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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, 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 incorporation or (I.R.S. Employer
organization) Identification No.)
15601 DALLAS PARKWAY, SUITE 600, ADDISON, TEXAS 75001
(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 1, 2004, Behringer Harvard REIT I, Inc. had 9,914,564 shares of
common stock, $.0001 par value, outstanding.
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BEHRINGER HARVARD REIT I, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003.........................3
Consolidated Statements of Operations for the three and nine months ended September 30, 2004
and September 30, 2003...........................................................................4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and
September 30, 2003...............................................................................5
Notes to Consolidated Financial Statements.........................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................26
ITEM 4. CONTROLS AND PROCEDURES...........................................................................26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.......................................26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................27
ITEM 5. OTHER INFORMATION.................................................................................27
ITEM 6. EXHIBITS..........................................................................................28
SIGNATURE....................................................................................................29
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BEHRINGER HARVARD REIT I, INC.
Consolidated Balance Sheets
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------------- ---------------------
ASSETS
Cash and cash equivalents $ 16,083,281 $ 5,146,856
Restricted cash 6,125,434 10,492
Prepaid expenses and other assets 21,409,010 77,837
Investments in tenant in common interests 65,820,472 6,359,823
Deferred financing fees, net of accumulated amortization of
$25,841 and $2,730, respectively 698,042 89,533
Receivables from affiliates 45,217 -
--------------------- ---------------------
TOTAL ASSETS $ 110,181,456 $ 11,684,541
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgages payable $ 38,528,417 $ 4,332,656
Accounts payable - 18,068
Payables to affiliates - 76,608
Dividends payable 425,346 41,994
Accrued liabilities 510,030 133,867
Subscriptions for common stock 3,633,004 9,977
--------------------- ---------------------
TOTAL LIABILITIES 43,096,797 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, 7,953,912 and
843,878 shares issued and outstanding at September 30,
2004 and December 31, 2003, respectively 795 84
Additional paid-in capital 70,199,986 7,454,733
Cumulative distributions and net loss (3,116,122) (383,446)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 67,084,659 7,071,371
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,181,456 $ 11,684,541
===================== =====================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
BEHRINGER HARVARD REIT I, INC.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
-------------------- -------------------- -------------------- --------------------
Total revenues $ - $ - $ - $ -
Expenses
Interest 490,808 - 719,257 -
Property and asset management fees 60,264 - 100,808 -
General and administrative 335,931 92,938 684,554 96,349
-------------------- -------------------- -------------------- --------------------
Total expenses 887,003 92,938 1,504,619 96,349
-------------------- -------------------- -------------------- --------------------
Interest income 71,644 1 147,406 1,530
-------------------- -------------------- -------------------- --------------------
Net loss before equity in earnings of
investments in tenant in common interests (815,359) (92,937) (1,357,213) (94,819)
Equity in earnings of investments
in tenant in common interests 366,053 - 533,472 -
-------------------- -------------------- -------------------- --------------------
Net loss $ (449,306) $ (92,937) $ (823,741) $ (94,819)
==================== ==================== ==================== ====================
Basic and diluted weighted
average shares outstanding 6,153,181 20,000 3,606,894 20,000
Basic and diluted loss per share $ (0.07) $ (4.65) $ (0.23) $ (4.74)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
-------------------------- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (823,741) $ (94,819)
Adjustments to reconcile net loss to net cash
flows used in operating activities
Amortization of deferred financing fees 23,111 -
Equity in earnings of investments in tenant in
common interests (533,472) -
Change in prepaid expenses and other assets (303,986) (5,220)
Change in accounts payable (18,068) -
Change in accrued liabilities 376,163 54,659
-------------------------- -------------------------
CASH USED IN OPERATING ACTIVITIES (1,279,993) (45,380)
-------------------------- -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of interests in properties (60,002,772) -
Escrow deposits on properties to be acquired (21,027,187) -
Distributions from investments 1,075,595 -
-------------------------- -------------------------
CASH USED IN INVESTING ACTIVITIES (79,954,364) -
-------------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing costs (631,620) -
Proceeds from mortgage notes 34,273,193 -
Payments on mortgage notes (77,432) -
Issuance of common stock 70,219,751 -
Offering costs (8,112,874) -
Dividends (886,496) -
Change in subscriptions for common stock 3,623,027 2,696,081
Change in restricted cash (6,114,942) (2,696,081)
Change in payables to affiliates (121,825) 35,347
-------------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 92,170,782 35,347
-------------------------- -------------------------
Net change in cash and cash equivalents 10,936,425 (10,033)
Cash and cash equivalents at beginning of period 5,146,856 196,290
-------------------------- -------------------------
Cash and cash equivalents at end of period $ 16,083,281 $ 186,257
========================== =========================
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 696,146 $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued in dividend reinvestment plan $ 639,087 $ -
Dividends payable in common stock under dividend
reinvestment plan $ 183,594 $ -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
BEHRINGER HARVARD REIT I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
that commenced on February 19, 2003 (the "Current 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 Current 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 Current Offering ("Offering Warrants"). The Current
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).
On October 25, 2004, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933 in respect of a second public offering of
the Company's common stock. The Company anticipates that this second offering of
common stock will commence upon termination of the Current Offering on or about
February 19, 2005 and will extend until 2007.
As of September 30, 2004, the Company had accepted subscriptions for
7,953,912 shares of its common stock, including 20,000 shares owned by Behringer
Harvard Holdings, LLC ("Behringer Holdings"), under the Current Offering. As of
September 30, 2004, individual broker-dealers had the right to acquire up to
317,356 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 September 30, 2004, the Company had no shares of preferred stock
issued and outstanding. On May 27, 2004, the independent members of the Board of
Directors of the Company were granted options to purchase a total of 9,000
shares of the Company's common stock at an exercise price of $12 per share under
the Company's Non-Employee Director Option Plan. These options vest monthly
through May 27, 2005 and expire on May 27, 2009. As of September 30, 2004, all
9,000 stock options were outstanding.
The Company admits new stockholders pursuant to the Current Offering at
least monthly. All subscription proceeds are held in escrow or in a separate
account until the subscribing investors are admitted as
6
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 or liquidation of the Company's assets on or before the twelfth
anniversary of the termination of the Current Offering. Depending upon then
prevailing market conditions, it is the intention of the Company's management
to consider beginning the process of listing or liquidation prior to the eighth
anniversary of the termination of the Current Offering. In the event the Company
does not obtain listing prior to the twelfth anniversary of the termination of
the Current Offering, unless a majority of the board of directors and a majority
of the independent directors extend such date, the Company's charter requires it
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 accounting principles generally accepted
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.
