Attached files
file | filename |
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EX-32.2 - CapLease, Inc. | v165043_ex32-2.htm |
EX-32.1 - CapLease, Inc. | v165043_ex32-1.htm |
EX-12.1 - CapLease, Inc. | v165043_ex12-1.htm |
EX-31.2 - CapLease, Inc. | v165043_ex31-2.htm |
EX-31.1 - CapLease, Inc. | v165043_ex31-1.htm |
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, 2009
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 001-32039
CapLease,
Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
52-2414533
|
(State or Other Jurisdiction of
|
(I.R.S. Employer Identification No.)
|
Incorporation or Organization)
|
|
1065 Avenue of the Americas, New York, NY
|
10018
|
(Address of Principal Executive Offices)
|
(ZIP Code)
|
Registrant’s Telephone Number, Including Area Code:
|
(212) 217-6300
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the Registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “accelerated filer,” “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer ¨
|
Accelerated filer x
|
Non-accelerated filer ¨ Smaller reporting company ¨ | |
(Do not check if a smaller reporting company)
|
Indicate by
check mark whether the Registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes ¨ No x
As of
November 6, 2009, there were 51,537,811 shares of common stock of CapLease,
Inc., $0.01 par value per share, outstanding (“Common Stock”).
CapLease,
Inc.
Index
to Form 10-Q
Page
|
||
PART
I. FINANCIAL INFORMATION
|
2
|
|
Item
1.
|
Financial
Statements
|
2
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
2
|
|
Consolidated
Statements of Operations (unaudited) for the Three and Nine Months Ended
September 30, 2009 and 2008
|
3
|
|
Consolidated
Statement of Changes in Equity (unaudited) for the Nine Months Ended
September 30, 2009
|
4
|
|
Consolidated
Statements of Cash Flows (unaudited) for the Nine Months Ended
September 30, 2009 and 2008
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
42
|
Item
4.
|
Controls
and Procedures
|
45
|
PART
II. OTHER INFORMATION
|
45
|
|
Item
1.
|
Legal
Proceedings
|
45
|
Item
1A.
|
Risk
Factors
|
45
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
46
|
Item
3.
|
Defaults
Upon Senior Securities
|
46
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
46
|
Item
5.
|
Other
Information
|
46
|
Item
6.
|
Exhibits
|
46
|
SIGNATURES
|
47
|
1
PART
I.
|
FINANCIAL
INFORMATION
|
Item
1.
|
Financial
Statements
|
CapLease,
Inc. and Subsidiaries
Consolidated
Balance Sheets
As of
September 30, 2009 (unaudited) and December 31, 2008
(Amounts in thousands, except share and per share amounts)
|
As Of
September 30,
2009
|
As Of
December 31,
2008
|
||||||
Assets
|
||||||||
Real
estate investments, net
|
$ | 1,446,555 | $ | 1,510,413 | ||||
Loans
held for investment, net
|
223,841 | 285,779 | ||||||
Commercial
mortgage-backed securities
|
152,180 | 161,842 | ||||||
Cash
and cash equivalents
|
41,231 | 8,439 | ||||||
Structuring
fees receivable
|
1,291 | 1,863 | ||||||
Other
assets
|
75,488 | 77,189 | ||||||
Total
Assets
|
$ | 1,940,586 | $ | 2,045,525 | ||||
Liabilities
and Equity
|
||||||||
Mortgages
on real estate investments
|
$ | 947,732 | $ | 972,324 | ||||
Collateralized
debt obligations
|
263,300 | 268,265 | ||||||
Credit
facility
|
129,188 | 189,262 | ||||||
Secured
term loan
|
116,697 | 123,719 | ||||||
Convertible
senior notes
|
49,216 | 66,239 | ||||||
Other
long-term debt
|
30,930 | 30,930 | ||||||
Total
Debt Obligations
|
1,537,063 | 1,650,739 | ||||||
Intangible
liabilities on real estate investments
|
47,375 | 49,277 | ||||||
Accounts
payable, accrued expenses and other liabilities
|
23,866 | 19,879 | ||||||
Dividends
and distributions payable
|
3,296 | 711 | ||||||
Total
Liabilities
|
1,611,600 | 1,720,606 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $0.01 par value, 100,000,000 shares authorized, Series A cumulative
redeemable preferred, liquidation preference $25.00 per share, 1,400,000
shares issued and outstanding
|
33,657 | 33,657 | ||||||
Common
stock, $0.01 par value, 500,000,000 shares authorized, 51,537,811 and
47,391,790 shares issued and outstanding, respectively
|
515 | 474 | ||||||
Additional
paid in capital
|
319,197 | 317,565 | ||||||
Accumulated
other comprehensive (loss)
|
(25,692 | ) | (28,118 | ) | ||||
Total
Stockholders' Equity
|
327,677 | 323,578 | ||||||
Non-controlling
interest in consolidated subsidiaries
|
1,309 | 1,341 | ||||||
Total
Equity
|
328,986 | 324,919 | ||||||
Total
Liabilities and Equity
|
$ | 1,940,586 | $ | 2,045,525 |
See notes
to consolidated financial statements.
2
CapLease,
Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
For the Three Months
Ended September 30
|
For the Nine Months
Ended September 30
|
|||||||||||||||
(Amounts in thousands, except per share amounts)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Revenues:
|
||||||||||||||||
Rental
revenue
|
$ | 34,592 | $ | 33,850 | $ | 102,342 | $ | 101,602 | ||||||||
Interest
income from loans and securities
|
7,621 | 8,662 | 23,592 | 26,519 | ||||||||||||
Property
expense recoveries
|
2,700 | 2,827 | 8,416 | 8,430 | ||||||||||||
Other
revenue
|
161 | 197 | 524 | 603 | ||||||||||||
Total
revenues
|
45,074 | 45,536 | 134,874 | 137,154 | ||||||||||||
Expenses:
|
||||||||||||||||
Interest
expense
|
22,386 | 24,734 | 68,120 | 73,657 | ||||||||||||
Property
expenses
|
4,759 | 4,845 | 14,903 | 14,341 | ||||||||||||
(Gain)
loss on derivatives
|
– | (444 | ) | – | 1,418 | |||||||||||
Loss
on investments
|
5,912 | 1,025 | 13,739 | 1,025 | ||||||||||||
General
and administrative expenses
|
2,596 | 2,776 | 7,750 | 9,018 | ||||||||||||
General
and administrative expenses-stock based compensation
|
550 | 621 | 1,570 | 1,682 | ||||||||||||
Depreciation
and amortization expense on real property
|
12,596 | 13,539 | 39,233 | 40,110 | ||||||||||||
Loan
processing expenses
|
76 | 80 | 232 | 207 | ||||||||||||
Total
expenses
|
48,875 | 47,176 | 145,547 | 141,458 | ||||||||||||
Gain
on extinguishment of debt
|
415 | – | 9,829 | – | ||||||||||||
Loss
from continuing operations
|
(3,386 | ) | (1,640 | ) | (844 | ) | (4,304 | ) | ||||||||
Income
from discontinued operations
|
– | 141 | 196 | 415 | ||||||||||||
Net
loss before non-controlling interest in consolidated
subsidiaries
|
(3,386 | ) | (1,499 | ) | (648 | ) | (3,889 | ) | ||||||||
Non-controlling
interest in consolidated subsidiaries
|
13 | 11 | 9 | 29 | ||||||||||||
Net
loss
|
(3,373 | ) | (1,488 | ) | (639 | ) | (3,860 | ) | ||||||||
Dividends
allocable to preferred shares
|
(711 | ) | (711 | ) | (2,133 | ) | (2,133 | ) | ||||||||
Net
loss allocable to common stockholders
|
$ | (4,084 | ) | $ | (2,199 | ) | $ | (2,772 | ) | $ | (5,993 | ) | ||||
Earnings
per share:
|
||||||||||||||||
Net
loss per common share, basic and diluted
|
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.13 | ) | ||||
Weighted
average number of common shares outstanding, basic and
diluted
|
50,179 | 45,555 | 48,539 | 44,902 | ||||||||||||
Dividends
declared per common share
|
$ | 0.05 | $ | 0.20 | $ | 0.15 | $ | 0.60 | ||||||||
Dividends
declared per preferred share
|
$ | 0.51 | $ | 0.51 | $ | 1.52 | $ | 1.52 |
See notes
to consolidated financial statements.
3
CapLease,
Inc. and Subsidiaries
Consolidated
Statement of Changes in Equity
(Unaudited)
(in
thousands)
Stockholders' Equity
|
||||||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
at Par
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Retained
Earnings
|
Non-controlling
Interest
|
Total
Equity
|
||||||||||||||||||||||
Balance
at December 31, 2008
|
$ | 33,657 | $ | 474 | $ | 312,187 | $ | (28,118 | ) | $ | – | $ | 1,341 | $ | 319,541 | |||||||||||||
Cumulative
effect of new accounting treatment of convertible senior
notes
|
– | – | 5,378 | – | – | – | 5,378 | |||||||||||||||||||||
Balance
at December 31, 2008-as adjusted
|
33,657 | 474 | 317,565 | (28,118 | ) | – | 1,341 | 324,919 | ||||||||||||||||||||
Incentive
stock plan compensation expense
|
– | – | 1,570 | – | – | – | 1,570 | |||||||||||||||||||||
Incentive
stock plan grants issued and forfeited
|
– | 11 | (11 | ) | – | – | – | – | ||||||||||||||||||||
Net
loss
|
– | – | (639 | ) | – | – | – | (639 | ) | |||||||||||||||||||
Non-controlling
interest in consolidated subsidiaries
|
– | – | – | – | – | (9 | ) | (9 | ) | |||||||||||||||||||
Issuance
of common stock
|
– | 30 | 10,250 | – | – | – | 10,280 | |||||||||||||||||||||
Dividends
declared-preferred
|
– | – | (2,133 | ) | – | – | – | (2,133 | ) | |||||||||||||||||||
Dividends
declared-common
|
– | – | (7,405 | ) | – | – | – | (7,405 | ) | |||||||||||||||||||
Distributions
declared-operating partnership units
|
– | – | – | – | – | (23 | ) | (23 | ) | |||||||||||||||||||
Amortization
of unrealized loss on securities previously classified as available
for sale
|
– | – | – | 419 | – | – | 419 | |||||||||||||||||||||
Increase
in fair value of securities available for sale
|
– | – | – | 1,411 | – | – | 1,411 | |||||||||||||||||||||
Reclassification
of derivative items into earnings
|
– | – | – | 596 | – | – | 596 | |||||||||||||||||||||
Balance
at September 30, 2009
|
$ | 33,657 | $ | 515 | $ | 319,197 | $ | (25,692 | ) | $ | – | $ | 1,309 | $ | 328,986 |
See notes
to consolidated financial statements.
4
CapLease,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
For the Nine Months
Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$ | (639 | ) | $ | (3,860 | ) | ||
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
39,619 | 40,803 | ||||||
Stock
based compensation
|
1,570 | 1,682 | ||||||
Amortization
of above and below market leases
|
1,016 | 1,077 | ||||||
Loss
(gain) attributable to non-controlling interest in consolidated
subsidiaries
|
(9 | ) | (29 | ) | ||||
Gain
on extinguishment of debt
|
(9,829 | ) | – | |||||
Loss
on investments
|
13,739 | 1,025 | ||||||
Loss
on derivatives
|
– | 1,418 | ||||||
Straight-lining
of rents
|
5,825 | 3,775 | ||||||
Amortization
of discounts/premiums, and origination fees/costs, net
|
(350 | ) | (264 | ) | ||||
Amortization
of debt issuance costs and fair market value of debt issued or
assumed
|
2,666 | 2,084 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Structuring
fees receivable
|
572 | 529 | ||||||
Other
assets
|
(7,068 | ) | 3,268 | |||||
Accounts
payable, accrued expenses and other liabilities
|
1,523 | 878 | ||||||
Deposits
and escrows
|
1 | (473 | ) | |||||
Amounts
due to servicer
|
– | (1 | ) | |||||
Net
cash provided by operating activities
|
48,636 | 51,912 | ||||||
Investing
activities
|
||||||||
Proceeds
from sale of loans
|
41,206 | – | ||||||
Additions
to loans held for investment
|
(790 | ) | – | |||||
Principal
received from borrowers
|
12,817 | 5,184 | ||||||
Purchase
of commercial mortgage-backed securities
|
(496 | ) | – | |||||
Proceeds
from sale of securities available for sale
|
7,475 | – | ||||||
Principal
amortization on commercial mortgage-backed securities
|
2,681 | 2,153 | ||||||
Proceeds
from sale of real estate investments
|
6,544 | – | ||||||
Real
estate improvements, additions, rebates and construction in
progress
|
(794 | ) | 948 | |||||
Purchases
of furniture, fixtures, equipment and leasehold
improvements
|
(5 | ) | (19 | ) | ||||
Net
cash provided by investing activities
|
68,638 | 8,266 | ||||||
Financing
activities
|
||||||||
Repayments
of repurchase agreement obligations
|
– | (232,867 | ) | |||||
Borrowings
from mortgages on real estate investments
|
1,164 | 1,046 | ||||||
Repayments
of mortgages on real estate investments
|
(9,594 | ) | (8,123 | ) | ||||
Collateralized
debt obligations repurchased
|
(2,881 | ) | – | |||||
Borrowings
from credit facility
|
– | 210,392 | ||||||
Repayments
on credit facility
|
(60,074 | ) | (12,196 | ) | ||||
Repayments
on secured term loan
|
(7,022 | ) | (4,273 | ) | ||||
Convertible
senior notes repurchased
|
(9,583 | ) | – | |||||
Debt
issuance costs
|
(6 | ) | (1,783 | ) | ||||
Escrows
held with mortgage lender
|
212 | 600 | ||||||
Funds
used in hedging and risk management activities
|
– | (8,502 | ) | |||||
Common
stock issued, net of offering costs
|
10,280 | 19,592 | ||||||
Distributions
to non-controlling interest
|
(16 | ) | (158 | ) | ||||
Dividends
paid on common and preferred stock
|
(6,962 | ) | (28,925 | ) | ||||
Net
cash used in financing activities
|
(84,482 | ) | (65,197 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
32,792 | (5,019 | ) | |||||
Cash
and cash equivalents at beginning of period
|
8,439 | 34,047 | ||||||
Cash
and cash equivalents at end of period
|
$ | 41,231 | $ | 29,028 |
See notes
to consolidated financial statements.
5
CapLease,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows – continued
(Unaudited)
(in
thousands)
For
the Nine Months
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Supplemental
disclosure of cash flow information
|
||||||||
Cash
paid for interest expense (excluding capitalized interest)
|
$ | 64,217 | $ | 70,174 | ||||
Distributions
declared but not paid
|
8 | 31 | ||||||
Dividends
declared but not paid
|
3,288 | 10,186 | ||||||
Supplemental
disclosure of noncash operating, investing and financing
information
|
||||||||
Securities
transferred to loans held for investment
|
$ | – | $ | 24,453 | ||||
Mortgage
notes payable transferred on properties sold
|
14,400 | – | ||||||
Operating
partnership units redeemed in exchange for common shares
|
– | 1,014 |
See notes
to consolidated financial statements.
6
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
1.
|
Organization
|
CapLease,
Inc. (“CapLease” and collectively with its majority-owned subsidiaries, the
“Company”) is a diversified real estate investment trust, or REIT, that invests
primarily in single tenant commercial real estate assets subject to long-term
leases to high credit quality tenants. The Company focuses on
properties that are subject to a net lease, or a lease that requires the tenant
to pay all or substantially all expenses normally associated with the ownership
of the property, such as utilities, real estate taxes, insurance and routine
maintenance. The Company also has made and expects to continue to
make investments in single tenant properties where the owner has exposure to
property expenses when it determines it can sufficiently underwrite that
exposure and isolate a predictable cash flow.
The
Company has two complimentary business lines: owning single tenant
properties and making first mortgage loans and other debt investments on single
tenant properties.
CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes. As such, it will generally
not be subject to federal income tax on that portion of its taxable income that
is distributed to stockholders if it distributes at least 90% of its taxable
income to its stockholders by prescribed dates and complies with various other
requirements.
CapLease
conducts its business through a variety of subsidiaries. CapLease
owns most of its owned properties through its predecessor and operating
partnership, Caplease, LP (the “Operating Partnership”). CapLease is
the indirect sole general partner of, and owns approximately 99.6% of the common
equity of, the Operating Partnership.
The
accompanying consolidated financial statements and related notes of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial reporting and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in the financial
statements prepared under accounting principles generally accepted in the United
States have been condensed or omitted. In the opinion of management,
all adjustments considered necessary for a fair presentation of the Company’s
financial position, results of operations and cash flows have been included and
are of a normal and recurring nature. The operating results presented
for interim periods are not necessarily indicative of the results that may be
expected for any other interim period or for the entire year. These
financial statements should be read in conjunction with the Company’s
consolidated financial statements for the fiscal year ended December 31, 2008
and notes thereto, included in the Company’s Form 10-K filed with the SEC on
March 6, 2009.
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the assets, liabilities,
and results of operations of the Company. Results of operations of
properties acquired are included in the Consolidated Statements of Operations
from the date of acquisition. The Company accounts for properties
that it intends to dispose of in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Codification Statement (“ASC”) 360-10-45
(formerly Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets). All significant intercompany
transactions, balances and accounts have been eliminated in
consolidation.
Accounting
for Real Estate
Real
estate is carried on the Company’s Consolidated Balance Sheet at cost, net of
accumulated depreciation and amortization. Depreciation and
amortization are determined by the straight-line method over the remaining
estimated economic useful lives of the properties. The Company has
allocated the purchase price of its owned properties to the following based on
estimated fair values on the acquisition date: land (no
depreciation), building and improvements (depreciated over periods not exceeding
40 years), above-market leases (amortized as a reduction of base rental revenue
over the remaining term of the respective lease), below-market leases (amortized
as an increase to base rental revenue over the remaining initial term plus the
term of any below-market renewal options of the respective lease), and in-place
leases (amortized as a component of depreciation and amortization expense over
the remaining initial term of the respective lease). Direct costs
incurred in acquiring properties are capitalized. Expenditures for
maintenance and repairs are charged to operations as
incurred. Significant renovations which extend the useful life of the
properties are capitalized.
