed by the Company for each
six-month period. During February 2004, the Company placed $2,500,000 in
restricted money market accounts with lenders as security for funds advanced to
Behringer Harvard Holdings, LLC. As of March 31, 2004 had outstanding guarantees
for $105,000 of loans to Behringer Harvard Holdings, LLC.
The Company has no other off-balance sheet arrangements that are
reasonably likely to have a current or future material effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
INFLATION
The real estate market has not been affected significantly by inflation
in the past several years due to the relatively low inflation rate. The majority
of the Company's leases contain inflation protection provisions applicable to
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 has no
investments that would be materially affected by a 10% increase or decrease in
interest rates. The Company's only borrowing is a mortgage payable at a fixed
rate of interest of 6.181%, maturing on November 1, 2010. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources." The Company does not have any foreign
operations and thus is not exposed to foreign currency fluctuations.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this report, the
Company's management evaluated, with the participation of the Company's
principal executive officer and principal financial officer, the effectiveness
of the
18
Company's disclosure controls and procedures as of March 31, 2004. Based on that
evaluation, the Company's principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures
were effective as of the end of the period covered by this report. To these
officers' knowledge, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
19
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.
As of March 31, 2004, the Company had sold the following securities
pursuant to the Offering for the following aggregate offering prices:
o 1,983,260 shares on a best efforts basis for $19,593,984; and
o 10,815 shares pursuant to the Company's dividend reinvestment plan
for $108,151.
The total of shares and gross offering proceeds pursuant to the Offering
as of March 31, 2004 is 1,994,075 shares for $19,702,135. The above-stated
number of shares sold and the gross offering proceeds received from such sales
does not include the 20,000 shares purchased by Behringer Harvard Holdings, LLC
preceding the commencement of the Offering.
Through March 31, 2004, the Company incurred the following expenses in
connection with the issuance and distribution of the registered securities
pursuant to the Offering:
TYPE OF EXPENSE AMOUNT
---------------------------------------- -------------------
Other expenses to affiliates $ 2,143,487
Other expenses to non-affiliates 14,386
-------------------
Total expenses $ 2,157,873
===================
The net offering proceeds to the Company, after deducting the total
expenses paid and accrued described above, are $17,544,262.
Other expenses to affiliates above include commissions and dealer
manager fees paid to Behringer Securities LP, an affiliate of the Company, which
reallowed all or a portion of the commissions and fees to soliciting dealers.
Through March 31, 2004, the Company had used $2,101,186 of such net
offering proceeds to purchase its tenant in common interest in Minnesota Center,
net of the mortgage payable. Of the amount used for the purchase of the
Minnesota Center investment, $220,194 was paid to Behringer Advisors, an
affiliate of the Company, as acquisition and advisory fees and acquisition
expense reimbursement.
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.
20
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
March 31, 2004.
21
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: May 17, 2004 By: /s/ Gary S. Bresky
-------------------------------------
Gary S. Bresky
Chief Financial Officer and Treasurer
22
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