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 September 30, 2004 and
September 30, 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
September 30, 2004 and December 31, 2003 and the consolidated results of its
operations and cash flows for the periods ended September 30, 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 subsidiaries. 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
Holdings.
7
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets include prepaid insurance and deposits
for the purchase of a tenant in common interest in an office building located in
Houston, Texas which closed on October 1, 2004, deposits for the future
acquisition of a tenant in common interest in a office building in Baltimore,
Maryland and rate lock deposits on future borrowings for future acquisitions.
INVESTMENTS IN TENANT IN COMMON INTERESTS
As of September 30, 2004, the "Investments in tenant in common
interests" on the Company's balance sheet consists of the Company's 14.4676%
interest in the Minnesota Center building in Bloomington, Minnesota, the
Company's 36.31276% interest in the Enclave on the Lake building in Houston,
Texas, the Company's 35.709251% interest in St. Louis Place in St. Louis,
Missouri and the Company's 79.4752% interest in the Colorado Building located in
Washington D.C. Consolidation of these investments is not required as they do
not qualify as variable interest entities as defined in Financial Accounting
Standards Board Interpretation No. 46R.
The Company accounts for these investments 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 these investments to be initially 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
these investments 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 these investments in the earnings or losses of the Company.
INVESTMENT IMPAIRMENTS
For real estate directly owned by the Company, management monitors
events and changes in circumstances 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
8
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 is
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. In estimating the
carrying costs that would have otherwise been incurred had the leases not been
in place, management includes items such 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 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 is 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.
REVENUE RECOGNITION
The Company recognizes rental income generated from all leases on real
estate assets in which it has an ownership interest, either directly or through
investments in joint ventures, on a straight-line basis over the terms of the
respective leases. Some leases contain provisions for the tenant's payment of
additional rent after certain tenant sales revenue thresholds are met. Such
contingent rent is recognized as revenue after the related revenue threshold is
met.
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 the 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.
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 $435,000. 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, 2005. The Company
believes that, commencing with the taxable year for which such election is
9
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.
STOCK BASED COMPENSATION
The Company has two stock-based employee and director compensation
plans. The Company accounts for these plans under the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
related interpretations.
CONCENTRATION OF CREDIT RISK
At September 30, 2004, the Company had cash and cash equivalents and
restricted cash in excess of federally insured levels on deposit in six
financial institutions. 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 September 30, 2004, the
Company had issued the independent members of the Board of Directors options to
purchase 9,000 shares of the Company's common stock at $12.00 per share. These
options were anti-dilutive for the periods ended September 30, 2004. As of
September 30, 2004, individual broker-dealers had the right to acquire up to
317,356 Offering Warrants for a nominal fee; however, none of the Offering
Warrants had been issued as of September 30, 2004.
5. ACQUISITIONS
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 purchase price for the Company's 36.31276% tenant
in common interest in Enclave on the Lake was $10,600,000.
On June 30, 2004, the Company acquired an undivided 35.709251% tenant in
common interest in St. Louis Place, a 20-story office building containing
approximately 337,088 rentable square feet and located on approximately 0.68
acres of land in St. Louis, Missouri. The purchase price for the Company's
35.709251% tenant in common interest in St. Louis Place was $12,100,000.
On August 10, 2004, the Company acquired an undivided 79.4752% tenant in
common interest in Colorado Building, an 11-story office building containing
approximately 121,701 rentable square feet, located on approximately 0.31 acres
of land in Washington, D.C. The Company's purchase price for its 79.4752% tenant
in common interest in the Colorado Building was approximately $37,400,000.
6. INVESTMENTS IN TENANT IN COMMON INTERESTS
The following is a summary of the Company's tenant in common interest
investments as of September 30, 2004:
Tenant in Carrying
Date Common Value of Mortgage
Property Name Acquired Interest Investment Payable
- ----------------------- --------------- ------------------- ---------------- ----------------
Minesota Center 10/15/03 14.467600% $ 6,014,122 $ 4,296,970
Enclave on the Lake 4/12/04 36.312760% 10,387,748 7,232,433
St. Louis Place 6/30/04 35.709251% 12,045,323 7,130,223
Colorado Building 8/10/04 79.475200% 37,373,279 19,868,791
---------------- ----------------
Total $ 65,820,472 $ 38,528,417
================ ================
10
The Company's undivided tenant in common interest investments in
Minnesota Center, Enclave on the Lake, St. Louis Place and Colorado Building as
of September 30, 2004 consisted of its proportionate share of the following
assets and liabilities:
Minnesota Enclave on St. Louis Colorado
Center the Lake Place Building
--------------- ------------------- ---------------- ----------------
Land $ 3,500,000 $ 1,907,758 $ 1,526,451 $ 13,328,000
Buildings, net 30,947,843 19,778,391 22,847,300 28,994,647
Real estate intangibles, net 5,473,881 6,528,642 6,229,773 4,032,876
Cash and cash equivalents 93,570 456,195 350,317 495,201
Restricted cash 2,350,102 627,065 2,707,246 689,338
Accounts receivable and other assets 211,861 397,321 1,394,966 360,175
--------------- ------------------- ---------------- ----------------
Total assets $ 42,577,257 $ 29,695,372 $ 35,056,053 $ 47,900,237
=============== =================== ================ ================
Total liabilities $ 1,007,667 $ 1,089,042 $ 1,324,393 $ 875,132
Equity 41,569,590 28,606,330 33,731,660 47,025,105
--------------- ------------------- ---------------- ----------------
Total liabilities and equity $ 42,577,257 $ 29,695,372 $ 35,056,053 $ 47,900,237
=============== =================== ================ ================
In the nine months ended September 30, 2004, the Company recorded
$533,472 of equity in earnings and $1,075,595 of distributions from its
undivided tenant in common interest investments. The Company's equity in
earnings from these tenant in common investments is its proportionate share of
the following earnings of the four properties for the nine months ended
September 30, 2004:
Minnesota Enclave on St. Louis Colorado
Center the Lake Place Building
--------------- ------------------- ---------------- ----------------
Revenue $ 5,012,419 $ 1,987,084 $ 1,382,881 $ 506,622
Operating expenses:
Operating expenses 1,385,686 399,773 429,503 149,285
Property taxes 888,552 286,430 98,034 78,789
--------------- ------------------- ---------------- ----------------
Total operating expenses 2,274,238 686,203 527,537 228,074
--------------- ------------------- ---------------- ----------------
Operating income 2,738,181 1,300,881 855,344 278,548
--------------- ------------------- ---------------- ----------------
Non-operating (income) expenses
Depreciation and amortization 2,083,827 732,732 422,419 174,405
(Interest income)/bank fees, net (6,237) 16,732 (851) 1
--------------- ------------------- ---------------- ----------------
Total non-operating (income) expenses 2,077,590 749,464 421,568 174,406
Net income $ 660,591 $ 551,417 $ 433,776 $ 104,142
=============== =================== ================ ================
Company's share of net income $ 95,572 $ 200,235 $ 154,898 $ 82,767
=============== =================== ================ ================
Company's share of distributions $ 441,273 $ 356,925 $ 183,517 $ 93,880
=============== =================== ================ ================
11
7. MORTGAGES 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 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 Holdings. Each tenant
in common investor, including the Company, is a borrower under 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"). Certain obligations under the Minnesota Center Loan are
guaranteed by Robert M. Behringer and Behringer Holdings. The Minnesota Center
Loan may only be prepaid after the Minnesota Center Lockout Period. As of
September 30, 2004, the outstanding principal balance under the Minnesota Center
Loan was $4,296,970.