7
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
Company reviews its owned real properties for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, in accordance with FASB ASC 360-10-35-21 (formerly SFAS No.
144). Upon determination of impairment, the Company would record a
write-down of the asset, which would be charged to
earnings. Significant judgment is required both in determining
impairment and in estimating the resulting write-down, including an evaluation
of factors such as the credit quality of the tenant, the anticipated cash flows
of the property, based on current leases in place, and an estimate of what lease
rents will be if the property is vacated coupled with an estimate of proceeds to
be realized upon sale. However, these estimates are highly subjective
and could differ materially from actual results. The Company
recognized $2,853 of impairment losses on long-lived assets during the nine
months ended September 30, 2009, related to an owned property sold in the second
quarter of 2009. See Note 6. The Company recognized $354
of impairment losses on long-lived assets during the three and nine months ended
September 30, 2008, related to a property it owns in Wyomissing, Pennsylvania
leased to Cott Corporation.
FASB ASC
360-10-45-9 and 360-10-45-14 (formerly SFAS No. 144) also requires that
long-lived assets and related liabilities that meet various criteria be
classified as held for sale and presented separately in the Consolidated Balance
Sheet. The operating results of these assets are reflected as
discontinued operations in the Consolidated Statement of
Operations. The Company reclassified the owned property it sold in
the second quarter of 2009 as held for sale at March 31, 2009, and as a result
the operating results from this property have been reclassified as discontinued
operations. See Note 6.
Loan
Investments
The
Company classifies its loans as long-term investments, as its strategy is to
hold the loans for the foreseeable future or until maturity. Loan
investments are carried on the Company’s Consolidated Balance Sheet at amortized
cost (unpaid principal balance adjusted for unearned discount or premium and
loan origination fees), net of any allowance for loan
losses. Unearned discounts or premiums and loan origination fees are
amortized as a component of interest income using the effective interest method
over the life of the loan.
In
accordance with FASB ASC 948-310-35-1 (formerly SFAS No. 65, Accounting for Certain Mortgage
Banking Activities), loans that the Company expects to sell, if any, are
classified as held for sale and carried at lower of cost or market
value. As of September 30, 2009, the Company had not classified any
of its loans as held for sale.
The
Company evaluates its loan investments for possible impairment on a quarterly
basis. The Company’s impairment analysis includes both a general
reserve component under FASB ASC 310-10-35-10 (formerly SFAS No. 5, Accounting for
Contingencies), and an asset-specific component under FASB ASC
310-10-35-16 (formerly SFAS No. 114, Accounting by Creditors for
Impairments of a Loan). The general reserve component covers
performing loans and in accordance with FASB ASC 310-10-35-10 provisions for
loan losses are recorded when (i) available information as of each balance
sheet date indicates that it is probable a loss has occurred in the portfolio
and (ii) the amount of the loss can be reasonably
estimated. Actual loan losses are then charged against the allowance
when management believes that uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance. Significant judgment is required in determining reserve
balances for the performing loan portfolio, including estimates of the
likelihood of default and lease rejection given the credit characteristics of
the tenant, and estimates of stressed collateral values and potential bankruptcy
claim recoveries. As of September 30, 2009, the Company has a
general loan loss reserve in accordance with FASB ASC 310-10-35-10 of
$500. See Note 4.
The
asset-specific component of the loan loss impairment analysis is conducted in
accordance with FASB ASC 310-10-35-16, and covers specific loans where the
Company has deemed it probable that it will not be able to collect all amounts
due according to the contractual terms of the loan. Any resulting
loan specific loss is measured based on the present value of expected future
cash flows from the loan or the fair value of the loan collateral, if the loan
is collateral dependent. Significant judgment is required in
determining any resulting loan specific loss, including factors such as the
status of the loans (i.e., current or actual or expected payment or other
defaults), the credit quality of the underlying tenants, the present value of
expected future cash flows on the loans, the fair value of any collateral, and
the amount and status of any senior debt. The Company’s accounting
policy is to continue to accrue interest income on specific impaired loans as
long as it concludes it is likely to collect it. As of
September 30, 2009, the Company had an asset-specific loan loss reserve of
$444 on a single impaired loan. See Note 4.
8
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
Commercial
Mortgage-Backed Securities
The
Company designates its commercial mortgage-backed securities and other real
estate securities (“CMBS”) investments pursuant to FASB ASC 320-10 (formerly
SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities). FASB
ASC 320-10 creates two classifications that are relevant with respect to the
Company’s securities investments:
|
·
|
“Held
to maturity” are those securities that the Company has the positive intent
and ability to hold until maturity. Under FASB ASC 320-10-25-1,
securities classified as held to maturity are presented at cost plus the
amortization of any premiums or discounts. For a security
transferred into the held to maturity category, the security is recorded
at estimated fair value on the date of transfer, with any unrealized gain
or loss amortized against the related fair value adjustment recorded as a
component of Other Comprehensive Income (Loss) within Stockholders’ Equity
over the expected term of the security using the effective interest
method.
|
|
·
|
“Available
for sale” are those securities that the Company does not hold for the
purpose of selling in the near-term, but may dispose of prior to
maturity. They are presented on the Consolidated Balance Sheet
at fair value with the net unrealized gains or losses included in
Accumulated Other Comprehensive Income (Loss), a component of
Stockholders’ Equity on the Company’s Consolidated Balance
Sheet.
|
In
January 2008, the Company reclassified a total of 11 securities that are
financed in its March 2005 collateralized debt obligation or in the December
2007 secured term loan transaction discussed at Note 9, from “available for sale” to “held to maturity,” as
the Company has the positive intent and ability to hold all of those securities
until maturity and the terms of the financings significantly restrict or
prohibit a sale. As of the date of transfer, the unrealized loss on
the securities reclassified as held to maturity included in Other Comprehensive
Income (Loss) was $(9,722). The Company classifies all of its other
securities investments as “available for sale.”
Any
premiums or discounts on securities are amortized as a component of interest
income using the effective interest method.
The
Company estimates fair value on all securities investments quarterly, and
unrealized losses that in the judgment of management are “other-than-temporary”
are charged against earnings as a loss on the Consolidated Statement of
Operations. In estimating other-than-temporary impairment losses,
management considers a variety of factors including (1) the financial condition
and near-term prospects of the credit, including credit rating of the security
and the underlying tenant and an estimate of the likelihood and expected timing
of any default, (2) the intent and ability of the Company to retain its
investment for a period of time sufficient to allow for anticipated recovery in
fair value, (3) the length of time and the extent to which the fair value has
been below cost, (4) current market conditions, (5) an estimate of underlying
collateral values, and (6) subordination levels within the securitization
pool. These estimates are highly subjective and could differ
materially from actual results. During the three and nine months
ended September 30, 2009, the Company had losses on securities charged to
the Statement of Operations of $0 and $133, respectively. The Company
had no losses on securities charged to the Statement of Operations during the
three and nine months ended September 30, 2008.
Deferred
Origination Fees and Costs
In
accordance with FASB ASC 310-20-25-2 (formerly SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases), the Company defers the recognition of fees and expenses
associated with the origination of its loans held for
investment. These items include lender fee income, rate lock income,
direct loan origination costs, certain legal fees, insurance costs, rating
agency fees and certain other expenses. Deferred fees and costs are
recognized as an adjustment to the effective yield over the life of the related
asset.
9
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
Cash
and Cash Equivalents
The
Company defines cash equivalents as highly liquid investments purchased with
maturities of three months or less at date of purchase. From time to
time, the Company’s account balance held at financial institutions exceeds
Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a
result, there is a concentration of credit risk related to the balance on
deposit in excess of FDIC insurance coverage. The Company believes
that the risk of loss is not significant.
Revenue
Recognition
Rental
revenue on real estate is recognized in accordance with FASB ASC 840-20-25-1
(formerly SFAS No. 13, Accounting for
Leases). Rental revenue is recognized on a straight-line basis
over the non-cancelable term of the lease unless another systematic and rational
basis is more representative of the time pattern in which the use benefit is
derived from the leased property. This includes the effects of rent
steps and rent abatements under the leases.
Interest
income from loans, securities, and structuring fees receivable, is recognized on
the accrual basis of accounting. Interest income from securities
(including interest-only strips) is recognized over the life of the investment
using the effective interest method. The cost basis of interest-only
strips is adjusted to reflect any prepayments from underlying assets, using the
initial yield-to-maturity at the purchase date. The Company has
adopted the cost-recovery method, in which all receipts are applied to reduce
the Company’s cost basis, on a limited number of its securities
investments.
On
occasion, the Company may consider a loan to be non-performing and place the
loan on non-accrual status. While on non-accrual status, the loan is accounted
for on either a cash basis, in which case interest income is recognized only
upon actual receipt, or on a cost-recovery basis based upon management’s
judgment as to the collectibility of the investment.
Income
Taxes
CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes. As such, it will generally
not be subject to federal income tax on that portion of its taxable income that
is distributed to stockholders if it distributes at least 90% of its taxable
income to its stockholders by prescribed dates and complies with various other
requirements. From time to time, the Company may conduct a portion of
its business through a taxable REIT subsidiary (“TRS”), and the income from the
activities of the TRS is subject to federal and state taxation at the applicable
corporate rates.
Earnings
per Share
In
accordance with FASB ASC 260-10-15 (formerly SFAS No. 128, Earnings per Share), the
Company presents both basic and diluted earnings per share
(“EPS”). Basic EPS excludes dilution and is computed by dividing net
income (loss) allocable to common stockholders by the weighted average number of
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
where such exercise or conversion would result in a lower EPS
amount. The Company’s computation of diluted earnings per share does
not include shares of common stock that may be issued in the future upon
conversion of the convertible senior notes issued in October 2007, as the impact
would not be dilutive. The number of weighted average common shares
not included was 4,653,228 and 5,142,024, respectively, for the three and nine
months ended September 30, 2009. For each of the 2008 periods, the
number of weighted average common shares not included was
6,627,780.
10
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
following summarizes the Company’s EPS computations for the three and nine
months ended September 30, 2009 and September 30, 2008 (in thousands,
except per share amounts):
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss allocable to common stockholders
|
$ | (4,084 | ) | $ | (2,199 | ) | $ | (2,772 | ) | $ | (5,993 | ) | ||||
Weighted
average number of common shares outstanding, basic and
diluted
|
50,179 | 45,555 | 48,539 | 44,902 | ||||||||||||
Loss
per share, basic and diluted
|
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.13 | ) | ||||
Non-vested
shares included in weighted average number of shares outstanding
above
|
1,803 | 932 | 1,803 | 932 |
Subsequent
Events
In
accordance with FASB ASC 855-10 (formerly SFAS No. 165, Subsequent Events), the
Company performed an evaluation of subsequent events through November 6, 2009,
which is the date the financial statements were issued.
Recently
Issued Accounting Pronouncements
In
June 2009, the FASB approved the FASB Accounting Standards
Codification (“Codification”) as the single source of authoritative
nongovernmental U.S. GAAP beginning on July 1, 2009. The
Codification does not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing
accounting standard documents have been superseded and all other accounting
literature not included in the Codification is considered
non-authoritative. The Codification was effective for the Company on
September 30, 2009. The Company’s adoption of the Codification did
not have an impact on its financial condition or results of
operations. However, because the Codification completely replaced
existing standards, it did affect the way U.S. GAAP is referenced within the
Company’s consolidated financial statements.
In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 166, Accounting for
Transfers of Financial Assets — an amendment of FASB Statement
No. 140) which requires additional information regarding transfers
of financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial assets.
The guidance eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets, and requires
additional disclosures. The guidance will be effective for the
Company on January 1, 2010. The Company is currently evaluating the
impact that the guidance will have on its financial condition and results of
operations.
In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 167, Amendments to
FASB Interpretation No. 46(R)) which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. The guidance clarifies that the determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. The guidance requires an ongoing reassessment of whether
a company is the primary beneficiary of a variable interest
entity. The guidance also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement. The guidance will be
effective for the Company on January 1, 2010. The Company is
currently evaluating the impact that the guidance will have on its financial
condition and results of operations.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current
presentation. There was no effect on net income (loss) or equity
related to these reclassifications.
11
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
3.
|
Real
Estate Investments
|
Real
estate held for investment and related intangible liabilities on real estate
investments consisted of the following at September 30, 2009 and December
31, 2008:
Sep 30, 2009
|
Dec 31, 2008
|
|||||||
Unaudited
|
||||||||
Real
estate investments, at cost:
|
||||||||
Land
|
$ | 190,571 | $ | 192,321 | ||||
Building
and improvements
|
1,260,335 | 1,278,025 | ||||||
Intangible
assets under SFAS 141
|
181,833 | 186,568 | ||||||
Less:
Accumulated depreciation and amortization
|
(186,184 | ) | (146,501 | ) | ||||
Real
estate investments, net
|
$ | 1,446,555 | $ | 1,510,413 | ||||
Intangible
liabilities on real estate investments:
|
||||||||
Intangible
liabilities under SFAS 141
|
$ | 56,000 | $ | 56,000 | ||||
Less:
Accumulated amortization
|
(8,625 | ) | (6,723 | ) | ||||
Intangible
liabilities on real estate investments, net
|
$ | 47,375 | $ | 49,277 |
The
Company did not complete any new real estate acquisitions or dispositions during
the three months ended September 30, 2009, or the three months ended
September 30, 2008. The Company did sell one owned real property
during the quarter ended June 30, 2009. See Note 6.
The
impact on rental revenue of the straight-line rent adjustment under FASB ASC
840-20-25-1 (formerly SFAS No. 13, Accounting for Leases) is
recorded on the Company’s Consolidated Balance Sheet through accrued rental
income and deferred rental income. Amounts for accrued rental income
and deferred rental income as of September 30, 2009 and December 31, 2008,
were as follows:
Sep 30, 2009
|
Dec 31, 2008
|
|||||||
Unaudited
|
||||||||
Accrued
Rental Income
|
$ | 30,219 | $ | 35,883 | ||||
Deferred
Rental Income
|
3,534 | 1,072 |
Accrued
rental income is included in “Other assets” on the Company’s Consolidated
Balance Sheet. See Note 8. Deferred rental income is included in
“Accounts payable, accrued expenses and other liabilities” on the Company’s
Consolidated Balance Sheet. See Note 10.
Depreciation
expense and amortization of intangible assets and liabilities on real estate
investments for the three and nine months ended September 30, 2009 and
September 30, 2008, were as follows:
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Depreciation on real estate (included in depreciation and amortization expense)
|
$ | 8,222 | $ | 8,299 | $ | 24,653 | $ | 24,696 | ||||||||
Amortization of in-place leases (included in depreciation and amortization expense)
|
4,375 | 5,240 | 14,580 | 15,414 | ||||||||||||
Amortization of above-market leases (included as a reduction of rental revenue)
|
962 | 962 | 2,887 | 2,887 | ||||||||||||
Amortization of below-market leases (included as a component of rental revenue)
|
634 | 634 | 1,901 | 1,901 |
12
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
As of
September 30, 2009, the Company’s weighted average amortization period on
intangible assets was 7.9 years, and the weighted average amortization period on
intangible liabilities was 25.8 years.
Scheduled
amortization on existing intangible assets and liabilities on real estate
investments as of September 30, 2009 was as follows:
Intangible
Assets
|
Intangible
Liabilities
|
|||||||
3
Months Ending December 31, 2009
|
$ | 4,973 | $ | 634 | ||||
2010
|
19,893 | 2,535 | ||||||
2011
|
19,181 | 2,535 | ||||||
2012
|
14,763 | 2,535 | ||||||
2013
|
9,091 | 2,400 | ||||||
Thereafter
|
40,128 | 36,736 | ||||||
$ | 108,029 | $ | 47,375 |
Substantially
all of the Company’s owned properties are pledged as collateral to the Company’s
lender that has provided financing on the property. The Company’s
strategy is to own and finance on a long-term basis each property through a
separate and distinct single purpose entity, or SPE, with each property and the
related lease or leases on the property generally representing the sole assets
of the SPE and the sole collateral available to the Company’s lender in the
event the Company defaults on the debt that finances the
property. Also see Note 9.
4.
|
Loans
Held for Investment
|
Loans
held for investment at September 30, 2009 and December 31, 2008, are
summarized in the following table. These investments consist
predominantly of mortgage loans on properties subject to leases to high credit
quality tenants. As of September 30, 2009, the weighted average
credit rating of the underlying tenants was BBB+ from Standard &
Poor’s. Except as described below, as of September 30, 2009,
none of the Company’s loans held for investment were on non-accrual status or
past due 90 days or more.
Sep 30, 2009
|
Dec 31, 2008
|
|||||||
Unaudited
|
||||||||
Principal
|
$ | 227,883 | $ | 283,912 | ||||
(Discount)
Premium
|
(2,641 | ) | 3,151 | |||||
Cost
basis
|
225,242 | 287,063 | ||||||
Allowance
for loan losses
|
(944 | ) | (500 | ) | ||||
Carrying
amount of loans
|
224,298 | 286,563 | ||||||
Deferred
origination fees, net
|
(457 | ) | (784 | ) | ||||
Total
|
$ | 223,841 | $ | 285,779 |
During
the quarter ended September 30, 2009, the Company sold a long-term mortgage loan
backed by a property leased to Koninklijke Ahold, N.V. and recorded a loss on
sale of $3,807. See Note 6. The decision to sell the loan
was driven primarily by the Company’s desire to reduce recourse
debt. The Company used the proceeds from the sale to repay principal
outstanding under its credit agreement with Wachovia Bank by $14,314 and
increase its cash on hand by $5,503.
As of
September 30, 2009, the Company has a general loan loss reserve in
accordance with FASB ASC 310-10-35-10 (formerly SFAS No. 5) of $500, reflecting
management’s estimate of losses that have probably occurred in its mortgage loan
portfolio. The loan loss reserve was established at December 31,
2008, and to date the Company has not had any actual losses charged against the
allowance.
13
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
At each
of September 30, 2009 and December 31, 2008, the Company’s loan investments
carried interest rates ranging from 5.28% to 10.00%. At
September 30, 2009 and December 31, 2008, the weighted average effective
interest rate on the Company’s loan investments, as measured against its cost
basis, was approximately 6.8% and 6.8%, respectively.
As of
September 30, 2009, the Company had one loan investment which is on
non-accrual status and past due more than 90 days. The loan has been
classified as impaired in accordance with FASB ASC 310-10-35-16 (formerly SFAS
No. 114). The Company intends to account for any interest income it
collects on the impaired loan on a cost-recovery basis. A second loan
which was classified as impaired as of June 30, 2009, was paid off at an amount
approximately equal to the loan’s carry value during the three months ended
September 30, 2009. The Company performed an impairment analysis for
the impaired loan as of September 30, 2009, and concluded that no loss
reserve beyond the reserve of $444 recorded at June 30, 2009, was
warranted.
The
following tables summarize certain financial information with respect to the
Company’s impaired loans, including the loan that was paid off during the
quarter ended September 30, 2009:
Average carrying amount
|
||||||||||||||||||||||||
Carrying Amount
|
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
||||||||||||||||||||||
Borrower
|
9/30/2009
|
12/31/2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||
Eden
Hylan Seaview LLC
|
$ | – | $ | 650 | $ | 457 | $ | 650 | $ | 585 | $ | 650 | ||||||||||||
West
End Mortgage Finance Fund I L.P.
|
1,000 | 6,154 | 1,000 | 6,539 | 2,319 | 6,615 |
Interest Income Recognized
|
||||||||||||||||||||||||||||||||
For the three months
ended September 30,2009
|
For the nine months
ended September 30,2009
|
For the three months
ended September 30,2008
|
For the nine months
ended September 30,2008
|
|||||||||||||||||||||||||||||
Borrower
|
Accrual
|
Cash
|
Accrual
|
Cash
|
Accrual
|
Cash
|
Accrual
|
Cash
|
||||||||||||||||||||||||
Eden
Hylan Seaview LLC
|
$ | 56 | $ | 171 | $ | 56 | $ | 171 | $ | 16 | $ | – | $ | 16 | $ | – | ||||||||||||||||
West
End Mortgage Finance Fund I L.P.
|
– | – | 115 | 115 | 163 | 163 | 163 | 163 |
The above
table includes interest income only for the period the loans were classified as
impaired. The loans were initially classified as impaired on July 1,
2008.
5.
|
Commercial
Mortgage-Backed Securities and Structuring Fees
Receivable
|
The
following is a summary of the Company’s securities investments at
September 30, 2009:
Description
|
Number of
Securities
|
Face
Value
|
Carry
Value
|
Amortized
Cost
|
Fair
Value
|
Gross
Unrecognized
Gain
|
Gross
Unrecognized
Loss
|
|||||||||||||||||||||
Held
to Maturity
|
16 | $ | 155,760 | $ | 140,007 | $ | 150,022 | $ | 104,375 | $ | 551 | $ | (46,198 | ) | ||||||||||||||
Available
For Sale
|
8 | 36,411 | 12,173 | 22,942 | 12,173 | - | (10,769 | ) | ||||||||||||||||||||
Total
|
24 | $ | 192,171 | $ | 152,180 | $ | 172,964 | $ | 116,548 | $ | 551 | $ | (56,967 | ) |
14
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
A
detailed schedule of the Company’s securities investments at September 30,
2009 follows:
Sep 30, 2009
|
||||||
Unaudited
|
||||||
BSCMS
1999 CLF1, Class E (rated D) Face Amount
|
Available For Sale
|
$ | 3,326 | |||
BSCMS
1999 CLF1, Class F (not rated) Face Amount
|
Available For Sale
|
251 | ||||
CMLBC
2001-CMLB-1, Class H (rated B-) Face Amount
|
Available For Sale
|
11,907 | ||||
CMLBC
2001-CMLB-1, Class J (rated D) Face Amount
|
Available For Sale
|
6,383 | ||||
NLFC
1999-LTL-1, Class X (IO) (rated AAA) Carry Value
|
Available For Sale
|
5,176 | ||||
WBCMT
2004-C15 180E (rated B) Face Amount
|
Available For Sale
|
8,000 | ||||
BACMS
2002-2, Class V-1 (7-Eleven, Inc.) (rated A) Face Amount
|
Available For Sale
|
541 | ||||
BACMS
2002-2, Class V-2 (Sterling Jewelers) (not rated) Face
Amount
|
Available For Sale
|
827 | ||||
BACM
2006-4, Class H (rated BBB+) Face Amount
|
Held To Maturity
|
8,000 | ||||
Banc
of America 2007-1, Class C (rated BB) Face Amount (1)
|
Held To Maturity
|
500 | ||||
CALFS
1997-CTL1, Class D (rated B-) Face Amount
|
Held To Maturity
|
6,000 | ||||
CMLBC
2001-CMLB-1, Class E (rated BBB+) Face Amount
|
Held To Maturity
|
9,526 | ||||
CMLBC
2001-CMLB-1, Class G (rated BB-) Face Amount
|
Held To Maturity
|
9,526 | ||||
JP
Morgan 2006-LDP9 (rated BB-) Face Amount (1)
|
Held To Maturity
|
200 | ||||
NLFC
1999-LTL-1, Class E (rated BB) Face Amount
|
Held To Maturity
|
11,081 | ||||
Wachovia
2007-C30, Class AJ (rated AAA) Face Amount (1)
|
Held To Maturity
|
200 | ||||
Wachovia
2007-C31, Class AJ (rated B+) Face Amount (1)
|
Held To Maturity
|
200 | ||||
Wachovia
2007-C33, Class AJ (rated AAA) Face Amount (1)
|
Held To Maturity
|
200 | ||||
WBCMT
2004-C15 180D (rated B+) Face Amount
|
Held To Maturity
|
15,000 | ||||
WBCMT
2006-C27, Class C (rated AA-) Face Amount
|
Held To Maturity
|
11,000 | ||||
CVS
Corporation (rated BBB+) Face Amount
|
Held To Maturity
|
18,198 | ||||
Koninklijke
Ahold, N.V. 7.82% Jan 2020 (rated BBB) Face Amount
|
Held To Maturity
|
8,283 | ||||
Lucent
6.70% due 9/1/2020 (rated B+) Face Amount
|
Held To Maturity
|
35,754 | ||||
Yahoo,
Inc. (rated BBB-) Face Amount
|
Held To Maturity
|
22,092 | ||||
Unearned
Discount
|
(19,207 | ) | ||||
Cost
Basis
|
172,964 | |||||
Net
unrealized gain (loss) on securities
|
(20,784 | ) | ||||
Total
|
$ | 152,180 |
(1)
|
Purchased
during the quarter ended September 30, 2009, for an aggregate purchase
price of $496, plus accrued
interest.
|
All
credit ratings in the above table are as of September 30,
2009.
During
the quarter ended September 30, 2009, the Company sold $9,500 face amount of
available for sale securities backed by loans on two office buildings leased to
Yahoo!, Inc. and recorded a loss on sale of $2,105. See Note
6. The decision to sell the securities was driven primarily by the
Company’s desire to reduce recourse debt. The Company used the
proceeds from the sale to repay principal outstanding under its credit agreement
with Wachovia Bank by $7,521.
Unrealized
gains and losses on securities at September 30, 2009 and December 31, 2008,
included as a component of Other Comprehensive Income (Loss) on the Company’s
Consolidated Balance Sheet, consisted of the following:
Sep 30, 2009
|
Dec 31, 2008
|
|||||||
Unaudited
|
||||||||
Unrealized
gains on securities previously available for sale
|
$ | 816 | $ | 878 | ||||
Unrealized
losses on securities previously available for sale
|
(10,831 | ) | (10,095 | ) | ||||
Unrealized
gains on securities available for sale
|
– | 1 | ||||||
Unrealized
losses on securities available for sale
|
(10,769 | ) | (13,397 | ) |
15
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
following table summarizes the Company’s securities in an unrealized loss
position as of September 30, 2009.
Aggregate
Fair Value
|
Aggregate
Unrealized
Loss
|
Number of
Securities
|
||||||||||
In
unrealized loss position less than 12 months
|
$ | 20,142 | $ | 2,936 | 3 | |||||||
In
unrealized loss position 12 or more months
|
86,035 | 54,031 | 13 |
The
collateral backing our securities investments is primarily net lease loan assets
and loss experience on the assets has historically been de
minimis. Credit ratings on the 13 securities in a continuous
unrealized loss position for more than 12 months range from AAA
to D with a weighted average of BBB- and those securities
have a weighted average maturity of approximately 9.5 years. The
Company believes that none of the unrealized losses on investment securities are
other than temporary because substantially all of the unrealized losses relate
to market interest rate changes, and the Company has both the intent and the
ability to hold these securities for a period of time sufficient to allow for a
full recovery in fair value. In addition, management considers the
underlying credits to be financially sound and believes the Company will receive
all contractual principal and interest related to these
investments.
At
September 30, 2009 and December 31, 2008, the weighted average effective
interest rate (yield to maturity on adjusted cost basis) on securities was
approximately 7.6% and 7.5%, respectively.
Structuring
fees receivable of $1,291 and $1,863 at September 30, 2009 and December 31,
2008, respectively, represented fees earned by the Company in conjunction with
the structuring and subsequent sale of certain net lease loans. Such
fees are payable to the Company monthly without interest through March 2020 and,
accordingly, have been discounted based on imputed interest rates estimated by
management to approximate market. Structuring fees receivable are
shown at their amortized cost.
6.
|
Assets Sold
and Discontinued Operations
|
Quarter
Ended September 30, 2009
During
August 2009, the Company sold $9,500 of face amount of 6.65% pass through
certificates backed by loans on two office buildings in Sunnyvale, California
leased to Yahoo!, Inc. At the time of the sale, the security was
classified as available for sale. In connection with the sale
of this asset, the Company recognized a loss of $2,105 during the quarter ended
September 30, 2009. The loss was included in “Loss on investments” in
the Company’s Consolidated Statement of Operations.
During
September 2009, the Company sold a $22,244 outstanding principal balance 7.90%
long-term mortgage loan on a property in Danvers, Massachusetts backed by a
Koninklijke Ahold N.V. lease. In connection with the sale of this
asset, the Company recognized a loss of $3,807 during the quarter ended
September 30, 2009. The loss was included in “Loss on Investments” in
the Company’s Consolidated Statement of Operations.
Quarters
Ended June 30, 2009 and March 31, 2009
During
April 2009, the Company sold the OSHA technological laboratory facility in
Sandy, Utah leased to the United States Government. In connection
with the sale of this property, the Company recognized a loss of $2,853 during
the quarter ended March 31, 2009. The loss was included in “Loss
on investments” in the Company’s Consolidated Statement of
Operations. In accordance with FASB ASC 205-20-45-1 (formerly SFAS
No. 144), operating results from this property are reflected as discontinued
operations in the Company’s Consolidated Statement of Operations.
During
April 2009, the Company sold a majority participation interest in a long-term
mortgage loan on a property in Framingham, Massachusetts backed by a Lowe’s
Companies Inc. lease. During the quarter ended March 31, 2009,
the Company recorded a loss of $4,397 in connection with the sale of this
loan. The loss was included in “Loss on investments” in the Company’s
Consolidated Statement of Operations.
16
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
7.
|
Fair
Value
|
FASB ASC
825-10-50-10 (formerly SFAS No. 107, Disclosure about Fair Value of
Financial Instruments) requires disclosure of
fair value information about all of the Company’s financial instruments, whether
or not these instruments are measured at fair value on the Company’s
Consolidated Balance Sheet.
For
purposes of FASB ASC 825-10-50-10, substantially all of the Company’s assets and
liabilities other than its owned property investments are classified as
financial instruments.
The
Company estimates that the fair values of cash and cash equivalents, other
assets, accounts payable, accrued expenses and other liabilities, and dividends
payable approximate their carrying values due to the short-term maturities of
these items.
The
carrying amounts and estimated fair values of the Company’s other financial
instruments at September 30, 2009 and December 31, 2008 are as
follows:
Carrying
Amount
|
Notional
Amount
|
Estimated
Fair Value
|
||||||||||||||||||||||
9/30/2009
|
12/31/2008
|
9/30/2009
|
12/31/2008
|
9/30/2009
|
12/31/2008
|
|||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Loans
held for investment
|
$ | 224,298 | $ | 286,563 | $ | 227,883 | $ | 283,912 | $ | 223,724 | $ | 262,647 | ||||||||||||
Commercial
mortgage-backed securities
|
152,180 | 161,842 | 192,171 | 202,382 | 116,548 | 119,083 | ||||||||||||||||||
Structuring
fees receivable
|
1,291 | 1,863 | N/A | N/A | 1,291 | 1,863 | ||||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Mortgages
on real estate investments
|
$ | 947,732 | $ | 972,324 | $ | 943,260 | $ | 966,091 | $ | 857,642 | $ | 936,668 | ||||||||||||
Collateralized
debt obligations
|
263,300 | 268,265 | 263,500 | 268,500 | 144,210 | 116,592 | ||||||||||||||||||
Credit
facility
|
129,188 | 189,262 | 129,188 | 189,262 | 129,188 | 189,262 | ||||||||||||||||||
Secured
term loan
|
116,697 | 123,719 | 116,697 | 123,719 | 71,353 | 62,010 | ||||||||||||||||||
Convertible
senior notes
|
49,216 | 66,239 | 52,444 | 71,760 | 43,848 | 28,329 | ||||||||||||||||||
Other
long-term debt
|
30,930 | 30,930 | 30,930 | 30,930 | 15,965 | 11,152 |
The fair
values indicated above are indicative of the interest rate and credit spread
environment as of September 30, 2009 and December 31, 2008, respectively, and
may not take into consideration the effects of subsequent interest rate, credit
spread fluctuations, or changes in the ratings of the tenant obligors under
related leases. The methodologies used and key assumptions made to
estimate fair values are as follows:
Loans held for investment—The
fair value of the Company’s fixed-rate loan portfolio is estimated with a
discounted cash flow analysis, utilizing scheduled cash flows and discount rates
estimated by management to approximate those that a willing buyer and seller
might use.
Commercial mortgage-backed
securities—The fair values of the securities reflect management’s best
estimate and require a considerable amount of judgment and
assumptions. Management evaluates a variety of inputs and then
estimates fair value based on those inputs. The primary inputs
evaluated by management are broker quotations, index pricing, market yields and
credit spreads on securities with similar credit ratings and duration,
collateral values, and liquidity of the security.
17
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
Structuring fees
receivable—The fair value of structuring fees receivable is estimated
with a discounted cash flow analysis, utilized scheduled cash flows and discount
rates estimated by management to approximate those that a willing buyer and
seller might use.
Credit facility—Management
believes that the stated interest rate (which floats based on short-term
interest rates) approximate market rates (when compared to similar credit
facilities with similar credit risk). As such, the fair value of
these obligations is estimated to be equal to the outstanding principal
amount.
Mortgages on real estate
investments, collateralized debt obligations and secured term loan —The
fair value of mortgages payable on real estate investments, collateralized debt
obligations and the secured term loan is estimated using a discounted cash flow
analysis, based on management’s estimates of market interest
rates. For mortgages where the Company has an early prepayment right,
management also considers the prepayment amount to evaluate the fair
value.
Convertible senior notes —The
carry value of convertible senior notes reflects the impact of new accounting
guidance for the notes. See Note 9. The fair value is estimated using a
discounted cash flow analysis, based on management’s estimates of market
interest rates, and indications of market yields, where available.
Other long-term debt—The fair
value of the Company’s other long-term debt is estimated using a discounted cash
flow analysis, based on management’s estimates of market interest
rates.
On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820 and formerly Statement No. 157, Fair Value Measurements) that
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The guidance does not impose any new requirements
around which assets and liabilities are to be measured at fair value, and
instead applies to asset and liability balances required or permitted to be
measured at fair value under existing accounting pronouncements. The
Company measures its securities available for sale and any derivative assets and
liabilities at fair value.
FASB ASC
820-10-35-37 (formerly SFAS No. 157) establishes a valuation hierarchy based on
the transparency of inputs used in the valuation of an asset or
liability. Classification is based on the lowest level of inputs that
is significant to the fair value measurement. The valuation hierarchy
contains three levels:
|
·
|
Level
1 – Quoted prices are available in active markets for identical assets or
liabilities at the reporting date. As of September 30,
2009, the Company has not classified any of its securities available for
sale as Level 1.
|
|
·
|
Level
2 – Pricing inputs other than quoted prices included within Level 1 that
are observable for substantially the full term of the asset or
liability. Level 2 assets include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities that are not active; and inputs other than
quoted prices that are observable, such as models or other valuation
methodologies. As of September 30, 2009, the Company has
not classified any of its securities available for sale as Level
2.
|
|
·
|
Level
3 – Inputs reflect management’s best estimate of what market participants
would use in pricing the asset or liability at the measurement date. These
valuations require a considerable amount of judgment and
assumptions. As of September 30, 2009, the Company has
classified all of its securities available for sale as Level
3. Management evaluates a variety of inputs and then estimates
fair value based on those inputs. The primary inputs evaluated
by management are broker quotations (observable), index pricing
(observable), market yields and credit spreads on securities with similar
credit ratings and duration (observable), collateral values (observable),
and liquidity of the security (unobservable). These inputs are
the factors employed by management and to its knowledge other parties in
determining where to price actual transactions. Broker quotes
generally reflect expected pricing rather than actual trades and may also
reflect distressed transactions in inactive and dislocated
markets.
|
18
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The table
below presents the fair value of the Company’s securities available for sale as
of September 30, 2009, aggregated by the level in the fair value hierarchy
within which those measurements fall. As of September 30, 2009,
the Company had no derivative assets or liabilities.