The Company used borrowings of $7,262,552 (the "Enclave Loan") under a
loan agreement (the "Enclave Loan Agreement") with State Farm Life Insurance
Company to pay a portion of the purchase price for its undivided 36.31276%
tenant in common interest in Enclave on the Lake. The remaining tenant in common
interests in Enclave on the Lake were acquired by various investors who
purchased their interests in a private offering sponsored by the Company's
affiliate, Behringer Holdings. Each tenant in common investor, including the
Company, is a borrower under the Enclave Loan Agreement. The original total
borrowings of all tenant in common interest holders under the Enclave Loan
Agreement was $20,000,000. The interest rate under the Enclave Loan is fixed at
5.45% per annum, and requires principal and interest payments monthly based on a
30-year amortization period, with any unamortized principal due at maturity.
Certain obligations under the Enclave Loan are guaranteed by Robert M. Behringer
and Behringer Holdings. The Enclave Loan Agreement allows for prepayment of the
entire outstanding principal after 42 months from the date of the Enclave Loan
Agreement subject to the payment of a prepayment penalty. No prepayment penalty
is due after 81 months from the date of the Enclave Loan Agreement. The Enclave
Loan has a seven year term. As of September 30, 2004, the outstanding principal
balance under the Enclave Loan was $7,232,433.
The Company used borrowings of $7,141,850 (the "St. Louis Place Loan")
under a loan agreement (the "St. Louis Place Loan Agreement") with Greenwich
Capital Financial Products, Inc. to pay a portion of its undivided 35.709251%
tenant in common interest in St. Louis Place. The remaining tenant in common
interests in St. Louis Place were acquired by various investors who purchased
their interests in a private offering sponsored by the Company's affiliate,
Behringer Holdings. Each tenant in common investor, including the Company, is a
borrower under the St. Louis Place Loan Agreement. The original total borrowings
of all tenant in common interest holders under the St. Louis Place Loan
Agreement was $20,000,000. The interest rate under the St. Louis Place Loan is
fixed at 6.078% per annum, and requires principal and interest payments monthly
based on a 30-year amortization period, with any unamortized principal due at
maturity. Certain obligations under the St. Louis Place Loan are guaranteed by
Robert M. Behringer and Behringer Holdings. The St. Louis Place Loan Agreement
requires a minimum debt coverage ratio of not less than 1.10 and prohibits
prepayment until the earlier of (i) 42 months or (ii) 2 years after
securitization after which and prior to month 81 it may be defeased. The St.
Louis Place Loan Agreement has a seven-year term. As of September 30, 2004, the
outstanding principal balance under the St. Louis Place Loan was $7,130,223.
The Company used borrowings of $19,868,791 (the "Colorado Property
Loan") under a loan agreement (the "Colorado Property Loan Agreement") with
Greenwich Capital Financial Products, Inc. to pay a portion of its undivided
79.4752% tenant in common interest in the Colorado Building. The remaining
tenant in common interests in the Colorado Building were acquired by various
investors who purchased their interests in a private offering sponsored by the
Company's affiliate, Behringer Holdings. Each tenant in common investor,
including the Company, is a borrower under the Colorado Property Loan Agreement.
The original total borrowings of all
12
tenant in common interest holders under the Colorado Property Loan Agreement was
$25,000,000. Additional borrowings of $3,000,000 are available under this loan
agreement for tenant improvements. The interest rate under the Colorado Property
Loan is fixed at 6.075% per annum, and requires principal and interest payments
monthly based on a 30-year amortization period, with any unamortized principal
due at maturity. Certain obligations under the Colorado Property Loan are
guaranteed by Robert M. Behringer and Behringer Holdings. The Colorado Property
Loan Agreement requires a minimum debt coverage ratio of not less than 1.10 and
allows for prepayment of the entire outstanding principal with no prepayment fee
from and after the third payment prior to maturity, with at least 15 days prior
notice. The Colorado Property Loan Agreement has a ten-year term. As of
September 30, 2004, the outstanding principal balance under the Colorado
Property Loan Agreement was $19,868,791.
8. STOCKHOLDERS' EQUITY
CAPITALIZATION
As of September 30, 2004, the Company had accepted subscriptions for
7,953,912 shares of its common stock, including 20,000 shares owned by Behringer
Holdings. As of September 30, 2004, individual broker-dealers had the right to
acquire up to 317,356 Offering Warrants for a nominal fee; however, none of the
Offering Warrants had been issued. As of September 30, 2004, the Company had no
shares of preferred stock issued and outstanding. As of September 30, 2004, the
Company had issued the independent members of the Board of Directors options to
purchase 9,000 shares of the Company's common stock at $12.00 per share.
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. The Company has a dividend reinvestment plan ("DRIP")
whereby stockholders may elect to receive additional shares of common stock in
lieu of a cash dividend. The Company records all dividends when declared, except
that the stock issued through the DRIP is recorded when the shares are actually
issued. The following are the dividends declared during the nine months ended
September 30, 2004:
Distributions
Declared -------------------------------------------------------------
in 2004 Total Cash DRIP
- ----------------- ------------------ ------------------ ------------------
1st Quarter $ 265,859 $ 160,830 $ 105,029
2nd Quarter 554,010 327,485 226,525
3rd Quarter 1,089,066 620,118 468,948
------------------ ------------------ ------------------
$ 1,908,935 $ 1,108,433 $ 800,502
================== ================== ==================
In January 2004, the Company issued 2,240 shares of common stock valued
at $22,403 to participants in the DRIP in lieu of cash dividends declared for
December 2003. In October 2004, the Company issued 18,379 shares of common stock
valued at $183,594 to participants in the DRIP program in lieu of cash dividends
declared for September 2004.
13
9. 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. The following is a summary of the related
party fees and compensation incurred by the Company during the nine months ended
September 30, 2004.
Total capitalized
Total capitalized to investment in
Total to offering tenant in common Total
incurred costs interests expensed
---------------------------------------------------------------------------
Behringer Securities, commissions and
dealer manager fees $ 6,505,554 $ 6,505,554 $ - $ -
Behringer Advisors, reimbursement of
organization and offering expenses 1,760,764 1,607,754 - 153,010
Behringer Advisors, acquisition, advisory
fees and expenses 2,100,981 - 2,100,981 -
HPT Management LP, property management
and leasing fees 72,848 - - 72,848
Behringer Advisors, asset management fees 27,960 - - 27,960
-------------- ------------------ -------------------- ---------------
Total $ 10,468,107 $ 8,113,308 $ 2,100,981 $ 253,818
============== ================== ==================== ===============
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 nine months ended September 30, 2004, Behringer Securities' commissions and
dealer manager fees totaled $4,747,614 and $1,757,940, 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 September 30, 2004, $4,654,036 of
organization and offering expenses had been incurred by Behringer Advisors on
behalf of the Company, of which $1,965,651 had been reimbursed by the Company
and the balance of $2,688,385 will be reimbursed at a rate of 2.5% of future
equity raised. Of the $1,965,651 of organization and offering expenses
reimbursed by the Company through September 30, 2004, $1,795,065 has been
capitalized as offering costs in "Additional paid-in capital" on the Company's
balance sheet and $170,586 has been expensed as organizational costs. For the
nine months ended September 30, 2004, $1,760,764 of organization and offering
expenses were reimbursed by the Company, of which $1,607,754 was capitalized as
offering costs in "Additional paid-in capital" and $153,010 was 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.
14
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
the nine months ended September 30, 2004, Behringer Advisors earned $2,100,981
in acquisition and advisory fees for the investments acquired by the Company.
The Company capitalizes these fees as part of its investments in tenant in
common interests.
The Company pays HPT Management LP ("HPT Management"), its affiliated
property manager, fees for the management and leasing of the Company's
properties, which may be subcontracted to unaffiliated third parties. 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 incurred fees of
$72,848 in the nine months ended September 30, 2004 for the services provided by
HPT Management in connection with the tenant in common investments.
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 nine months ended
September 30, 2004, the Company incurred $27,960 of 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.
15
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.
10. COMMITMENTS AND CONTINGENCIES
On January 28, 2004, the Company and Behringer Holdings entered into an
agreement whereby the Company would provide loan guarantees to Behringer
Holdings, so that Behringer Holdings 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 Holdings must pay to the Company a 1% fee of
any loan guaranteed by the Company for each six-month period. Behringer Holdings
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 Holdings 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 to be advanced to Behringer Holdings for
future loans. As of September 30, 2004, the Company had no guarantees
outstanding on borrowings by Behringer Holdings.
On August 9, 2004, the Accommodation Agreement was amended and restated
to include 1) options to extend the six month guaranty period for one or more
additional six-month periods, with an additional 1% fee payable on the date of
each extension; and 2) the option for the Company's guarantees to include the
guarantee of bridge loans. A bridge loan, as defined in the Amended and Restated
Accommodation Agreement, is any loan pursuant to which Behringer Holdings
acquires an interest in respect of a project, which interest is intended to be
sold in a tenant in common offering. Each bridge guaranty is limited to no more
than the obligations under the bridge loan. The term and fees associated with
the bridge guarantees are the same as those of the other guarantees allowed
under this agreement. The Company or its affiliates have the right, but not an
obligation, to purchase up to a 5% interest in each project with respect to
which a guaranty is made by the Company. The Company's purchase price for each
1% interest in a project will equal the price paid by Behringer Holdings, plus a
pro rata share of the closing costs.
On October 1, 2004, the Company acquired an undivided 60% tenant in
common interest in Travis Tower, a 21-story office building containing
approximately 507,470 rentable square feet and a 10-story parking garage located
on approximately 1.1079 acres of land in Houston, Texas (the "Travis Property").
The contract price for the Travis Property was $52,000,000, plus closing costs.
The Company used borrowings of $22,650,000 under a loan agreement with Bear
Stearns Commercial Mortgage, Inc. to pay a portion of such purchase price and
paid the remaining portion of its purchase price from proceeds of the Company's
offering of its common stock. The Company's tenant in common interest is held by
Behringer Harvard Travis Tower H LP, which is wholly owned by the Company's
operating partnership, Behringer Harvard OP I.
The remaining 40% tenant in common interest in the Travis Property was
acquired by Behringer Harvard Travis Tower S LP, an indirect wholly owned
subsidiary of Behringer Harvard Holdings, LLC. Behringer Harvard Travis Tower S
LP intends to sell all or a portion of its 40% tenant in common interest to
various investors. Each tenant in common investor, including the Company, is a
party to the Travis Property Loan Agreement. The total borrowings of all tenant
in common interest holders under the Travis Property Loan Agreement is
$37,750,000. The interest rate under the Travis Property Loan Agreement is fixed
at 5.434% per annum. Certain obligations under the Travis Property Loan are
guaranteed by Robert M. Behringer and Behringer Holdings. The Travis Property
Loan Agreement allows for prepayment of the entire outstanding principal with no
prepayment fee during the last three months prior to maturity. The Travis
Property Loan Agreement has a ten-year term.
On October 1, 2004, in connection with the purchase of a 40% tenant in
common interest in Travis Tower, Behringer Holdings entered into a loan
agreement with First American Bank, SSB ("FAB") for $12,600,000 (the "Bridge
Loan"). The Bridge Loan bears interest at the greater of (i) 6% per annum, or
(ii) 1% in excess of the variable rate of interest per annum established from
time to time in the Money Rates column of THE
16
WALL STREET JOURNAL (Central Edition) or, if such publication designates two or
more published rates as the "prime rate," the rate of interest per annum
publicly announced by FAB as its prime rate in effect at its principal office in
Dallas, Texas. Commencing on January 1, 2005, and continuing thereafter through
final maturity, the Bridge Loan is to be paid in quarterly installments of all
accrued and unpaid interest with the entire amount of unpaid principal and
interest due on October 1, 2005.