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Balance at
September 30,2009
|
|||||||||||||
Assets
|
||||||||||||||||
Securities
available for sale
|
$ | – | $ | – | $ | 12,173 | $ | 12,173 |
The
following table summarizes the change in the fair value for Level 3 items for
the three and nine months ended September 30, 2009:
Three months ended
September 30, 2009
|
Nine months ended
September 30,2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Securities
available for sale
|
||||||||
Beginning
balance
|
$ | 10,815 | $ | 13,483 | ||||
Gains
(losses) included in net income (loss)
|
- | (133 | ) | |||||
Gains
(losses) included in other comprehensive income
|
1,613 | (492 | ) | |||||
Amortization
included in interest income
|
(52 | ) | (176 | ) | ||||
Settlements
or repayments
|
(203 | ) | (509 | ) | ||||
Ending
balance
|
$ | 12,173 | $ | 12,173 |
8.
|
Other
Assets
|
Other
assets as of September 30, 2009 and December 31, 2008, consisted of the
following:
Sep 30, 2009
|
Dec 31, 2008
|
|||||||
Unaudited
|
||||||||
Receivables
and accrued interest
|
$ | 10,177 | $ | 10,024 | ||||
Prepaid
expenses and deposits
|
2,462 | 1,198 | ||||||
Reserve
accounts
|
18,845 | 12,889 | ||||||
Escrow
held with mortgage lender
|
- | 212 | ||||||
Funds
with CDO trustee pending distribution or reinvestment
|
3,538 | 3,947 | ||||||
Restricted
cash
|
262 | 44 | ||||||
Amounts
held by servicer
|
243 | 356 | ||||||
Accrued
rental income
|
30,219 | 35,883 | ||||||
Debt
issuance costs, net
|
7,740 | 10,404 | ||||||
Investment
in statutory trust
|
930 | 930 | ||||||
Other
|
1,072 | 1,302 | ||||||
Total
|
$ | 75,488 | $ | 77,189 |
19
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
9.
|
Debt
Obligations
|
Credit
Agreement
During
April 2008, the Company (through its wholly-owned subsidiary Caplease Debt
Funding, LP) entered into a credit agreement with Wachovia Bank,
N.A. Pursuant to the credit agreement, Wachovia Bank agreed to make
an aggregate of $250,000 of term and revolving credit loans available to the
Company. The Company drew a $210,392 term loan upon closing of the
credit agreement and may make draws of revolving credit loans from time to time
during the agreement term to finance commercial real estate assets that are
approved by Wachovia Bank in its discretion.
On
December 31, 2008, Wells Fargo & Company acquired Wachovia Bank, N.A.,
through a merger of Wachovia Bank’s parent company, Wachovia Corporation, with
and into Wells Fargo & Company.
The
credit agreement is for an initial term of two years (until April 2010) with a
one-year extension option (until April 2011) at the Company’s option provided it
meets certain conditions. During September 2009, the Company
satisfied the primary condition to extending the facility by reducing its
borrowings to below $135,000. The Company can prepay its borrowings
under the facility in whole or in part at any time (subject to a $1,000 minimum)
without any penalty or premium. Subject to certain exceptions, the
Company is required to use a portion of its future debt or equity issuances to
prepay borrowings under the facility. The Company is required to pay
interest on its borrowings at prevailing short-term rates (30-day LIBOR) plus a
pricing spread ranging from 200 to 250 basis points. As of
September 30, 2009, the Company’s weighted average effective financing rate
on the credit agreement was approximately 2.9%.
The
Company’s borrowings under the facility are secured by a combination of first
mortgage loan investments, intercompany mortgage loans on owned property
investments, commercial mortgage backed securities and a first lien on the
Company’s ownership interest in the real property located in Johnston, Rhode
Island. The Company’s obligations under the credit agreement are also
fully recourse to all of its other assets. In the event Wachovia
determines in its sole discretion that the value of the Company’s collateral
assets has declined, including as a result of an underlying tenant credit rating
downgrade or other adverse tenant-credit event, Wachovia may require the Company
to prepay a portion of its borrowings, provided that Wachovia may not reduce the
value of any of the Company’s collateral other than CMBS securities due to
general credit spread or interest rate fluctuations.
The
Company is required to comply with the following financial covenants under the
credit agreement: minimum liquidity (as defined in the agreement) of at least
$8,000, and minimum consolidated tangible net worth (as defined in the
agreement) of at least $180,000 plus 75% of the aggregate net proceeds from
equity offerings or capital contributions after September 22, 2004.
Amounts
related to the Company’s credit agreement as of September 30, 2009 and
December 31, 2008, were as follows:
At September 30, 2009
|
At December 31, 2008
|
|||||||||||||||
Borrowings
|
Collateral
Carry Value
|
Borrowings
|
Collateral
Carry Value
|
|||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
Credit
Agreement
|
||||||||||||||||
Loans
held for investment
|
$ | 9,089 | $ | 12,463 | $ | 55,434 | $ | 78,071 | ||||||||
Intercompany
mortgage loans and investments in CapLease CDO
|
116,381 | 143,618 | 119,119 | 145,816 | ||||||||||||
Commercial
mortgage-backed securities
|
3,718 | 10,580 | 14,709 | 19,390 | ||||||||||||
Owned
property
|
– | 40,503 | – | 44,398 | ||||||||||||
Total
|
$ | 129,188 | $ | 207,164 | $ | 189,262 | $ | 287,675 |
20
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
following interest rates apply with respect to the Company’s credit agreement
and repurchase agreement borrowings for the three and nine months ended
September 30, 2009 and September 30, 2008:
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
unaudited
|
unaudited
|
unaudited
|
unaudited
|
|||||||||||||
Weighted
average effective financing rate
|
3.72 | % | 5.84 | % | 3.71 | % | 5.39 | % | ||||||||
30-Day
LIBOR rate
|
0.29 | % | 2.47 | % | 0.39 | % | 2.89 | % |
Mortgage
Notes on Real Estate Investments
The
Company has financed most of its owned real properties with third party mortgage
debt. The Company’s mortgage notes payable are summarized in the
following table:
Sep
30, 2009
|
Dec
31, 2008
|
Effective
Financing
|
||||||||||||||||||||||||
Property
Level Debt - Fixed Rate
|
Face
|
Carry
Value
|
Face
|
Carry
Value
|
Coupon
|
Rate
(1)
|
Maturity
|
|||||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||||
$ | 14,972 | $ | 14,972 | $ | 15,120 | $ | 15,120 | 5.11 | % | 5.16 | % | |||||||||||||||
Aetna
Life Insurance Company, Fresno, CA
|
16,043 | 16,043 | 16,043 | 16,043 | 5.63 | % | 5.68 | % |
Dec
2016
|
|||||||||||||||||
Allstate
Insurance Company, Charlotte, NC
|
20,045 | 20,045 | 20,209 | 20,209 | 5.68 | % | 5.71 | % |
Jan
2016
|
|||||||||||||||||
Allstate
Insurance Company, Roanoke, VA
|
21,341 | 21,341 | 21,516 | 21,516 | 5.68 | % | 5.76 | % |
Jan
2016
|
|||||||||||||||||
AmeriCredit
Corp., Arlington, TX
|
27,802 | 27,507 | 28,148 | 27,828 | 5.28 | % | 5.51 | % |
Sep
2017
|
|||||||||||||||||
AMVESCAP
PLC, Denver, CO
|
43,700 | 43,700 | 43,700 | 43,700 | 6.03 | % | 6.08 | % |
Jul
2016
|
|||||||||||||||||
Aon
Corporation, Glenview, IL
|
62,651 | 62,651 | 63,613 | 63,613 | 5.23 | % | 5.75 | % |
Nov
2014
|
|||||||||||||||||
Bunge
North America, Inc., Fort Worth, TX
|
6,262 | 6,262 | 6,262 | 6,262 | 5.45 | % | 5.55 | % |
May
2017
|
|||||||||||||||||
Cadbury
Schweppes Plc, Whippany, NJ
|
34,038 | 34,038 | 34,491 | 34,491 | 5.26 | % | 5.34 | % |
Mar
2015
|
|||||||||||||||||
Capital
One Financial Corporation, Plano, TX
|
20,374 | 20,374 | 20,630 | 20,630 | 5.24 | % | 5.29 | % |
May
2013
|
|||||||||||||||||
Choice
Hotels International, Inc., Silver Spring, MD
|
29,347 | 29,347 | 30,080 | 30,080 | 5.30 | % | 5.34 | % |
May
2013
|
|||||||||||||||||
County
of Yolo, California, Woodland, CA
|
10,332 | 10,332 | 10,332 | 10,332 | 5.68 | % | 5.75 | % |
Feb
2017
|
|||||||||||||||||
Farmers
Group, Inc., Simi Valley, CA
|
25,620 | 25,620 | 25,620 | 25,620 | 5.81 | % | 5.85 | % |
Jan
2017
|
|||||||||||||||||
Farmers
New World Life Insurance Company, Mercer Island, WA
|
30,200 | 30,200 | 30,200 | 30,200 | 5.69 | % | 5.72 | % |
Jan
2016
|
|||||||||||||||||
ITT
Industries, Inc., Herndon, VA
|
41,011 | 41,011 | 41,301 | 41,301 | 5.33 | % | 5.40 | % |
Jun
2015
|
|||||||||||||||||
Johnson
Controls, Inc., Largo, FL
|
16,200 | 16,200 | 16,200 | 16,200 | 5.48 | % | 5.52 | % |
Jan
2017
|
|||||||||||||||||
Koninklijke
Ahold, N.V., Levittown, PA
|
14,297 | 14,297 | 14,441 | 14,441 | 6.05 | % | 6.11 | % |
Jul
2016
|
|||||||||||||||||
Lowes
Companies, Inc., Aliso Viejo, CA
|
42,125 | 42,125 | 42,125 | 42,125 | 5.10 | % | 5.37 | % |
Jul
2015
|
|||||||||||||||||
Nestle
Holdings, Inc., Breinigsville, PA; Fort Wayne, IN; and Lathrop,
CA
|
117,000 | 117,000 | 117,000 | 117,000 | 6.32 | % | 5.65 | % |
Aug
2012
|
|||||||||||||||||
Omnicom
Group, Inc., Irving, TX
|
13,152 | 13,152 | 13,361 | 13,361 | 5.24 | % | 5.30 | % |
May
2013
|
|||||||||||||||||
Pearson
Plc., Lawrence, KS
|
16,025 | 16,025 | 16,025 | 16,025 | 5.84 | % | 5.95 | % |
May
2016
|
|||||||||||||||||
T-Mobile
USA, Inc., Nashville, TN
|
10,885 | 10,885 | 10,885 | 10,885 | 5.59 | % | 5.69 | % |
Dec
2016
|
|||||||||||||||||
The
Travelers Corporation, Hartford, CT
|
11,536 | 12,020 | 15,074 | 15,950 | 9.80 | % | 5.53 | % |
Sep
2011
|
|||||||||||||||||
The
Travelers Corporation, Hartford, CT
|
15,090 | 16,051 | 13,925 | 15,159 | 10.76 | % | 7.67 | % |
Oct
2011
|
|||||||||||||||||
Tiffany
& Co., Parsippany, NJ
|
58,400 | 58,400 | 58,400 | 58,400 | 5.33 | % | 5.34 | % |
Oct
2015
|
|||||||||||||||||
Time
Warner Entertainment Company, L.P., Milwaukee, WI
|
17,500 | 17,500 | 17,500 | 17,500 | 5.55 | % | 5.59 | % |
Dec
2016
|
|||||||||||||||||
TJX
Companies, Inc., Philadelphia, PA
|
70,372 | 70,372 | 70,805 | 70,805 | 5.57 | % | 5.59 | % |
Mar
2016
|
|||||||||||||||||
United
States Government (DEA), Birmingham, AL
|
11,280 | 11,280 | 11,280 | 11,280 | 5.23 | % | 5.42 | % |
Sep
2015
|
|||||||||||||||||
United
States Government (EPA), Kansas City, KS
|
20,244 | 23,160 | 20,245 | 23,328 | 7.57 | % | 5.45 | % |
Oct
2022
|
|||||||||||||||||
United
States Government (FBI), Albany, NY
|
10,137 | 10,137 | 10,137 | 10,137 | 5.50 | % | 5.68 | % |
Nov
2016
|
|||||||||||||||||
United
States Government (FBI), Birmingham, AL
|
18,800 | 18,800 | 18,800 | 18,800 | 5.23 | % | 5.31 | % |
Sep
2015
|
|||||||||||||||||
United
States Government (NIH), N. Bethesda, MD
|
61,286 | 61,286 | 62,322 | 62,322 | 5.32 | % | 5.56 | % |
Sep
2015
|
|||||||||||||||||
United
States Government (OSHA), Sandy, UT
|
– | – | 14,470 | 15,361 | 6.28 | % | 5.45 | % |
Jan
2024
|
|||||||||||||||||
United
States Government (SSA), Austin, TX
|
5,391 | 5,391 | 5,391 | 5,391 | 5.23 | % | 5.46 | % |
Sep
2015
|
|||||||||||||||||
United
States Government (VA), Ponce, PR
|
5,452 | 5,630 | 5,867 | 6,078 | 7.30 | % | 6.41 | % |
Apr
2016
|
|||||||||||||||||
Walgreen
Co., Pennsauken, NJ
|
1,518 | 1,600 | 1,636 | 1,733 | 7.65 | % | 6.04 | % |
Oct
2016
|
|||||||||||||||||
Walgreen
Co., Portsmouth, VA
|
2,832 | 2,978 | 2,937 | 3,098 | 7.20 | % | 6.18 | % |
Jul
2018
|
|||||||||||||||||
Total
|
$ | 943,260 | $ | 947,732 | $ | 966,091 | $ | 972,324 |
(1)
|
The
effective rate is the Company’s approximate borrowing cost, including the
effect of hedge gains or losses and other deferred financing costs
associated with the related
borrowing.
|
21
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
mortgage notes are non-recourse to the Company subject to limited non-recourse
exceptions and are secured by the respective properties and an assignment of the
relevant leases on the properties. See Note 3 regarding the separate and distinct nature of the
Company’s SPEs. The Company’s book value before accumulated
depreciation and amortization on owned property investments encumbered with
mortgage debt aggregated $1,431,351 at September 30, 2009, and $1,455,527
at December 31, 2008.
Collateralized
Debt Obligations
During
March 2005, the Company issued a collateralized debt obligation, or
CDO. The CDO is an entirely fixed rate on-balance sheet
financing. The Company aggregated approximately $300,000 face amount
of assets and then transferred these assets into a wholly-owned securitization
vehicle, and initially issued $285,000 face amount of multi-class notes and
$15,000 of preferred equity through the securitization vehicle. The
assets serve as collateral for the Company’s obligations under the
notes. The securitization vehicle is an SPE, with its business
limited to the issuance of the notes and the preferred equity, the acquisition
of the collateral and certain other related matters. The net amount
of the debt the Company issued was $268,130, inclusive of a $370 discount to
face, as the Company retained the three most junior note classes aggregating a
face amount of $16,500 and the full $15,000 of preferred equity. Each
of the five note classes of the CDO was and continues to be rated investment
grade. The reinvestment period for the CDO which allowed the Company
to reinvest principal payments on the underlying assets into qualifying
replacement collateral will expire during October 2009. The CDO notes
have a stated maturity in January 2040, although the actual life of the notes
could be substantially shorter. The Company’s weighted average
effective financing rate (inclusive of original issue discount and debt issuance
and hedge costs) on its CDO is approximately 5.7% The CDO debt is
non-recourse to the Company but is secured by the collateral
assets. The following table summarizes the type and carry value of
the assets posted as CDO collateral as of September 30, 2009.
Carry Value
|
||||
$ | 169,795 | |||
Intercompany
mortgage loans on CapLease properties
|
37,024 | |||
Commercial
mortgage-backed securities
|
82,393 | |||
Total
|
$ | 289,212 |
During
the nine months ended September 30, 2009, the Company repurchased $5,000 of
the Class A CDO notes at a price of $2,825, plus accrued interest, or a
43.5% discount from the face of the notes. The Company recorded a
gain on extinguishment of the CDO debt during the nine months ended
September 30, 2009 of $2,012.
Secured
Term Loan
During
December 2007, the Company completed a $129,521 secured term loan with KBC Bank,
N.V. Upon closing of the financing, the Company pledged approximately
$163,145 principal amount of collateral to secure its obligations under the
loan. The interest coupon on the loan is fixed at 5.81% annually
until the loan matures in January 2018. The Company’s effective
financing rate on the loan is approximately 6.0% annually (inclusive of hedge
and closing costs). The loan is non-recourse to the Company, subject
to limited non-recourse exceptions. The following table summarizes
the type and carry value of the assets pledged as collateral for the Company’s
obligations under the loan as of September 30, 2009.
Carry Value
|
||||
$ | 41,539 | |||
Intercompany
mortgage loans on CapLease properties
|
48,179 | |||
Commercial
mortgage-backed securities
|
57,615 | |||
Total
|
$ | 147,333 |
22
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
Convertible
Senior Notes
During
October 2007, CapLease issued $75,000 principal amount of 7.50% convertible
senior notes due 2027. The notes represent general unsecured recourse
obligations of CapLease and rank equally in right of payment with all of its
other existing and future obligations that are unsecured and
unsubordinated. The notes are jointly and severally, fully and
unconditionally guaranteed, on a senior unsecured basis by four of CapLease’s
subsidiaries, Caplease, LP, Caplease Debt Funding, LP, Caplease Services Corp.
and Caplease Credit LLC.
As of
January 1, 2009, the Company adopted new accounting guidance (codified primarily
at FASB ASC 470 and formerly FASB Staff Position No. Accounting Principles Board
14-1, Accounting for
Convertible Debt Instruments That May be Settled in Cash upon Conversion
(Including Partial Cash Settlement)) that retrospectively changed the
accounting for the convertible senior notes. The guidance affected
the accounting for the Company’s convertible senior notes by requiring the
initial proceeds from their sale to be allocated between a liability component
and an equity component in a manner that results in interest expense on the
liability component at the Company’s estimated nonconvertible debt borrowing
rate on the date of issue.
During
December 2008, the Company agreed to repurchase $8,740 of the convertible senior
notes at a price of $3,269, plus accrued interest on the notes, or a 62.6%
discount from the face amount of the notes. The repurchase of a total
of $3,240 of notes was closed in December at a price of
$1,179. Inclusive of the impact of the new accounting guidance, the
Company recorded a gain on extinguishment of debt of $1,713 in the year ended
December 31, 2008. The repurchase of the remaining $5,500 was closed
in January at a price of $2,090. The Company recorded a gain on
extinguishment of debt in the quarter ended March 31, 2009 of
$2,821.
During
the quarter ended June 30, 2009, the Company repurchased $12,316 of the
convertible senior notes at a price of $6,512, plus accrued interest on the
notes, or a 47.1% discount from the face of the notes. The Company
recorded a gain on extinguishment of the convertible senior notes in the quarter
ended June 30, 2009 of $4,581.
During
the quarter ended September 30, 2009, the Company repurchased $1,500 of the
convertible senior notes at a price of $949, plus accrued interest on the notes,
or a 36.8% discount from the face of the notes. The Company recorded
a gain on extinguishment of the convertible senior notes in the quarter ended
September 30, 2009 of $415.
The notes
bear interest at an annual fixed rate of 7.50% and will mature on
October 1, 2027, unless earlier converted, redeemed or
repurchased. The Company’s effective financing rate on the notes,
which includes the effect of the offering discount and expenses of the
transaction, is approximately 8.2%. The Company’s effective interest
rate on the liability component of the instrument as measured under the new
accounting guidance was 11.4% at September 30, 2009.
Holders
may require CapLease to repurchase their notes, in whole or in part, on October
1, 2012, October 1, 2017 and October 1, 2022, for a cash price equal to 100% of
the principal amount of the notes to be repurchased, plus any accrued and unpaid
interest.
Trust
Preferred Securities
In
December 2005, the Operating Partnership issued $30,000 in aggregate principal
amount of fixed/floating rate preferred securities through its wholly-owned
subsidiary, Caplease Statutory Trust I. The trust preferred
securities represent an unsecured subordinated recourse debt obligation of the
Company and require quarterly interest payments calculated at a fixed interest
rate equal to 7.68% per annum through January 30, 2016, and subsequently at a
variable interest rate equal to LIBOR plus 2.60% per annum. The
securities must be redeemed on January 30, 2036, and may be redeemed, in whole
or in part, at par, at the Company’s option, beginning on January 30,
2011. The Company’s effective financing rate on the trust preferred
securities, inclusive of deferred issuance costs, is approximately 8.3% per
annum.
23
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
Scheduled
principal amortization and balloon payments for all of the Company’s outstanding
debt obligations as of September 30, 2009, for the next five years and
thereafter are as follows:
10.
|
Accounts
payable, accrued expenses and other
liabilities
|
Accounts
payable, accrued expenses and other liabilities as of September 30, 2009
and December 31, 2008 consisted of the following:
11.
|
Risk
Management Transactions
|
As part
of its financing strategy, the Company may use interest rate swap transactions
to manage its exposure to interest rate fluctuations on assets not yet financed
with long-term fixed rate debt. As of September 30, 2009, the
Company had no open interest rate swap positions.
During
most of 2008, the Company had a single open interest rate swap, intended to
manage the Company’s exposure to interest rate movements for a planned long-term
financing of assets financed on its interim financing facility with Wachovia
Bank. During November 2008, the Company closed the swap as a result
of unprecedented credit market dislocations and associated declines in the
10-Year Treasury and other benchmark market interest rates.
The
Company had net income (expense) from derivatives of $444 and $(1,418) for the
three and nine months ended September 30, 2008, related to hedge
ineffectiveness on the interest rate swap position that was closed in November
2008. These amounts are included in “(Gain) loss on derivatives” on
the Company’s Consolidated Statements of Operations.
As of
September 30, 2009, the Company had $4,909 of net realized losses on
derivatives deferred on the Company’s Consolidated Balance Sheet as a component
of Accumulated Other Comprehensive Income (Loss). Within the next
twelve months, the Company estimates that $607 of net losses currently held
within Accumulated Other Comprehensive Income (Loss) will be reclassified to
earnings as additional interest expense.
The
Company classifies the cash flows from derivatives as a financing activity on
the Consolidated Statements of Cash Flows.
24
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
12.
|
Commitments
and Contingencies
|
The
Company is involved from time to time in litigation arising in the ordinary
course of business. The Company is not currently involved in any
matter which management believes will have a material adverse effect on the
Company’s business, results of operations or financial
condition. However, periodic settlements and/or professional or other
fees and expenses related to any matter could have an adverse impact on our
results of operations in the quarterly or annual period in which they are
recognized.
As an
owner of commercial real estate, the Company is subject to potential
environmental costs. At September 30, 2009, the Company was not
aware of any environmental concerns that would have a material adverse effect on
the Company’s business, results of operations or financial
condition.
13.
|
Stockholders’
Equity
|
Stock
Issuances
CapLease’s
authorized capital stock consists of 500,000,000 shares of common stock, par
value $0.01 per share, and 100,000,000 shares of preferred stock, par value
$0.01 per share. As of September 30, 2009, CapLease had issued
and outstanding 51,537,811 shares of common stock, and 1,400,000 shares of
8.125% Series A cumulative redeemable preferred stock.
During
the quarter ended September 30, 2009, CapLease issued an aggregate of 2,086,500
shares of common stock through its “at the market offering” program with Brinson
Patrick Securities Corporation at an average price of $3.33 per share, for net
proceeds of $6,955. During the nine months ended September 30, 2009,
CapLease issued an aggregate of 2,239,100 shares of common stock through its “at
the market offering” program at an average price of $3.30 per share, for net
proceeds of $7,397. CapLease did not issue any shares or common stock
through its “at the market offering” program during the quarter and nine months
ended September 30, 2009.
During
the nine months ended September 30, 2009, CapLease issued 807,661 shares of
common stock through its dividend reinvestment and stock purchase plan at a
price of $3.60 per share. During the nine months ended September 30,
2008, CapLease issued 1,204,461 shares of common stock through its dividend
reinvestment and stock purchase plan at an average price of $8.01 per
share.
During
the nine months ended September 30, 2009, CapLease issued 1,107,600 shares of
common stock to its executive officers, directors and other employees pursuant
to the Company’s stock incentive plan, including 531,805 shares in March 2009
and 575,795 shares in June 2009 after CapLease’s stockholders approved
amendments to the plan increasing the number of shares
authorized. During March 2008, CapLease issued 393,950 shares of
common stock to its executive officers, other employees and directors pursuant
to the Company’s stock incentive plan. As of September 30, 2009,
the Company had outstanding awards for 2,890,455 shares of common stock under
the stock plan, all in the form of stock awards to executive officers, other
employees and directors of the Company (see Note 14 below).
Dividends
The
following table summarizes the dividend history on shares of CapLease common
stock for the periods indicated.
Ended
|
Record
Date
|
Payment
Date
|
Dividend
Per Share
|
Total
Amount
|
||||||||
12/31/2007
|
12/31/2007
|
1/15/2008
|
$ | 0.20 | $ | 8,870 | ||||||
3/31/2008
|
3/31/2008
|
4/15/2008
|
0.20 | 8,949 | ||||||||
6/30/2008
|
6/30/2008
|
7/15/2008
|
0.20 | 8,973 | ||||||||
9/30/2008
|
9/30/2008
|
10/15/2008
|
0.20 | 9,475 | ||||||||
3/31/2009
|
3/31/2009
|
4/15/2009
|
0.05 | 2,396 | ||||||||
6/30/2009
|
6/30/2009
|
7/15/2009
|
0.05 | 2,433 | ||||||||
9/30/2009
|
9/30/2009
|
10/15/2009
|
0.05 | 2,577 |
25
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
Company did not declare a dividend on CapLease common stock during the fourth
quarter of 2008.
The
following table summarizes the dividend history on shares of CapLease Series A
preferred stock for the periods indicated.
Ended
|
Record
Date
|
Payment
Date
|
Dividend
Per Share
|
Total
Amount
|
||||||||
12/31/2007
|
12/31/2007
|
1/15/2008
|
$ | 0.5078125 | $ | 711 | ||||||
3/31/2008
|
3/31/2008
|
4/15/2008
|
0.5078125 | 711 | ||||||||
6/30/2008
|
6/30/2008
|
7/15/2008
|
0.5078125 | 711 | ||||||||
9/30/2008
|
9/30/2008
|
10/15/2008
|
0.5078125 | 711 | ||||||||
12/31/2008
|
12/31/2008
|
1/15/2009
|
0.5078125 | 711 | ||||||||
3/31/2009
|
3/31/2009
|
4/15/2009
|
0.5078125 | 711 | ||||||||
6/30/2009
|
6/30/2009
|
7/15/2009
|
0.5078125 | 711 | ||||||||
9/30/2009
|
9/30/2009
|
10/15/2009
|
0.5078125 | 711 |
14.
|
Stock
Based Compensation
|
The
Company adopted a stock incentive plan for its employees and directors during
March 2004 in connection with its initial public offering. On
June 16, 2009, CapLease’s stockholders approved amendments to the stock
incentive plan which, among other things, increased by 2,800,000 shares, to
5,123,000 shares, the number of shares authorized under the plan. As
of September 30, 2009, the Company had outstanding awards for 2,890,455
shares of common stock under the stock plan, all in the form of stock awards to
executive officers, other employees and directors of the Company. The
Company has not awarded any options, stock appreciation rights or other stock
based compensation under the stock plan.
A summary
of the Company’s activity under the stock plan from January 1, 2008 through the
nine months ended September 30, 2009, is presented below:
Number of
Shares
|
||||
Stock
Awards at January 1, 2008
|
1,397,245 | |||
Granted
During the Year Ended December 31, 2008
|
393,950 | (1) | ||
Stock
Awards at January 1, 2009
|
1,791,195 | |||
Granted
During the Period Ended September 30, 2009
|
1,107,600 | (2) | ||
Forfeited
During the Period Ended September 30, 2009
|
(8,340 | ) | ||
Stock
Awards at September 30, 2009
|
2,890,455 |
|
(1)
|
Shares
are scheduled to vest between March 2009 and March 2013, but will
generally be forfeited if the recipient either terminates his employment
with the Company or ceases to be a member of CapLease’s Board of Directors
at any time prior to the vesting date. Vesting of an aggregate
of 196,725 shares is also subject to satisfaction of objective and
subjective performance criteria, to be determined by CapLease’s
Compensation Committee.
|
|
(2)
|
Shares
are scheduled to vest between March 2010 and March 2014, but will
generally be forfeited if the recipient either terminates his employment
with the Company or ceases to be a member of CapLease’s Board of Directors
at any time prior to the vesting date. Vesting of an aggregate
of 523,572 shares is also subject to satisfaction of objective and
subjective performance criteria, to be determined by CapLease’s
Compensation Committee.
|
26
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
A summary
of the status of unvested shares from January 1, 2008 through the nine months
ended September 30, 2009, is presented below:
Shares
Awarded
Under Plan
|
Shares Priced
Under SFAS
123 and 123R
|
Weighted
Average Fair
Value
|
||||||||||
Nonvested
at January 1, 2008
|
692,582 | 446,731 | $ | 10.99 | ||||||||
Current
period awards
|
393,950 | 236,570 | 8.43 | |||||||||
Prior
period awards
|
N/A | 79,799 | 8.43 | |||||||||
Vested
|
(156,300 | ) | (156,300 | ) | 11.00 | |||||||
Nonvested
at January 1, 2009
|
930,232 | 606,800 | 9.66 | |||||||||
Current
period awards
|
1,107,600 | 688,741 | 2.23 | |||||||||
Prior
period awards
|
N/A | 119,140 | 1.88 | |||||||||
Vested
|
(226,809 | ) | (226,809 | ) | 6.74 | |||||||
Forfeited
|
(8,340 | ) | (8,340 | ) | 4.31 | |||||||
Nonvested
at September 30, 2009
|
1,802,683 | 1,179,532 | 4.18 |
The
Company uses the closing stock price on the grant date as its estimate of the
fair value of the award.
As the
immediately preceding table indicates, not all Company share awards have been
valued for purposes of FASB ASC 718-10-30 (formerly SFAS 123R (Revised 2004) −
Share-Based Payment),
as the Company’s stock awards include shares awarded with vesting dependent upon
satisfaction of performance criteria and with the performance criteria on a
portion of the shares to be determined in the future. “Prior period
awards” represent share awards made in a prior period which have been valued for
purposes of FASB ASC 718-10-30 in the current period when the CapLease
Compensation Committee determined the performance criteria.
As of
September 30, 2009, $3,892 of unvested shares (fair value at the grant
dates) is expected to be charged to the Company’s Consolidated Statement of
Operations ratably over the remaining vesting period (through March
2014). As of September 30, 2009, the grant date fair value for
awards of 23,557 restricted shares made in 2006, 62,700 restricted shares made
in 2007, 118,035 restricted shares made in 2008 and 418,859 restricted shares
made in 2009, has not yet been determined because the grant date (as defined
under at FASB ASC 718-10-20 (formerly SFAS 123R (Revised 2004) − Share-Based Payment)) has not
yet occurred.
15.
|
Other
Comprehensive Income (Loss)
|
Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to owners. For the
Company’s purposes, comprehensive income (loss) represents net income (loss), as
presented in the Company’s Consolidated Statements of Operations, adjusted for
unrealized gains or losses on securities available for sale, unrealized gains or
losses on derivatives designated as cash flow hedges, and realized gains and
losses on derivatives designated as cash flow hedges (net of amortization of
those realized gains and losses reclassified into interest
expense).
27
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
The
Company’s comprehensive income (loss) for the three and nine months ended
September 30, 2009 and September 30, 2008 is summarized
below:
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss
|
$ | (3,373 | ) | $ | (1,488 | ) | $ | (639 | ) | $ | (3,860 | ) | ||||
Increase
(decrease) in fair value on securities available for sale
|
3,714 | (4,248 | ) | 1,411 | (7,253 | ) | ||||||||||
Amortization
of unrealized loss on securities previously classified
as available for sale
|
197 | 145 | 419 | 393 | ||||||||||||
Decrease
in fair value of derivatives
|
– | (3,283 | ) | – | (3,295 | ) | ||||||||||
Reclassification
of derivative items into earnings
|
165 | (286 | ) | 596 | 1,889 | |||||||||||
Realized
loss on derivatives
|
– | (1,018 | ) | – | (2,249 | ) | ||||||||||
Comprehensive
loss
|
$ | 703 | $ | (10,178 | ) | $ | 1,787 | $ | (14,375 | ) |
FASB ASC
220-10-45-6 (formerly SFAS No. 130, Reporting Comprehensive
Income) divides comprehensive income (loss) into “net income (loss)” and
“other comprehensive income (loss).” Other comprehensive income
(loss) is defined as revenues, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive income (loss) but
excluded from net income (loss). Other comprehensive income (loss) is
a component of Stockholders’ Equity and is shown on the Company’s Consolidated
Statement of Changes in Stockholders’ Equity (fourth column). The
following table summarizes the Company’s Accumulated Other Comprehensive Income
(Loss) as reported on the Consolidated Statement of Changes in Stockholders’
Equity.
Sep 30, 2009
|
Dec 31, 2008
|
|||||||
Net
unrealized losses on securities available for sale
|
$ | (10,769 | ) | $ | (13,396 | ) | ||
Net
unrealized losses on securities previously classified as
available for sale
|
(10,015 | ) | (9,217 | ) | ||||
Net
realized losses on derivatives
|
(4,908 | ) | (5,505 | ) | ||||
Accumulated
other comprehensive loss
|
$ | (25,692 | ) | $ | (28,118 | ) |
16.
|
Non-Controlling
Interests
|
As of
January 1, 2009, the Company adopted new accounting guidance (codified at FASB
ASC 810 and formerly SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51) that
classifies the portion of the equity that the Company does not own in the
Operating Partnership as a non-controlling interest, rather than a minority
interest.
During
June 2006, the Operating Partnership issued 263,157 units of limited partnership
to an unaffiliated third party. All of these units were issued in
connection with the Company’s acquisition of a property in June 2006 from the
third party. During June 2008, the units of limited partnership
became redeemable by the holder, at its option, on the basis of one unit for
either one share of CapLease common stock or cash equal to the fair market value
of a share of common stock at the time of the redemption. The units
of limited partnership do not have a liquidation preference. During
September 2008, the non-controlling interest holder redeemed 107,131 units for
the same number of shares of CapLease common stock. As of
September 30, 2009, the Operating Partnership had issued and outstanding
156,026 units of limited partnership.
Cash
distributions by the Operating Partnership are paid in the following priority:
first, to the non-controlling interest holder until such holder receives the
amount it would have received if the holder’s units of limited partnership
interest were converted to an equal number of shares of CapLease common stock,
and then, to CapLease. Since July 2006, at the same time CapLease has
paid a cash dividend to its common stockholders, the non-controlling interest
holder has been paid a cash dividend of the same amount per limited partnership
unit.
28
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
17.
|
Rental
Income
|
The
Company is the lessor to tenants under operating leases with expiration dates
ranging from 2009 to 2026. The minimum rental amounts due under the
leases are generally subject to scheduled fixed increases. The leases
generally also require that the tenants pay for or reimburse the Company for the
occupancy and operating costs of the properties, or in certain cases reimburse
the Company for increases in certain operating costs and real estate taxes above
their base year costs. Approximate future minimum rents to be
received over the next five years and thereafter for non-cancelable operating
leases in effect at September 30, 2009 are as follows:
$ | 25,447 | |||
2010
|
118,059 | |||
2011
|
118,258 | |||
2012
|
117,098 | |||
2013
|
90,435 | |||
Thereafter
|
510,732 | |||
$ | 980,029 |
18.
|
Segment
Reporting
|
FASB ASC
280 (formerly SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information) establishes the manner in which
public businesses report information about operating segments in annual and
interim financial reports issued to stockholders. FASB ASC 280-10-50
defines a segment as a component of an enterprise about which separate financial
information is available and that is evaluated regularly to allocate resources
and assess performance. The Company conducts its business through two
segments: operating real estate (including its investments in owned
properties) and lending investments (including its loan investments as well as
its investments in securities). For segment reporting purposes, the
Company does not allocate interest income on short-term investments or general
and administrative expenses.