Pursuant to the Amended and Restated Accommodation Agreement between the
Company and Behringer Holdings, the Company guaranteed the Bridge Loan and
pledged an amount of cash held in an account with FAB equal to the principal
amount of the Bridge Loan to support such guarantee. The Company received a fee
of 1% of the Bridge Loan ($126,000) in consideration for such guarantee for an
initial six-month period and will receive an additional 1% for any additional
six-month period thereafter.
11. SUBSEQUENT EVENTS
On October 1, 2004, the Company acquired an undivided 60% tenant in
common interest in Travis Tower, a 21-story office building containing
approximately 507,470 rentable square feet and a 10-story parking garage located
on approximately 1.1079 acres of land in Houston, Texas (the "Travis Tower").
The Company's cost for its 60% tenant in common interest in the Travis Tower was
$35,070,225, including closing costs. The Company used borrowings of $22,650,000
under a Loan Agreement with Bear Stearns Commercial Mortgage, Inc. to pay a
portion of its undivided 60% tenant in common interest in the Travis Tower.
The Company issued 1,960,652 shares of its common stock between October
1, 2004 and November 1, 2004, resulting in gross proceeds of $19,594,409 to the
Company. Common stock outstanding as of November 1, 2004 totaled 9,914,564
shares.
On October 25, 2004, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933 pursuant to a second public offering of the
Company's common stock. The Company anticipates that this second offering of
common stock will commence upon termination of the Company's initial public
offering of common stock on or about February 19, 2005 and will extend until
2007.
On November 4, 2004, the Company entered into an assignment from Harvard
Property Trust, LLC, an affiliated entity, of a contract to purchase Alamo
Plaza, a 16-story office building containing approximately 191,151 rentable
square feet and a four-story parking garage located on approximately 1.15 acres
of land in Denver, Colorado from MG-Alamo, LLC, an unaffiliated third party. The
contract price for Alamo Plaza is $41,750,000, plus closing costs. At closing,
the Company intends to assign a portion its ownership interest to Behringer
Holdings for reorganization of the property into tenant in common interests in
which the Company will retain a significant interest. As of the date of this
filing, a $3,000,000 deposit has been made by the Company.
On November 4, 2004, the Company entered into an assignment from Harvard
Property Trust, LLC, an affiliated entity, of a contract to purchase Ashford
Perimeter, a six-story office building containing approximately 288,175 rentable
square feet and a four-story parking garage located on approximately 10.6 acres
of land in Atlanta, Georgia from HSOV Ashford Perimeter, LLC, an unaffiliated
third party. The contract price for Ashford Perimeter is $46,300,000, plus
closing costs. The contract includes an obligation of the purchaser to pay the
prepayment premium under the existing loan on the property and provides that the
purchase price will be increased by one-half of any negotiated reduction of such
prepayment premium. At closing, the Company intends to assign a portion its
ownership interest to Behringer Holdings for reorganization of the property into
tenant in common interests in which the Company will retain a significant
interest. Deposits totaling $2,000,000 are required under the purchase
agreement. As of the date of this filing, a $1,000,000 deposit has been made by
the Company and the remaining $1,000,000 deposit is expected to be funded on or
about November 29, 2004.
The consummation of the purchases of Alamo Plaza and Ashford Perimeter
are subject to substantial conditions. The Company's decision to consummate the
acquisition of these properties will generally depend upon:
17
o the satisfaction of the conditions to the acquisitions contained
in their respective contracts;
o no material adverse change occurring relating to the properties,
tenants or local economic conditions;
o the Company's receipt of sufficient net proceeds from the
offering of its common stock to the public and financing
proceeds to complete these acquisitions; and
o the Company's receipt of satisfactory due diligence information
including appraisals, environmental reports and lease
information.
Other properties may be identified in the future that the Company may
acquire before or instead of these properties. The Company cannot make any
assurances that the closing of the acquisitions of these properties is probable.
In evaluating these properties as potential acquisitions and determining
the appropriate amount of consideration to be paid for the properties, the
Company has considered a variety of factors including overall valuation of net
rental income, location, demographics, quality of tenants, length of leases,
price per square foot, occupancy and the fact that overall rental rates at these
properties are comparable to market rates. The Company believes that these
properties are well located, have acceptable roadway access, are well maintained
and have been professionally managed. These properties will be subject to
competition from similar office buildings within their market area, and their
economic performance could be affected by changes in local economic conditions.
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 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
18
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. On a regular basis, the Company evaluates
these estimates, including investment impairment. 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 the
allocation of the purchase price of acquired properties and 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 that 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. In estimating the
carrying costs that would have otherwise been incurred had the leases not been
in place, management includes 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
19
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.
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 the three and nine month
periods ended September 30, 2004 are not comparable to results for the three and
nine month periods ended September 30, 2003.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003
Interest expense for the three months ended September 30, 2004 was
$490,808 and was comprised of interest expense and amortization of deferred
financing fees related to the Company's mortgages associated with its tenant in
common interest investments. During the three months ended September 30, 2003,
the Company did not own any real estate investments and there was no outstanding
debt. Management believes there will be significant increases in interest
expense in the future as the Company continues to invest in additional real
estate properties.
Property and asset management fees for the three months ended September
30, 2004 was $60,264 and was comprised of property management and asset
management fees associated with the Company's tenant in common interest
investments. During the three months ended September 30, 2003, the Company did
not own any real estate investments. Management believes there will be
significant increases in property and asset management fees in the future as the
Company continues to invest in additional real estate properties.
General and administrative expense for the three months ended September
30, 2004 was $335,931 and was comprised of corporate general and administrative
expenses including directors' and officers' insurance premiums, organizational
expenses, transfer agent fees, auditing fees, legal fees and other
administrative expenses. During the three months ended September 30, 2003, these
fees totaled $92,938 due to the lack of corporate activity.
Interest income for the three months ended September 30, 2004 was
$71,644 and was comprised of interest income associated with funds on deposits
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. During the three months ended September
30, 2003, the Company earned a significantly lower amount than in 2004 due to
the lower cash balances on deposit with banks.
Equity in earnings of investments in tenant in common interests for the
three months ended September 30, 2004 was $366,053 and was comprised of the
Company's share of equity in the earnings of Minnesota Center, Enclave on the
Lake, St. Louis Place and the Colorado Building. During the three months ended
September 30, 2003, the Company did not own any real estate investments.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Interest expense for the nine months ended September 30, 2004 was
$719,257 and was comprised of interest expense and amortization of deferred
financing fees related to the Company's mortgages associated with its tenant in
common interest investments. During the nine months ended September 30, 2003,
the Company did not own any real estate investments and there was no outstanding
debt. Management believes there will be
20
significant increases in interest expense in the future as the Company continues
to invest in additional real estate properties.