Selected
results of operations by segment for the three months ended September 30,
2009 and September 30, 2008, are as follows:
Corporate /
Unallocated
|
Operating
Real Estate
|
Lending
Investments
|
||||||||||||||||||||||
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
|||||||||||||||||||
Total
revenues
|
$ | 136 | $ | 136 | $ | 37,443 | $ | 36,873 | $ | 7,495 | $ | 8,526 | ||||||||||||
Total
expenses
|
5,061 | 5,812 | 33,037 | 35,498 | 10,777 | 5,865 | ||||||||||||||||||
Gain
on extinguishment of debt
|
415 | – | – | – | – | – | ||||||||||||||||||
Income
(loss) from continuing operations
|
(4,510 | ) | (5,676 | ) | 4,406 | 1,375 | (3,282 | ) | 2,661 | |||||||||||||||
Total
assets
|
57,479 | 58,196 | 1,504,101 | 1,580,540 | 379,006 | 457,325 |
Selected
results of operations by segment for the nine months ended September 30, 2009
and September 30, 2008, are as follows:
Corporate /
Unallocated
|
Operating
Real Estate
|
Lending
Investments
|
||||||||||||||||||||||
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
|||||||||||||||||||
Total
revenues
|
$ | 313 | $ | 713 | $ | 111,200 | $ | 110,587 | $ | 23,362 | $ | 25,854 | ||||||||||||
Total
expenses
|
15,603 | 17,931 | 104,031 | 104,594 | 25,914 | 18,933 | ||||||||||||||||||
Gain
on extinguishment of debt
|
9,829 | – | – | – | – | – | ||||||||||||||||||
Income
(loss) from continuing operations
|
(5,461 | ) | (17,218 | ) | 7,169 | 5,994 | (2,551 | ) | 6,920 | |||||||||||||||
Total
assets
|
57,479 | 58,196 | 1,504,101 | 1,580,540 | 379,006 | 457,325 |
29
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2009 (unaudited)
19.
|
Subsequent
Events
|
During
October 2009, the Company extended the maturity date of the term loan component
of the April 2008 credit agreement with Wachovia Bank until April 2011 while
preserving its option to later extend the revolving loan component of the
agreement.
30
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with the consolidated
financial statements and the notes to those financial statements, included
elsewhere in this filing.
General
We are a
diversified REIT that invests primarily in single tenant commercial real estate
assets subject to long-term leases to high credit quality tenants. We
focus on properties that are subject to a net lease, or a lease that requires
the tenant to pay all or substantially all expenses normally associated with the
ownership of the property, such as utilities, real estate taxes, insurance and
routine maintenance. We also have made investments in single
tenant properties where the owner has exposure to property expenses when we
determine we can sufficiently underwrite that exposure and isolate a predictable
cash flow.
We have
two complimentary business lines: owning single tenant properties and
making first mortgage loans and other debt investments on single tenant
properties.
The
principal sources of our revenues are rental income on our owned real properties
and interest income from our debt investments (loans and
securities). The principal sources of our expenses are interest
expense on our assets financed, depreciation expense on our real properties,
general and administrative expenses and property expenses (net of expense
recoveries).
Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and the
cost of financing our portfolio. We rely on leverage to allow us to
invest in a greater number of assets and enhance our asset
returns. Our overall portfolio leverage as of September 30, 2009
was approximately 75.4%. We expect our leverage levels to decrease
over time, as a result of one or more of the following factors: scheduled
principal amortization on our debt, voluntary debt reduction, and lower leverage
on new asset acquisitions. As a result of market conditions, we began
to reduce our debt levels during 2008 and have begun and expect to continue to
do so in 2009.
Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis. We seek to finance our assets with “match-funded”
or substantially “match-funded” debt, meaning that we seek to obtain debt whose
maturity matches as closely as possible the maturity of the asset
financed. Through September 30, 2009, our long-term fixed rate
asset financings have been in the form of traditional third party mortgage
financings (on most of our owned real properties) and two term financings,
including a secured term loan (completed in December 2007) and one CDO
(completed in March 2005). We have also financed certain of our
assets on a non-match-funded floating rate recourse credit
agreement.
As
discussed in greater detail under “Business Environment” below, the ongoing
credit crisis has adversely impacted our company in a variety of ways, including
by causing us to suspend growth, significantly curtailing our access to credit
and capital on attractive terms and causing us to finance a portion of our
long-term fixed rate assets on a non-match-funded, floating rate, recourse
credit agreement. In response to the crisis we have refocused our
strategy in a number of ways, including by reducing our debt levels, selectively
selling assets, intensively managing our portfolio and reducing our general and
administrative expenses. We do not know when conditions will
stabilize, if adverse conditions will intensify or the full extent to which the
disruptions will affect us.
Business
Environment
Conditions
within the United States credit markets in general and United States real estate
credit markets in particular continue to experience historic levels of
dislocation and stress that began in the summer of 2007. These
conditions continue to impact us in a variety of ways, including
by:
|
·
|
making
it difficult for us to price and finance new investment opportunities on
attractive terms. As a result of market conditions, we have not
been adding new asset investments to our investment
portfolio.
|
|
·
|
causing
us to preserve our liquidity rather than make new investments due to the
lack of debt or equity capital on attractive
terms.
|
31
|
·
|
causing
a delay in the long-term fixed rate financing of the mortgage assets
financed under our credit agreement with Wachovia Bank. We
expect credit market conditions to continue to impact our ability to
obtain long-term fixed rate financing and, therefore, we cannot provide
any assurance as to the timing or our ability to do
so. Further, to the extent we continue to finance a portion of
our portfolio through the credit agreement with Wachovia Bank, that
agreement is recourse to all of our other assets, we will continue to be
subject to potential margin calls from the lender (primarily for credit
events related to the assets financed) and we will be subject to interest
rate risk as the borrowings are priced at floating rates based on 30-day
LIBOR, or the London Interbank Offered Rate. Increases in LIBOR
rates will cause our borrowing costs on the Wachovia credit agreement to
increase.
|
|
·
|
causing
us to sell selected assets to reduce debt and generate
liquidity.
|
Dislocated
credit spreads and limited market trading activity for real estate securities
continue to result in depressed valuations on our real estate
securities. If these conditions do not improve, we may be subject to
impairment losses on our securities investments in the future, and these losses
may be significant.
We do not
know when market conditions will stabilize, if adverse conditions will intensify
or the full extent to which the disruptions will affect us. If market
instability persists or intensifies, the trends discussed above may continue and
we may be impacted in a variety of additional ways. For example, we
may experience challenges in refinancing debt as it matures or raising
additional capital, margin calls on our Wachovia Bank credit agreement and
impairment charges on our assets. If weak economic conditions
continue and capital for commercial real estate remains scarce, certain
collateral within our CDO may default, which could cause the CDO to fail to
satisfy certain cash flow coverage tests, which would result in a redirection of
the cash distributions payable to us from the CDO until the tests are back into
compliance.
We have
taken and may continue to take a variety of cash conservation measures such as
asset sales, expense reductions and dividend adjustments to increase our
liquidity levels until credit markets normalize. Our ability to sell
collateral to generate liquidity could also be impacted by factors such as
market conditions, the relative illiquidity of certain of our assets (i.e., our
owned property and loan investments) and limitations on sale imposed pursuant to
the debt financing terms of our assets.
Current
economic conditions and the credit crisis may cause commercial real estate
values and market rental rates to decline significantly. These
declines could adversely impact us in a number of ways, including by causing us
to record losses on our assets, reducing the proceeds we receive upon sale or
refinance of our assets or adversely impacting our ability to re-let our owned
properties.
Current
economic conditions have contributed to unexpected bankruptcies and rapid
declines in financial condition at a number of companies, particularly in the
retail and financial sectors. These conditions could cause one or
more of the tenants to whom we have exposure to fail or default in their payment
obligations, which could cause us to record material losses or a material
reduction in our revenue and cash flows.
Application
of Critical Accounting Policies
A summary
of our critical accounting policies is included in our Annual Report on Form
10-K for the year ended December 31, 2008 in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. There have been
no significant changes to those policies during 2009.
Investment
and Financing Activities
During
each of the three months ended September 30, 2009, and September 30,
2008, we did not make any new portfolio investments, other than some nominal
securities investments we made in the 2009 period through the reinvestment
feature of our CDO. We also did not complete any new asset financings
during these periods.
32
Supplemental
Information
Owned
Properties
The
occupancy rate on our owned properties as of September 30, 2009 was
99.8%. The average annualized rent per square foot on our owned
properties for the nine months ended September 30, 2009 was
$13.88. The average annual rent per square foot on our owned
properties for the years 2008, 2007, and 2006, was $12.56, $12.06, and $14.70,
respectively.
The
following table sets forth certain information regarding scheduled lease
expirations in our owned property portfolio as of September 30,
2009.
Expiration
|
Number of
Expiring
Leases (1)
|
Square Feet
Subject to
Expiring Lease
|
2008 Annual
Gross Rent
(in thousands)
|
Percent
of Annual
Rent (2)
|
||||||||||||
2 | (3) | 347,842 | $ | 9,450 | 7.3 | % | ||||||||||
2010
|
6 | (4) | 444,025 | 6,690 | 5.2 | % | ||||||||||
2011
|
1 | 130,000 | 6,044 | 4.7 | % | |||||||||||
2012
|
16 | (5) | 2,745,009 | 22,340 | 17.2 | % | ||||||||||
2013
|
14 | (6) | 320,491 | 5,720 | 4.4 | % | ||||||||||
2014
|
1 | 88,420 | 744 | 0.6 | % | |||||||||||
2015
|
5 | 598,039 | 7,862 | 6.1 | % | |||||||||||
2016
|
8 | 1,127,586 | 13,159 | 10.1 | % | |||||||||||
2017
|
13 | 1,242,727 | 15,545 | 12.0 | % | |||||||||||
2018
|
2 | 112,089 | 1,668 | 1.3 | % | |||||||||||
2019
|
2 | 189,993 | 5,423 | 4.2 | % | |||||||||||
Thereafter
|
14 | 3,156,332 | 35,177 | 27.1 | % |
|
(1)
|
On
four of our owned properties, we have more than one tenant, including one
owned property (United States Government (NIH)) where we also have
multiple leases with the primary tenant expiring at different
dates.
|
|
(2)
|
Represents
lease expiration dates as a percentage of 2008 gross annual
rent.
|
|
(3)
|
99%
of the leases expiring in 2009 (by square footage) represent Factory
Mutual Insurance Company property in Johnston, Rhode
Island.
|
|
(4)
|
95%
of the leases expiring in 2010 (by square footage) represent Qwest
Corporation properties in Omaha,
Nebraska.
|
|
(5)
|
100%
of the leases expiring in 2012 (by square footage) represent Nestle
Properties and the US Government (NIH)
property.
|
|
(6)
|
100%
of the leases expiring in 2013 (by square footage) represent the Choice
property in Silver Spring, MD and Omnicom property in Irving,
Texas.
|
With
respect to certain of our owned properties, we own the improvements on the land
and control the land through an estate for years with an option to enter into a
ground lease at the expiration of the estate for years (Nestle, Qwest and Kroger
properties). For each of these properties, we also have an option to
purchase the land at the expiration of the estate for years and on the last day
of the primary term and each renewal term of the ground lease for fair market
value. If we exercise the purchase option, the fair market value will
be agreed to by us and the seller or if the parties cannot agree determined
through an appraisal process. For two of our owned properties, we own
the improvements on the land and control the land through a ground lease
(Crozer-Keystone Health System and property in Johnston, Rhode Island formerly
leased to Factory Mutual Insurance Company). See “Item 1—Business” of
our Form 10-K for the fiscal year ended December 31, 2008 for more detail in the
tabular presentation of our owned property portfolio. We can transfer
our interest in all of these properties at any time and our interest in all of
these properties will revert to the land owner at the expiration of the ground
lease estate unless we have purchased the land or extended the leasehold
estate.
Securities
Investments
Our
securities investments are collateralized by mortgage loan assets secured by
properties located throughout the United States. If one or more of
the underlying loans in the securitization default, receipt of the scheduled
payments on our securities may become dependent upon the recovery value of the
related collateral. In such an event, any economic downturn such as
the current credit crisis or other adverse events or conditions in any location
where we have a significant credit concentration could cause the recovery value
of the related collateral to decline, and, therefore, could result in a material
reduction of our cash flows or material losses to our company.
33
The
following table summarizes the geographic concentrations of five percent or more
within our securities portfolio as of September 30, 2009.
State
|
Allocated
Cost Basis
(in thousands)
|
Percentage
|
||||||
Colorado
|
$ | 37,770 | 21.8 | % | ||||
New
York
|
29,043 | 16.8 | % | |||||
California
|
28,350 | 16.8 | % |
The
weighted average life of our securities investments as of September 30,
2009 was 8.0 years.
Business
Segments
We
conduct our business through two operating segments:
|
·
|
operating
real estate (including our investments in owned real properties);
and
|
|
·
|
lending
investments (including our loan investments as well as our investments in
securities).
|
Selected
results of operations by segment for the three months ended September 30,
2009 and September 30, 2008, are as follows (dollar amounts in
thousands):
Corporate /
Unallocated
|
Operating
Real Estate
|
Lending
Investments
|
||||||||||||||||||||||
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
|||||||||||||||||||
Total
revenues
|
$ | 136 | $ | 136 | $ | 37,443 | $ | 36,873 | $ | 7,495 | $ | 8,526 | ||||||||||||
Total
expenses
|
5,061 | 5,812 | 33,037 | 35,498 | 10,777 | 5,865 | ||||||||||||||||||
Gain
on extinguishment of debt
|
415 | – | – | – | – | – | ||||||||||||||||||
Income
(loss) from continuing operations
|
(4,510 | ) | (5,676 | ) | 4,406 | 1,375 | (3,282 | ) | 2,661 | |||||||||||||||
Total
assets
|
57,479 | 58,196 | 1,504,101 | 1,580,540 | 379,006 | 457,325 |
Selected
results of operations by segment for the nine months ended September 30, 2009
and September 30, 2008, are as follows (dollar amounts in
thousands):
Corporate /
Unallocated
|
Operating
Real Estate
|
Lending
Investments
|
||||||||||||||||||||||
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
Sep 30, 2009
|
Sep 30, 2008
|
|||||||||||||||||||
Total
revenues
|
$ | 313 | $ | 713 | $ | 111,200 | $ | 110,587 | $ | 23,362 | $ | 25,854 | ||||||||||||
Total
expenses
|
15,603 | 17,931 | 104,031 | 104,594 | 25,914 | 18,933 | ||||||||||||||||||
Gain
on extinguishment of debt
|
9,829 | – | – | – | – | – | ||||||||||||||||||
Income
(loss) from continuing operations
|
(5,461 | ) | (17,218 | ) | 7,169 | 5,994 | (2,551 | ) | 6,920 | |||||||||||||||
Total
assets
|
57,479 | 58,196 | 1,504,101 | 1,580,540 | 379,006 | 457,325 |
Comparison
of the Quarter Ended September 30, 2009 to the Quarter Ended September 30,
2008
The
following discussion compares our operating results for the quarter ended
September 30, 2009 to the comparable period in 2008.
Revenue.
Total
revenue decreased $0.5 million, or 1%, to $45.1 million. The decrease
was attributable to a decrease in interest income.
Rental
revenue and property expense recoveries, in the aggregate, increased a modest
$0.6 million, or 2%, to $37.3 million, primarily reflecting the impact of two
months of holdover rent on our property in Johnston, Rhode
Island. The tenant vacated the building and stopped paying rent in
October 2009.
34
Interest
income decreased $1.0 million, or 12%, to $7.6 million, primarily as a result of
lower loan balances and lower interest rates on cash balances.
Expenses.
Total
expenses increased $1.7 million, or 4%, to $48.9 million. The
increase in expenses was primarily attributable to higher investment losses in
the 2009 period, offset in part by lower interest expense and various other
expenses.
Interest
expense decreased $2.3 million, or 9%, to $22.4 million, from $24.7
million. The decrease in the 2009 period resulted primarily from $1.5
million of lower interest expense on floating rate borrowings (resulting from
lower borrowings and interest rates in the 2009 period), $0.5 million of lower
interest expense on convertible debt due to repurchases of the convertible debt,
$0.2 million of lower interest expense on property mortgages and $0.1 million of
lower interest expense on the secured term loan. The Company’s average
balance outstanding and effective financing rate under its floating rate
borrowings was approximately $148 million at 3.72% during the 2009 period
(average 30-day LIBOR of 0.29%), compared with approximately $203 million at
5.84% during the 2008 period (average 30-day LIBOR of 2.47%).
Property
expenses decreased $0.1 million, or 2%, to $4.8 million, reflecting slightly
reduced expenses. The net amount of property expenses we incurred
(net of expense recoveries) was basically unchanged from the 2008
period.
We had
gain on derivatives of $0.4 million in the 2008 period, compared with no hedge
activity in the 2009 period. During the 2008 period, delays in our
anticipated long-term financing caused a portion of our hedge activity to be
reported as current income (loss) on our Consolidated Statement of Operations
rather than deferred as a component of equity on our Consolidated Balance
Sheet.
We had
losses on investments on $5.9 million in the 2009 period, reflecting losses on
two assets we sold during the third quarter. We had losses on
investments of $1.0 million during the 2008 period, including a $0.7 million
write-off of a mezzanine loan and a $0.4 million impairment charge on an owned
property investment. The 2009 losses are discussed at Notes 4, 5 and
6 of the consolidated financial statements included in this Form
10-Q.
General
and administrative expense decreased $0.2 million, or 6%, to $2.6 million,
primarily reflecting higher legal expenses in the 2008 period related to our
legal actions involving the real property we own in Johnston, Rhode
Island.
General
and administrative expense-stock based compensation decreased $0.1 million, or
11%, to $0.6 million. The decrease was primarily a result of reduced
amortization expense related to the vesting of prior year awards, offset in part
by an additional year of stock awards and an increase in estimated vesting
percentage in the 2009 period. As of September 30, 2009, $3.9
million of unvested shares (fair value at the grant dates) is expected to be
charged to our Consolidated Statement of Operations ratably over the remaining
vesting period (through March 2014). As of September 30, 2009,
the grant date fair value for awards of 23,557 restricted shares made in 2006,
62,700 restricted shares made in 2007, 118,035 restricted shares made in 2008
and 418,859 restricted shares made in 2009, has not yet been determined because
the grant date (as defined under at FASB ASC 718-10-20 (formerly SFAS 123R
(Revised 2004) − Share-Based
Payment)) has not yet occurred.
Depreciation
and amortization expense on real property decreased $0.9 million, or 7%, from
$13.5 million to $12.6 million, primarily due to the value of our in place lease
on the property in Johnston, Rhode Island being fully amortized at the scheduled
lease maturity in July 2009.
Gain
on extinguishment of debt.
We had
$0.4 million of non-cash gain on extinguishment of debt in the 2009 period,
relating to the repurchase of $1.5 million of our convertible senior
notes. See Note 9.
Net
loss.
Net loss
increased $1.9 million, to $(3.4) million, from $(1.5) million, primarily as a
result of the higher loss on investments in the 2009 period, offset in part by
lower interest expense in the 2009 period. Net income allocable to
common stockholders was $(4.1) million in the third quarter of 2009, reflecting
dividends to preferred stockholders of $0.7 million.
35
Comparison
of the Nine Months Ended September 30, 2009 to the Nine Months Ended September
30, 2008
The
following discussion compares our operating results for the nine months ended
September 30, 2009 to the comparable period in 2008.
Revenue.
Total
revenue decreased $2.3 million, or 2%, to $134.9 million. The
decrease was attributable to a decrease in interest income.
Rental
revenue and property expense recoveries, in the aggregate, increased $0.7
million, or 1%, to $110.8 million. The increase primarily reflects
the impact of two months of holdover rent on our property in Johnston, Rhode
Island. The tenant vacated the building and stopped paying rent in
October 2009.
Interest
income decreased $2.9 million, or 11%, to $23.6 million, primarily as a result
of lower loan balances, average cash balances and interest rates and an
unexpected payment we received on an interest only bond during the 2008
period.
Expenses.
Total
expenses increased $4.1 million, or 3%, to $145.5 million. The
increase in expenses was primarily attributable to higher loss on investments in
the 2009 period, offset in part by lower interest expense, the loss on
derivatives in the 2008 period and lower general and administrative
expenses.
Interest
expense decreased $5.5 million, or 8%, from $73.7 million to $68.1
million. The decrease in the 2009 period resulted primarily from $3.6
million of lower interest expense on floating rate borrowings (resulting from
lower borrowings and interest rates in the 2009 period), $1.0 million of lower
interest expense on convertible debt due to repurchases of the convertible debt,
$0.6 million of lower interest expense on property mortgages and $0.3 million of
lower interest expense on the secured term loan. The Company’s average
balance outstanding and effective financing rate under its floating rate
borrowings was approximately $167 million at 3.71% during the 2009 period
(average 30-day LIBOR of 0.39%), compared with approximately $208 million at
5.39% during the 2008 period (average 30-day LIBOR of 2.89%).
Depreciation
and amortization expense on real property decreased $0.9 million, primarily due
to the value of our in place lease on the property in Johnston, Rhode Island
being fully amortized at the scheduled leased maturity in July
2009.
Property
expenses increased $0.6 million, or 4%, to $14.9 million, reflecting increased
expenses including costs paid to one of our tenants and real estate
taxes. The net amount of property expenses we incurred (net of
expense recoveries) increased $0.6 million from the 2008 period.
We had
loss on derivatives of $1.4 million in the 2008 period, compared with no hedge
activity in the 2009 period. During the 2008 period, delays in our
anticipated long-term financing caused a portion of our hedge activity to be
reported as current income (loss) on our Consolidated Statement of Operations
rather than deferred as a component of equity on our Consolidated Balance
Sheet.
We had
losses on investments of $13.7 million in the 2009 period, including $5.9
million of losses on two assets that were sold in the third quarter of
2009. The 2009 losses are discussed at Notes 4, 5 and 6 of the
consolidated financial statements included in this Form 10-Q.
General
and administrative expense decreased $1.3 million, or 14%, to $7.7 million,
primarily reflecting higher legal expenses in the 2008 period.
General
and administrative expense-stock based compensation decreased $0.1 million, or
7%, to $1.6 million. The decrease was primarily a result of reduced
amortization expense related to the vesting of prior year awards, offset in part
by an additional year of stock awards and an increase in estimated vesting
percentage in the 2009 period.
36
Gain
on extinguishment of debt.
We had
$9.8 million of non-cash gain on extinguishment of debt in the 2009 period,
relating to the repurchase of our convertible senior notes and CDO
debt.
Net
loss.
Net loss
decreased $3.2 million, to $(0.6) million, from $(3.9) million,
primarily as a result of the gain on extinguishment of debt and lower interest
expense in the 2009 period, offset in part by the higher loss on investments in
the 2009 period. Net loss allocable to common stockholders was $(2.8)
million in the 2009 period, reflecting dividends to preferred stockholders of
$2.1 million.
Funds
from Operations
Funds
from operations, or FFO, is a non-GAAP financial measure. We believe
FFO is a useful additional measure of our performance because it facilitates an
understanding of our operating performance after adjustment for real estate
depreciation, a non-cash expense which assumes that the value of real estate
assets diminishes predictably over time. In addition, we believe that
FFO provides useful information to the investment community about our financial
performance as compared to other REITs, since FFO is generally recognized as an
industry standard for measuring the operating performance of an equity
REIT. FFO does not represent cash generated from operating activities
in accordance with GAAP and is not indicative of cash available to fund cash
needs. FFO should not be considered as an alternative to net income
or earnings per share determined in accordance with GAAP as an indicator of our
operating performance or as an alternative to cash flow as a measure of
liquidity. Since all companies and analysts do not calculate FFO in a
similar fashion, our calculation of FFO may not be comparable to similarly
titled measures reported by other companies.
We
calculate FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts (“NAREIT”) which defines FFO as net
income (loss) (computed in accordance with GAAP) excluding gains (or losses)
from sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
The
following table reconciles our net loss allocable to common stockholders to FFO
for the three and nine months ended September 30, 2009 and
September 30, 2008.
For the Three Months
Ended September 30
|
For the Nine Months
Ended September 30
|
|||||||||||||||
(Amounts in thousands, except per share
amounts)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
loss allocable to common stockholders
|
$ | (4,084 | ) | $ | (2,199 | ) | $ | (2,772 | ) | $ | (5,993 | ) | ||||
Add
(deduct):
|
||||||||||||||||
Non-controlling
interest in consolidated subsidiaries
|
(13 | ) | (11 | ) | (9 | ) | (29 | ) | ||||||||
Depreciation
and amortization expense on real property
|
12,596 | 13,539 | 39,233 | 40,110 | ||||||||||||
Depreciation and amortization expense on
discontinued operations
|
– | 149 | 149 | 447 | ||||||||||||
Funds from operations
|
$ | 8,499 | $ | 11,478 | $ | 36,601 | $ | 34,535 | ||||||||
Weighted
average number of common shares outstanding, basic and
diluted
|
50,179 | 45,555 | 48,539 | 44,902 | ||||||||||||
Weighted average number of OP units
outstanding
|
156 | 239 | 156 | 255 | ||||||||||||
Weighted average number of common shares and OP
units outstanding, diluted
|
50,335 | 45,794 | 48,695 | 45,157 | ||||||||||||
Net
loss per common share, basic and diluted
|
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.13 | ) | ||||
Funds
from operations per share
|
$ | 0.17 | $ | 0.25 | $ | 0.75 | $ | 0.76 |
Liquidity
and Capital Resources
We rely
on leverage to allow us to invest in a greater number of assets and enhance our
asset returns. Leverage also exposes us to a variety of risks which
are discussed in more detail in our most recent Annual Report on Form 10-K under
the heading “Risk Factors.” Our overall portfolio leverage as of
September 30, 2009 was approximately 75.4%. We expect our
leverage levels to decrease over time, as a result of one or more of the
following factors: scheduled principal amortization on our debt, voluntary debt
reduction, and lower leverage on new asset acquisitions. As a result
of market conditions, we began to reduce our debt levels during 2008 and have
begun and expect to continue to do so in 2009.
37
Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis. We seek to finance our assets with “match-funded”
or substantially “match-funded” debt, meaning that we seek to obtain debt whose
maturity matches as closely as possible the maturity of the asset
financed. Through September 30, 2009, our long-term fixed rate
asset financings have been in the form of traditional third party mortgage
financings (on most of our owned real properties) and two term financings,
including a secured term loan (completed in December 2007) and one CDO
(completed in March 2005). As of September 30, 2009, we have
financed on a long-term fixed rate basis an aggregate of approximately $1.79
billion of assets in portfolio with third party mortgage debt of $947.7 million
and term financings of $380.0 million.
As a
REIT, we are required to distribute at least 90% of our taxable income to our
stockholders on an annual basis, and we intend to distribute all or
substantially all of our REIT taxable income in order to comply with the
distribution requirements of the Code and to avoid federal income tax and the
nondeductible excise tax. We declared a cash dividend of $0.05 per
share of common stock in each of the quarters ended March 31, 2009,
June 30, 2009 and September 30, 2009. We also declared a cash
dividend of $0.5078125 per share of 8.125% Series A cumulative redeemable
preferred stock in each of the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009.
Short-Term
Liquidity and Financing.
We expect
that our short-term liquidity requirements will be met generally through our
available cash and cash equivalents, cash provided by operations, and, to the
extent we make new investments, through revolving loan borrowings under our
credit agreement with Wachovia Bank discussed below. We expect that
our short-term liquidity requirements will also be met through a portion of the
proceeds from any issuances of debt and/or equity capital. Our
ability to issue debt or equity capital is currently being adversely impacted by
the factors discussed under “Business Environment” above. As of
September 30, 2009, we had $41.2 million in available cash and cash
equivalents. As of November 6, 2009, we had $37.3 million in
available cash and cash equivalents.
During
April 2008, we entered into a credit agreement with Wachovia
Bank. Pursuant to the agreement, Wachovia Bank agreed to make an
aggregate of $250 million of term and revolving credit loans available to
us. We drew a $210.4 million term loan upon closing of the credit
agreement and may make draws of revolving credit loans from time to time during
the agreement term to finance commercial real estate assets that are approved by
Wachovia Bank in its discretion.
The
credit agreement is for an initial term of two years (through April 2010) with a
one-year extension option (through April 2011) at our option provided we meet
certain conditions. During September 2009, we satisfied the primary
condition to extending the facility by reducing borrowings under the facility to
below $135 million. During October 2009, we extended the maturity
date of the term loan component of the agreement until April 2011 while
preserving our option to later extend the revolving loan component.
We can
prepay our borrowings under the facility in whole or in part at any time
(subject to a $1 million minimum) without any penalty or
premium. Subject to certain exceptions, we are required to use a
portion of our future debt or equity issuances to prepay borrowings under the
facility. We are required to pay interest on our borrowings at
prevailing short-term rates (30-day LIBOR) plus a pricing spread ranging from
200 to 250 basis points.
Our
borrowings under the facility are secured by a combination of first mortgage
loan investments, intercompany mortgage loans on our owned property investments,
commercial mortgage-backed securities and a first lien on our ownership interest
in the real property located in Johnston, Rhode Island. Our
obligations under the credit agreement are also fully recourse to all of our
other assets. In the event Wachovia determines in its sole discretion
that the value of our collateral assets has declined, including as a result of
an underlying tenant credit rating downgrade or other adverse tenant-credit
event, Wachovia may require us to prepay a portion of our borrowings, provided
that Wachovia may not reduce the value of any of our collateral other than CMBS
securities due to general credit spread or interest rate
fluctuations. As of September 30, 2009, we had $4.7 million borrowed
against collateral classified as CMBS securities by Wachovia.
We are
required to comply with the following financial covenants under the credit
agreement: minimum liquidity (as defined in the agreement) of at least $8
million, and minimum consolidated tangible net worth (as defined in the
agreement) of at least $180 million plus 75% of the aggregate net proceeds from
equity offerings or capital contributions after September 22, 2004.
We had
$129.2 million outstanding as of September 30, 2009 under our Wachovia
credit agreement, which borrowings were secured by loan investments with an
aggregate carry value of $12.5 million, intercompany mortgage loans and
investments in our CDO with an aggregate carry value of $143.6 million, CMBS
investments with a carry value of $10.6 million and a single owned property with
a carry value of $40.5 million.
38
Long-Term
Liquidity and Financing.
We expect
that our long-term liquidity requirements will be met generally through cash
provided by operations, long-term fixed-rate financings on our asset investments
and issuances of debt and equity capital. Our ability to obtain
long-term financings and to issue debt or equity capital is currently being
adversely impacted by the factors discussed under “Business Environment”
above. We have begun and may continue to selectively sell assets to
help us to meet our long-term liquidity needs.
Our
primary long-term liquidity requirement is repayment of our debt
obligations. We intend generally to manage our debt maturities by
refinancing or repaying the related debt at maturity. We expect to
utilize a combination of (i) cash on hand, (ii) cash from sales of assets which
may include the collateral for the debt, and (iii) cash from future debt or
equity capital raises to fund any liquidity needed to satisfy these
obligations. These actions, however, may not enable us to generate
sufficient liquidity to satisfy our borrowings and, therefore, we cannot provide
any assurance we will be able to refinance or repay our debt obligations as they
come due. Our ability to refinance debt, sell assets and/or raise
capital on favorable terms will be highly dependent upon prevailing market
conditions. See “Item 1A—Risk Factors—Our use of debt financing could
have a material adverse effect on our financial condition.” in our most recent
Annual Report on Form 10-K.
We have
two recourse debt obligations that will mature over the next few
years. Our credit agreement with Wachovia Bank is scheduled to mature
in April 2011 and our convertible senior notes can be called for repurchase at
the option of the note holders at 100% of the principal amount of the notes in
October 2012. The credit agreement with Wachovia Bank is a secured
borrowing agreement and the convertible senior notes are unsecured
obligations. With respect to the Wachovia Bank agreement, we have
begun and will continue to seek a longer-term extension or refinancing of this
facility with Wachovia. We may also seek to refinance this facility
with a variety of other lenders. With respect to the convertible
notes, we will continue to seek to opportunistically repurchase this debt over
time and then intend to repay or refinance any remaining obligation at
maturity.
While we
believe we will be successful in either refinancing or repaying these
obligations at or prior to maturity, we cannot provide any assurance we will be
able to do so. If we are unsuccessful in refinancing these
obligations, we may not have sufficient liquidity to repay the debt in full at
maturity. Our failure to do so is a default under the debt and could
materially adversely affect our financial condition and operating results in a
variety of ways. For example, if we default under the Wachovia
agreement, the bank could foreclose on its collateral causing us to lose some of
our assets. Wachovia and the convertible note holders also would have
general recourse against our company if we default in our obligations to
them. In addition, each of these obligations is cross-defaulted with
the other, meaning that a default under one obligation could result in the other
lender accelerating the maturity of our obligations to them.
Sources
of Equity Capital
We have
implemented a dividend reinvestment and direct stock purchase plan and an “at
the market offering” program (as defined in Rule 415 of the Securities Act of
1933, as amended), each of which may be utilized by us from time to time to sell
shares of our common stock and increase liquidity.
In March
2007, we implemented a dividend reinvestment and direct stock purchase
plan. The plan allows interested stockholders to reinvest all or a
portion of their cash dividends in shares of our common stock and to make
monthly purchases of our common stock generally up to a maximum of $10,000
(unless a higher amount is approved by us in our sole
discretion). Shares purchased through the plan may be either (i)
newly issued by us or (ii) purchased by the plan administrator in the open
market, at our discretion. During the nine months ended September 30,
2009, we issued 807,661 shares of common stock through the plan at a price of
$3.60. During the nine months ended September 30, 2008, we
issued 1,204,461 shares of common stock through the plan at an average price of
$8.01 per share. As of September 30, 2009, we have reserved an
aggregate of 1,857,843 shares of common stock for future issuance pursuant to
the dividend reinvestment and direct stock purchase plan. We are not
currently issuing new shares through the plan, although we reserve the right to
elect to do so in our sole discretion at any time in the future.
In
October 2009, we entered into a new sales agreement with Brinson Patrick
Securities Corporation that permits us to issue and sell through Brinson
Patrick, from time to time, up to 5,000,000 shares of our common stock, and
Brinson Patrick agrees to use its best efforts to sell such shares during the
term of the agreement and on the terms set forth therein. We will pay
Brinson Patrick a commission ranging from 1.5% to 2.0% of the gross sales price
per share sold, depending upon the aggregate proceeds raised by
them. The sales agreement replaces the sales agreement dated as of
August 15, 2005, between us and Brinson Patrick, which initially authorized the
issuance and sale by us of up to 2,400,000 shares of common stock and had been
fully utilized by us as of September 30, 2009. We have no
obligation to sell any shares of common stock pursuant to the sales agreement,
and may at any time suspend solicitation and offers pursuant to the sales
agreement or terminate the sales agreement. To date, we have not sold
any shares of common stock through the new sales agreement, although we reserve
the right to elect to do so in our sole discretion at any time in the
future.
39
We sold
an aggregate of 2,086,500 shares of common stock through the “at the market
offering” program at an average price of $3.33 per share, in the quarter ended
September 30, 2009, and an aggregate of 2,239,100 shares of common stock at
an average price of $3.30 per share, in the nine months ended September 30,
2009. Brinson Patrick acted as our agent for these sales pursuant to
the August 15, 2005 sales agreement with them and received a sales commission of
3% on the sales. We raised net proceeds of approximately $7.4 million
during the nine months ended September 30, 2009, and we used the proceeds to
replenish cash that had been used to fund repurchases of outstanding
debt.
As of
September 30, 2009, we have an effective shelf registration statement under
which we can offer an aggregate of $482.4 million of common stock,
preferred stock and/or senior or subordinated debt securities from time to time,
including an aggregate of 5,000,000 shares of common stock reserved for sale
under the October 2009 Brinson Patrick sales agreement. We intend to continue to
raise additional capital from time to time to enable us to continue to implement
our strategy. Our ability to raise capital is influenced by market
conditions, and we cannot assure you that conditions for raising capital will be
favorable for us at any time.
Long-Term
Mortgage Financings.
We have
financed most of our owned properties through traditional mortgage financings
provided through the commercial mortgage-backed securitization
market. We also have utilized the term financings described below to
put incremental leverage on many of our owned properties.