Property and asset management fees for the nine months ended September
30, 2004 was $100,808 and was comprised of property management and asset
management fees associated with the Company's tenant in common interest
investments. During the nine months ended September 30, 2003, the Company did
not own any real estate investments. Management believes there will be
significant increases in property and asset management fees in the future as the
Company continues to invest in additional real estate properties.
General and administrative expense for the nine months ended September
30, 2004 was $684,554 and was comprised of corporate general and administrative
expenses including directors' and officers' insurance premiums, organizational
expenses, transfer agent fees, auditing fees, legal fees and other
administrative expenses. During the nine months ended September 30, 2003, these
fees totaled $96,349 due to the lack of corporate activity.
Interest income for the nine months ended September 30, 2004 was
$147,406 and was comprised of interest income associated with funds on deposits
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. During the nine months ended September 30,
2003, the Company earned interest income of $1,530, a significantly lower amount
than in 2004 due to the lower cash balances on deposit with banks in 2003.
Equity in earnings of investments in tenant in common interests for the
nine months ended September 30, 2004 was $533,472 and was comprised of the
Company's share of equity in the earnings of Minnesota Center, Enclave on the
Lake, St. Louis Place, and the Colorado Building. During the nine months ended
September 30, 2003, the Company did not own any real estate investments.
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 the nine months ended September 30,
2004 are not comparable to the cash flows for the nine months ended September
30, 2003.
Cash flows used in operating activities for the nine months ended
September 30, 2004 were $(1,279,993) and were primarily comprised of the net
loss of $(823,741) adjusted for equity in earnings of investments in tenant in
common interests of $(533,472). During the nine months ended September 30, 2003,
cash flows from operating activities were $(45,380) primarily due to the lack of
investments and corporate activity.
Cash flows from investing activities for the nine months ended September
30, 2004 were $(79,954,364) and were comprised of purchases of interests in the
Enclave on the Lake, St. Louis Place, and the Colorado Building properties of
$(60,002,772) and deposits of $(21,027,187) for the purchase of a tenant in
common interest in an office building located in Houston, Texas which closed on
October 1, 2004, for the future acquisitions of an office building in Baltimore,
Maryland and rate lock deposits on future borrowings for future acquisitions,
partially offset by distributions from the Company's investment in tenant in
common interests of $1,075,595. During the nine months ended September 30, 2003,
there were no cash flows from investing activities.
Cash flows from financing activities for the nine months ended September
30, 2004 were $92,170,782 and were comprised primarily of funds received from
the issuance of stock and proceeds from mortgage notes less a $2,500,000
increase in restricted cash associated with the loan guarantees for Behringer
Holdings, as discussed in liquidity and capital resources. During the nine
months ended September 30, 2003, cash flows from financing activities were
$35,347 primarily due to the lack of investments and corporate activity.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for funds will continue to 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 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 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 Holdings. Each tenant
in common investor, including the Company, is a borrower under 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"). Certain obligations under the Minnesota Center Loan are
guaranteed by Robert M. Behringer and Behringer Holdings. The Minnesota Center
Loan may only be prepaid after the Minnesota Center Lockout Period. As of
September 30, 2004, the outstanding principal balance under the Minnesota Center
Loan was $4,296,970.
The Company used borrowings of $7,262,552 (the "Enclave Loan") under a
loan agreement (the "Enclave Loan Agreement") with State Farm Life Insurance
Company to pay a portion of the purchase price for its undivided 36.31276%
tenant in common interest in Enclave on the Lake. The remaining tenant in common
interests in Enclave on the Lake were acquired by various investors who
purchased their interests in a private offering sponsored by the Company's
affiliate, Behringer Holdings. Each tenant in common investor, including the
Company, is a borrower under the Enclave Loan Agreement. The original total
borrowings of all tenant in common interest holders under the Enclave Loan
Agreement was $20,000,000. The interest rate under the Enclave Loan is fixed at
5.45% per annum and requires principal and interest payments monthly based on a
30-year amortization period, with any unamortized principal due at maturity.
Certain obligations under the Enclave Loan are guaranteed by Robert M. Behringer
and Behringer Holdings. The Enclave Loan Agreement allows for prepayment of the
entire outstanding principal after 42 months from the date of the Enclave Loan
Agreement subject to the payment of a prepayment penalty. No prepayment penalty
is due after 81 months from the date of the Enclave Loan
22
Agreement. The Enclave Loan has a seven-year term. As of September 30, 2004, the
outstanding principal balance under the Enclave Loan was $7,232,433.
The Company used borrowings of $7,141,850 (the "St. Louis Place Loan")
under a loan agreement (the "St. Louis Place Loan Agreement") with Greenwich
Capital Financial Products, Inc. to pay a portion of its undivided 35.709251%
tenant in common interest in St. Louis Place. The remaining tenant in common
interests in St. Louis Place were acquired by various investors who purchased
their interests in a private offering sponsored by the Company's affiliate,
Behringer Holdings. Each tenant in common investor, including the Company, is a
borrower under the St. Louis Place Loan Agreement. The original total borrowings
of all tenant in common interest holders under the St. Louis Place Loan
Agreement was $20,000,000. The interest rate under the St. Louis Place Loan is
fixed at 6.078% per annum and requires principal and interest payments monthly
based on a 30-year amortization period, with any unamortized principal due at
maturity. Certain obligations under the St. Louis Place Loan are guaranteed by
Robert M. Behringer and Behringer Holdings. The St. Louis Place Loan Agreement
prohibits prepayment until the earlier of (i) 42 months or (ii) 2 years after
securitization after which and prior to month 81 it may be defeased. The St.
Louis Place Loan Agreement has a seven-year term. As of September 30, 2004, the
outstanding principal balance under the St. Louis Place Loan was $7,130,223.
The Company used borrowings of $19,868,791 (the "Colorado Property
Loan") under a loan agreement (the "Colorado Property Loan Agreement") with
Greenwich Capital Financial Products, Inc. to pay a portion of its undivided
79.4752% tenant in common interest in the Colorado Building. The remaining
tenant in common interests in the Colorado Building were acquired by various
investors who purchased their interests in a private offering sponsored by the
Company's affiliate, Behringer Holdings. Each tenant in common investor,
including the Company, is a borrower under the Colorado Property Loan Agreement.
The original total borrowings of all tenant in common interest holders under the
Colorado Property Loan Agreement was $25,000,000. Additional borrowings of
$3,000,000 are available under this loan agreement for tenant improvements. The
interest rate under the Colorado Property Loan is fixed at 6.075% per annum and
requires principal and interest payments monthly based on a 30-year amortization
period, with any unamortized principal due at maturity. Certain obligations
under the Colorado Property Loan are guaranteed by Robert M. Behringer and
Behringer Holdings. The Colorado Property Loan Agreement requires a minimum debt
coverage ratio of not less than 1.10 and allows for prepayment of the entire
outstanding principal with no prepayment fee from and after the third payment
prior to maturity, with at least 15 days prior notice. The Colorado Property
Loan Agreement has a ten year term. As of September 30, 2004, the outstanding
principal balance under the Colorado Property Loan was $19,868,791.
On October 1, 2004, the Company acquired an undivided 60% tenant in
common interest in Travis Tower, a 21-story office building containing
approximately 507,470 rentable square feet and a 10-story parking garage located
on approximately 1.1079 acres of land in Houston, Texas (the "Travis Property").
The contract price for the Travis Property was $52,000,000, plus closing costs.
The Company used borrowings of $22,650,000 under a loan agreement with Bear
Stearns Commercial Mortgage, Inc. to pay a portion of such purchase price and
paid the remaining portion of its purchase price from proceeds of the Company's
offering of its common stock. The Company's tenant in common interest is held by
Behringer Harvard Travis Tower H LP, which is wholly owned by the Company's
operating partnership, Behringer Harvard OP I.
The remaining 40% tenant in common interest in the Travis Property was
acquired by Behringer Harvard Travis Tower S LP, an indirect wholly owned
subsidiary of Behringer Harvard Holdings, LLC. Behringer Harvard Travis Tower S
LP intends to sell all or a portion of its 40% tenant in common interest to
various investors. Each tenant in common investor, including the Company, is a
party to the Travis Property Loan Agreement. The total borrowings of all tenant
in common interest holders under the Travis Property Loan Agreement is
$37,750,000. The interest rate under the Travis Property Loan Agreement is fixed
at 5.434% per annum. Certain obligations under the Travis Property Loan are
guaranteed by Robert M. Behringer and Behringer Holdings. The Travis Property
Loan Agreement allows for prepayment of the entire outstanding principal with no
prepayment fee during the last three months prior to maturity. The Travis
Property Loan Agreement has a ten-year term.
On October 1, 2004, in connection with the purchase of a 40% tenant in
common interest in Travis Tower, Behringer Holdings entered into a loan
agreement with First American Bank, SSB ("FAB") for $12,600,000 (the "Bridge
Loan"). The Bridge Loan bears interest at the greater of (i) 6% per annum, or
(ii) 1% in excess of the variable rate of interest per annum established from
time to time in the Money Rates column of THE WALL STREET JOURNAL (Central
Edition) or, if such publication designates two or more published rates as the
"prime
23
rate," the rate of interest per annum publicly announced by FAB as its prime
rate in effect at its principal office in Dallas, Texas. Commencing on January
1, 2005, and continuing thereafter through final maturity, the Bridge Loan is to
be paid in quarterly installments of all accrued and unpaid interest with the
entire amount of unpaid principal and interest due on October 1, 2005.
Pursuant to the Amended and Restated Accommodation Agreement between the
Company and Behringer Holdings, the Company guaranteed the Bridge Loan and
pledged an amount of cash held in an account with FAB equal to the principal
amount of the Bridge Loan to support such guarantee. The Company received a fee
of 1% of the Bridge Loan ($126,000) in consideration for such guarantee for an
initial six-month period and will receive an additional 1% for any additional
six-month period thereafter.
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. Currently, a portion of
the dividends are paid from cash provided by operations and a portion is paid
from sales of securities. 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 Holdings entered into an
agreement (the "Accommodation Agreement") whereby the Company would provide loan
guarantees to Behringer Holdings, so that Behringer Holdings 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 Holdings 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
Holdings. As of September 30, 2004, the Company had no loan guarantees
outstanding on borrowings by Behringer Holdings.
On August 9, 2004, the Accommodation Agreement was amended and restated
to include (1) options to extend the six month guaranty period for one or more
additional six-month periods, with an additional 1% fee payable on the date of
each extension; and (2) the option for the Company's guarantees to include the
guarantee of bridge loans. A bridge loan, as defined in the Amended and Restated
Accommodation Agreement, is any loan pursuant to which Behringer Holdings
acquires an interest in respect of a project, which interest is intended to be
sold in a tenant in common offering. Each bridge guaranty is limited to no more
than the obligations under the bridge loan. The term and fees associated with
the bridge guarantees are the same as those of the other guarantees allowed
under this agreement. The Company or its affiliates have the right, but not an
obligation, to purchase at least a 5% interest in each project with respect to
which a guaranty is made by the Company. The Company's purchase price for each
1% interest in a project will equal the price paid by Behringer Holdings, plus a
pro rata share of the closing costs.
On October 1, 2004, the Company acquired an undivided 60% tenant in
common interest in Travis Tower, a 21-story office building containing
approximately 507,470 rentable square feet and a 10-story parking garage located
on approximately 1.1079 acres of land in Houston, Texas (the "Travis Property").
The contract price for the Travis Property was $52,000,000, plus closing costs.
The Company used borrowings of $22,650,000 under a loan agreement with Bear
Stearns Commercial Mortgage, Inc. to pay a portion of such purchase price and
paid the remaining portion of its purchase price from proceeds of the Company's
offering of its common stock. The Company's tenant in common interest is held by
Behringer Harvard Travis Tower H LP, which is wholly owned by the Company's
operating partnership, Behringer Harvard OP I.
The remaining 40% tenant in common interest in the Travis Property was
acquired by Behringer Harvard Holdings, LLC. Behringer Harvard Travis Tower S
LP, an indirect wholly owned subsidiary of Behringer Harvard Travis Tower S LP
intends to sell all or a portion of its 40% tenant in common interest to various
investors. Each
24
tenant in common investor, including the Company, is a party to the Travis
Property Loan Agreement. The total borrowings of all tenant in common interest
holders under the Travis Property Loan Agreement is $37,750,000. The interest
rate under the Travis Property Loan Agreement is fixed at 5.434% per annum.
Certain obligations under the Travis Property Loan are guaranteed by Robert M.
Behringer and Behringer Holdings. The Travis Property Loan Agreement allows for
prepayment of the entire outstanding principal with no prepayment fee during the
last three months prior to maturity. The Travis Property Loan Agreement has a
ten-year term.
On October 1, 2004, in connection with the purchase of a 40% tenant in
common interest in Travis Tower, Behringer Holdings entered into a loan
agreement with First American Bank, SSB ("FAB") for $12,600,000 (the "Bridge
Loan"). The Bridge Loan bears interest at the greater of (i) 6% per annum, or
(ii) 1% in excess of the variable rate of interest per annum established from
time to time in the Money Rates column of THE WALL STREET JOURNAL (Central
Edition) or, if such publication designates two or more published rates as the
"prime rate," the rate of interest per annum publicly announced by FAB as its
prime rate in effect at its principal office in Dallas, Texas. Commencing on
January 1, 2005, and continuing thereafter through final maturity, the Bridge
Loan is to be paid in quarterly installments of all accrued and unpaid interest
with the entire amount of unpaid principal and interest due on October 1, 2005.
Pursuant to the Amended and Restated Accommodation Agreement between the
Company and Behringer Holdings, the Company guaranteed the Bridge Loan and
pledged an amount of cash held in an account with FAB equal to the principal
amount of the Bridge Loan to support such guarantee. The Company received a fee
of 1% of the Bridge Loan ($126,000) in consideration for such guarantee for an
initial six-month period and will receive an additional 1% for any additional
six-month period thereafter.
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.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as
of September 30, 2004:
Payments due by period
------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
-------------------------------------------------------------------------------------------
Mortgage note payable
Minnesota Center $ 4,296,970 $ 45,872 $ 110,424 $ 124,352 $ 4,016,322
Enclave on the Lake 7,232,433 94,872 206,181 229,082 6,702,298
St. Louis Place 7,130,223 81,044 177,826 199,822 6,671,531
Colorado Building 19,868,791 401,454 880,831 992,586 17,593,920
-------------------------------------------------------------------------------------------
$ 38,528,417 $ 623,242 $ 1,375,262 $ 1,545,842 $ 34,984,071
===========================================================================================
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.
25
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 1% increase or decrease in
interest rates. 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 Company's disclosure controls and procedures as of September 30, 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.
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.` UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
As of September 30, 2004, the Company had sold the following securities
pursuant to the Offering for the following aggregate offering prices:
o 7,867,437 shares on a best efforts basis for $78,415,265; and
o 66,475 shares pursuant to the Company's dividend reinvestment
plan for $663,876.
The total of shares and gross offering proceeds pursuant to the Offering
as of September 30, 2004 is 7,933,912 shares for $79,079,141. 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 Holdings preceding the
commencement of the Offering.
Through September 30, 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 $ 9,234,559
Other expenses to non-affiliates 14,386
--------------------
Total expenses $ 9,248,945
====================
The net offering proceeds to the Company, after deducting the total
expenses paid and accrued described above, are $69,830,196.
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.
26
Through September 30, 2004, the Company had used $29,966,393 of such net
offering proceeds to purchase its tenant in common interest investments, net of
the mortgages payable. Of the amount used for the purchase of these investments,
$2,321,175 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.
On November 4, 2004, the Company entered into an assignment from Harvard
Property Trust, LLC, an affiliated entity, of a contract to purchase Alamo
Plaza, a 16-story office building containing approximately 191,151 rentable
square feet and a four-story parking garage located on approximately 1.15 acres
of land in Denver, Colorado from MG-Alamo, LLC, an unaffiliated third party. The
contract price for Alamo Plaza is $41,750,000, plus closing costs. At closing,
the Company intends to assign a portion its ownership interest to Behringer
Holdings for reorganization of the property into tenant in common interests in
which the Company will retain a significant interest. As of the date of this
filing, a $3,000,000 deposit has been made by the Company.
On November 4, 2004, the Company entered into an assignment from Harvard
Property Trust, LLC, an affiliated entity, of a contract to purchase Ashford
Perimeter, a six-story office building containing approximately 288,175 rentable
square feet and a four-story parking garage located on approximately 10.6 acres
of land in Atlanta, Georgia from HSOV Ashford Perimeter, LLC, an unaffiliated
third party. The contract price for Ashford Perimeter is $46,300,000, plus
closing costs. The contract includes an obligation of the purchaser to pay the
prepayment premium under the existing loan on the property and provides that the
purchase price will be increased by one-half of any negotiated reduction of such
prepayment premium. At closing, the Company intends to assign a portion its
ownership interest to Behringer Holdings for reorganization of the property into
tenant in common interests in which the Company will retain a significant
interest. Deposits totaling $2,000,000 are required under the purchase
agreement. As of the date of this filing, a $1,000,000 deposit has been made by
the Company and the remaining $1,000,000 deposit is expected to be funded on or
about November 29, 2004.
The consummation of the purchases of Alamo Plaza and Ashford Perimeter
are subject to substantial conditions. The Company's decision to consummate the
acquisition of these properties will generally depend upon:
o the satisfaction of the conditions to the acquisitions contained
in their respective contracts;
o no material adverse change occurring relating to the properties,
tenants or local economic conditions;
o the Company's receipt of sufficient net proceeds from the
offering of its common stock to the public and financing
proceeds to complete these acquisitions; and
o the Company's receipt of satisfactory due diligence information
including appraisals, environmental reports and lease
information.
Other properties may be identified in the future that the Company may
acquire before or instead of these properties. The Company cannot make any
assurances that the closing of the acquisitions of these properties is probable.
In evaluating these properties as potential acquisitions and determining
the appropriate amount of consideration to be paid for the properties, the
Company has considered a variety of factors including overall valuation of net
rental income, location, demographics, quality of tenants, length of leases,
price per square foot,
27
occupancy and the fact that overall rental rates at these properties are
comparable to market rates. The Company believes that these properties are well
located, have acceptable roadway access, are well maintained and have been
professionally managed. These properties will be subject to competition from
similar office buildings within their market area, and their economic
performance could be affected by changes in local economic conditions.
ITEM 6. EXHIBITS.
The exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
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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 10, 2004 By: /s/ Gary S. Bresky
-----------------------------------------
Gary S. Bresky
Chief Financial Officer and Treasurer
29
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Purchase and Sale Agreement by and between MG-Alamo, LLC and
Harvard Property Trust, LLC dated October 18, 2004, as
assigned by Harvard Property Trust to the Company on November
4, 2004
10.2 Agreement of Sale and Purchase by and between HSOV Ashford
Perimeter, LLC and Harvard Property Trust, LLC dated November
4, 2004, as assigned by Harvard Property Trust to the Company
on November 4, 2004.
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