During
the quarter ended September 30, 2009, we did not obtain any new mortgage
financings.
Our
mortgage financings are all fixed rate financings. The notes
typically mature over a long-term period of approximately ten years, and debt
service is payable monthly. The notes are non-recourse to us subject
to limited recourse exceptions and are secured by a mortgage on the property and
an assignment of the underlying lease and rents on the property. The
notes are often interest only for all or a portion of the note term, and thus
require a balloon payment at maturity. As described above, we cannot
provide any assurance we will be able to refinance or repay these obligations at
maturity and our ability to do so on favorable terms will be highly dependent
upon prevailing market conditions. See “Business Environment” above
and “Item 1A—Risk Factors” in our most recent Annual Report on Form
10-K.
Term
Financings.
We have
financed most of our loan and securities investments as well as a select number
of our owned properties through the term financings described
below. As noted above, we have also utilized term financings to add
additional leverage on our owned properties financed with mortgage
debt.
In
December 2007, we completed a $129.5 million original principal balance secured
term loan. Upon closing of the financing, we pledged approximately
$163.1 million principal amount of collateral to secure our obligations under
the loan. The interest coupon on the loan is fixed at 5.81% annually
until the loan matures in January 2018. Our effective financing rate
on the loan is approximately 6.0% annually (inclusive of hedge and closing
costs). The loan is non-recourse to us, subject to limited
non-recourse exceptions.
We also
completed an entirely fixed rate CDO financing in March 2005. We
aggregated approximately $300 million face amount of assets and then transferred
these assets into a wholly-owned securitization vehicle, and issued $285 million
face amount of multi-class notes and $15 million of preferred equity through the
securitization vehicle. The assets serve as collateral for our
obligations under the notes. The securitization vehicle is an SPE,
with its business limited to the issuance of the notes and the preferred equity,
the acquisition of the collateral and certain other matters related
thereto. The net amount of the debt we initially issued was $268.1
million, inclusive of a $0.4 million discount to face, as we retained the three
most junior note classes aggregating a face amount of $16.5 million and the full
$15 million of preferred equity. Each of the five note classes of the
CDO was and continues to be rated investment grade. The reinvestment
period for the CDO which allowed us to reinvest principal payments on the
underlying assets into qualifying replacement collateral expired during October
2009. The CDO notes have a stated maturity in January 2040, although
the actual life of the notes could be substantially shorter. Our
weighted average effective financing rate (inclusive of original issue discount
and debt issuance and hedge costs) on our CDO is approximately
5.7%. Our CDO debt is non-recourse to us but is secured by the
collateral assets. We reduced the debt outstanding under our CDO by
repurchasing $5 million of our Class A CDO notes during the nine months ended
September 30, 2009.
40
We have
financed certain of our portfolio assets on a $250 million credit agreement we
entered into with Wachovia Bank in April 2008. See “Liquidity and
Capital Resources—Short-Term Liquidity and Financing” above. We drew
a $210.4 million term loan under the agreement at closing which we have reduced
to $129.2 million outstanding as of September 30, 2009. Our
borrowings are scheduled to mature in April 2011. The agreement is a
floating rate LIBOR based facility. Our obligations under the credit
agreement are also fully recourse to all of our other assets and, pursuant to
the margin call provisions in the agreement, we may be obligated to prepay a
portion of the debt if Wachovia determines the value of our collateral has
declined. We intend to continue to pursue a variety of strategies for
the assets financed on the facility, including obtaining longer-term financing,
including long-term fixed rate financing when market conditions permit, pursuing
selected asset sales, and retiring the debt on selected assets and holding the
assets unlevered. We expect credit market conditions to impact our
ability to achieve these objectives and, therefore, we cannot provide any
assurance as to the timing or our ability to do so.
Statement
of Cash Flows
Operating
activities provided $48.6 million of cash during the nine months ended
September 30, 2009, primarily driven by net (loss) as adjusted by various
non-cash gains, losses, income and charges of $53.6 million, partially offset by
increases in other assets of $7.1 million. Operating activities
provided $51.9 million of cash during the nine months ended September 30, 2008,
primarily driven by net (loss) as adjusted by various non-cash gains, income and
charges of $47.7 million and decreases in other assets of $3.3
million.
We
recognize rental income on our owned properties on a straight line basis in
accordance with FASB ASC 840-20-25-1 (formerly SFAS No. 13, Accounting for
Leases). As of September 30, 2009, this has resulted in the
Company accruing $26.7 million, net, of rental income in excess of actual rents
due under the various leases. During the nine months ended September
30, 2009, actual rents due under the leases exceeded rents on a straight-line
basis by $5.8 million. We expect the impact of straight-lining of
rents to fluctuate over time as contractual rents step up and actual rents due
increase under the various leases and market conditions improve and we purchase
additional properties. Certain of our owned properties are also
subject to rents which pay semi-annually, rather than monthly, and this also
impacts the quarter-to-quarter changes due to straight-lining of
rents.
Investing
activities provided $68.6 million of cash during the nine months ended
September 30, 2009, which primarily resulted from net proceeds from the
sale of loans and securities of $48.7 million, net proceeds from the sale of
owned properties of $6.5 million and net principal received on loans of $12.8
million and securities of $2.7 million. Investing activities provided
$8.3 million of cash during the nine months ended September 30, 2008, which
primarily resulted from principal received on loans of $5.2 million and
securities of $2.1 million.
Cash used
in financing activities during the nine months ended September 30, 2009 was
$84.5 million, which primarily resulted from net repayments of principal on debt
of $75.5 million ($60.1 million on the Wachovia credit facility, $8.4 million,
net, on property mortgages, and $7.0 million on the secured term loan with KBC
Bank), $12.5 million used to repurchase our convertible senior notes and
collateralized debt obligations, and dividends and distributions paid of $7.0
million, partially offset by proceeds from common stock issuances of $10.3
million. Cash used in financing activities during the nine months
ended September 30, 2008 was $65.2 million, which primarily resulted from net
repayments of principal on debt of $46.0 million (net of $34.7 million on the
Wachovia repurchase agreement and credit facility, net of $7.1 million on
property mortgages and $4.3 million on the secured term loan with KBC Bank),
dividends and distributions paid of $29.1 million, and cash deposited to
collateralize an open hedge position of $8.5 million, partially offset by
proceeds from common stock issuances of $19.6 million.
See our
consolidated statements of cash flows included in the historical consolidated
financial statements included elsewhere in this filing for a reconciliation of
our cash position for the periods described above.
41
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We may
from time to time make written or oral forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
contained in our filings with the Securities and Exchange Commission and in our
press releases and webcasts. Forward-looking statements relate to
expectations, beliefs, projections, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. In some cases, you can identify forward-looking
statements by terms such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “should,” “strategy,” “will” and
other words of similar meaning. The forward-looking statements are
based on our beliefs, assumptions and expectations of future performance, taking
into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of many possible
events or factors, not all of which are known to us or are within our
control. If a change occurs, our business, financial condition,
liquidity and results of operations may vary materially from those expressed in
our forward-looking statements. In connection with the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, we are
hereby identifying important factors that could cause actual results and
outcomes to differ materially from those contained in any forward-looking
statement made by or on our behalf. Such factors include, but are not
limited to:
|
·
|
our
ability to make additional investments in a timely manner or on acceptable
terms;
|
|
·
|
current
credit market dislocations and our ability to obtain long-term financing
for our asset investments in a timely manner and on terms that are
consistent with those we project when we invest in the
asset;
|
|
·
|
access
to capital markets and capital market
conditions;
|
|
·
|
adverse
changes in the financial condition of the tenants underlying our
investments;
|
|
·
|
increases
in our financing costs (including as a result of LIBOR rate increases),
our general and administrative costs and/or our property
expenses;
|
|
·
|
changes
in our industry, the industries of our tenants, interest rates or the
general economy;
|
|
·
|
impairments
in the value of the collateral underlying our investments;
and
|
|
·
|
the
degree and nature of our
competition.
|
These
risks and uncertainties should be considered in evaluating any forward-looking
statement we may make from time to time. Any forward-looking
statement speaks only as of its date. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are qualified by the cautionary statements in this section. We
undertake no obligation to update or publicly release any revisions to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date made.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Market
risk refers to the risk of loss from adverse changes in the level of one or more
market prices, rate indices or other market factors. We are exposed
to market risk primarily from changes in interest rates, credit spreads, tenant
credit ratings and equity prices. We may attempt to mitigate certain
of these risks by entering into hedge and other risk management transactions
during the short-term and fixed-rate financings for the long-term. We
seek to obtain long-term fixed rate financing as soon as practicable after we
make an asset investment. There can be no assurance, however, that
such mitigation strategies will be completely or even partially
successful. The level of our exposure to market risk is subject to
factors beyond our control, including political risk (including terrorism),
monetary and tax policy, general economic conditions and a variety of other
associated risks.
Interest
Rate Exposure
We are
exposed to interest rate risk in various aspects of our business. The
most significant ways we can be impacted by interest rates are as follows:
increases in the level of interest rates may impact our ability to add new
assets, as spreads on assets we are targeting may compress (unless there is a
corresponding increase in asset returns) and demand for our products may be
adversely affected.
Also, to
the extent we finance assets in our portfolio on our floating rate borrowing
facilities, our net income from these fixed rate assets will decrease as
interest rates rise (particularly LIBOR rates) and our borrowing cost
increases. Our Wachovia Bank credit facility is currently our only
floating rate borrowing facility. In addition, as interest rates
rise, our anticipated cost to finance these assets on a long-term fixed rate
basis may rise, causing our expected spread on these assets to be
reduced. We may attempt to mitigate these risks by entering into risk
management transactions that react in a manner that offsets our increased
interest costs and by locking our long-term financing cost as soon as
practicable after we commit to an asset. As a result of market
conditions, we are not currently carrying an open interest rate hedge to manage
our exposure to interest rate fluctuations for assets for which we may obtain
long-term financing for in the future. Our decision to do so leaves
us exposed to increases in long-term interest rates for those assets and,
therefore, may make it more difficult or more costly to obtain long-term
financing. As noted above, there can be no assurance that our
mitigation strategies will be successful.
42
Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market’s
expectations of future interest rates, would also affect the yield required on
our loans and real estate securities. Changes in the required yield
would result in a higher or lower value for these assets. If the
required market yields increase as a result of these interest rate changes, the
value of our loans and real estate securities would decline relative to U.S.
Treasuries. Conversely, if the required market yields decrease as a
result of interest rate changes, the value of our loans and real estate
securities would increase relative to U.S. Treasuries. These changes
in the market value may affect the equity on our balance sheet or, if the value
is less than our cost basis and we determine the losses to be
other-than-temporary, our Statement of Operations through impairment losses on
our loans or securities. These value changes may also affect our
ability to borrow and access capital.
Credit
Spread Curve Exposure
We are
subject to credit spread risk in various aspects of our
business. Credit spreads represent the portion of the required yield
on an income investment attributable to credit quality. Credit
spreads fluctuate over time as investor appetite for credit risk
changes.
Changes
in credit spreads can have many of the same impacts on us as a change in
interest rates, or principally:
|
·
|
increases
in credit spreads can result in spread compression on investments we
target and, thus, a slowing of our new investment
pace;
|
|
·
|
increases
in credit spreads can increase our anticipated cost to finance assets not
yet financed with long-term fixed rate debt, causing our expected spread
on these assets to be reduced; and
|
|
·
|
increases
in credit spreads can lower the value of our loans and securities as
required yields on these assets
increase.
|
Market
conditions since the summer of 2007 have resulted in increases in credit spreads
and generally lower fair valuations for our securities. If these
conditions continue or persist, we may be required to record impairment losses
on our securities, and these losses may be significant.
Tenant
Credit Rating Exposure
Substantially
all of our portfolio assets are subject to risks due to credit rating changes of
the underlying tenant or tenants. Deterioration in the underlying tenant’s
credit rating can result in a lower value for the related asset, which could
result in a reduction in the equity on our balance sheet or, if the value is
less than our cost basis and we determine the loss to be other-than-temporary,
an impairment loss on our Statement of Operations. In addition,
declines in the credit rating of a particular tenant prior to our obtaining
long-term fixed rate financing could result in a margin call by the related
lender, and precipitous declines may significantly impede or eliminate our
ability to finance the asset. We manage these risks by maintaining
diversity among our credits and assessing our aggregate exposure to ratings
classes, in particular lower rated classes. We also seek to lock or
procure long-term financing on our assets as promptly as practicable after we
commit to invest.
Equity
Price Risk Exposure
We may
seek to raise capital by sale of our common stock. Our ability to do
so is dependent upon the market price of our common stock and general market
conditions. Any sales we make may be dilutive to existing
stockholders.
43
Fair
Value
For
certain of our financial instruments, fair values are not readily available
since there are no active trading markets as characterized by current exchanges
between willing parties. Accordingly, we derive or estimate fair
values using various valuation techniques, such as computing the present value
of estimated future cash flows using discount rates commensurate with the risks
involved. However, the determination of estimated cash flows may be subjective
and imprecise. Changes in assumptions or estimation methodologies can
have a material affect on these estimated fair values. The fair
values indicated below are indicative of the interest rate and credit spread
environment as of September 30, 2009, and may not take into consideration
the effects of subsequent interest rate or credit spread fluctuations, or
changes in the ratings of the underlying tenants.
The
following summarizes certain data regarding our interest rate sensitive
instruments as of September 30, 2009:
Carrying
Amount
|
Notional
Amount
|
Weighted
Average
Effective
Interest /
Financing
Rate
|
Maturity Date
|
Fair Value
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
Assets:
|
||||||||||||||||||||
Loans
held for investment (1)
|
$ | 224,298 | $ | 227,883 | 6.8 | % |
Various
|
$ | 223,724 | |||||||||||
Commercial
mortgage-backed securities (2)
|
152,180 | 192,171 | 7.6 | % | 2009-2028 | 116,548 | ||||||||||||||
Structuring
fees receivable
|
1,291 | N/A | 8.1 | % | 2010-2020 | 1,291 | ||||||||||||||
Liabilities
|
||||||||||||||||||||
Mortgage
notes payable (4)
|
$ | 947,732 | $ | 943,260 | 5.6 | % | 2011-2022 | $ | 857,642 | |||||||||||
Collateralized
debt obligations (4)
|
263,300 | 263,500 | 5.7 | % |
2015
|
144,210 | ||||||||||||||
Credit
facility (3)
|
129,188 | 129,188 | 2.9 | % |
2010
|
129,188 | ||||||||||||||
Secured
term loan (4)
|
116,697 | 116,697 | 6.0 | % |
2018
|
71,353 | ||||||||||||||
Convertible
senior notes (5)
|
49,216 | 52,444 | 11.4 | % |
2012
|
43,848 | ||||||||||||||
Other
long-term debt (6)
|
30,930 | 30,930 | 8.3 | % |
2016
|
15,965 |
(1)
|
This
portfolio of loans bears interest at fixed rates. We have
estimated the fair value of this portfolio of loans based on sales of
loans with similar credit and structural characteristics where available,
and management’s estimate of fair values where comparable sales
information is not available. The maturity dates for the loans
range from 2009 through 2033.
|
(2)
|
Commercial
mortgage-backed securities represent subordinate interests in
securitizations, as well as pass-through certificates representing our pro
rata investments in a pool of mortgage loans (collectively,
CMBS). Structuring fees receivable represent cash flows
receivable by us from the sale of loans to third-party
purchasers. The notional values for the CMBS are shown at their
respective face amounts. The fair values of CMBS reflect
management’s best estimate and require a considerable amount of judgment
and assumptions. Management evaluates a variety of inputs and
then estimates fair value based on those inputs. The primary
inputs evaluated by management are broker quotations, index pricing,
market yields and credit spreads on securities with similar credit ratings
and duration, collateral values, and liquidity of the
security. Fair value for the structuring fees receivable is
shown at our amortized cost for these items. For the CMBS, we
expect to receive monthly interest coupon payments, and contractual
principal payments as scheduled.
|
(3)
|
Our
credit facility bears interest at floating rates, and we believe that for
similar financial instruments with comparable credit risks, the effective
rates approximate market value. Accordingly, the carrying
amounts outstanding are believed to approximate fair
value.
|
(4)
|
We
estimate the fair value of mortgage notes on real estate investments,
collateralized debt obligations and the secured term loan using a
discounted cash flow analysis, based on our estimates of market interest
rates. For mortgages where we have an early payment right, we
also consider the prepayment amount to evaluate the fair
value. The maturity date of the collateralized debt obligations
of January 2015 reflects the first date the auction call mechanism in the
notes is triggered and is used to compute the related fair value and
weighted average effective interest
rate.
|
(5)
|
The
carry value and effective financing rate on the convertible senior notes
reflect the impact of the new accounting guidance applicable to the
notes. See Note 9 in our consolidated
financial statements included in this Form 10-Q. We estimate
the fair value of our convertible senior notes using a discounted cash
flow analysis, based upon management’s estimates of market interest rates,
and indications of market yields, where available. The maturity
date of our convertible senior notes reflects our expected maturity date
in October 2012 when the note investors have the right to require us to
repurchase their notes for cash and is used to compute the related fair
value and weighted average effective interest
rate.
|
(6)
|
We
estimate the fair value of our other long-term debt using a discounted
cash flow analysis, based upon management’s estimates of market interest
rates. The maturity date of our other long-term debt reflects
our expected maturity date in January 2016 and is used to compute the
related fair value and weighted average effective interest
rate.
|
44
Scheduled
maturities of interest rate sensitive instruments as of September 30, 2009
are as follows:
Expected Maturity Dates
|
||||||||||||||||||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|||||||||||||||||||
(in thousands, notional amounts where appropriate,
otherwise carrying amounts)
|
||||||||||||||||||||||||
Loans
held for investment
|
$ | 4,085 | $ | 11,193 | $ | 12,277 | $ | 12,884 | $ | 10,034 | $ | 177,410 | ||||||||||||
Commercial
mortgage-backed securities
|
23,324 | 2,494 | 3,248 | 3,721 | 4,252 | 155,132 | ||||||||||||||||||
Structuring
fees receivable
|
198 | 767 | 72 | 79 | 86 | 89 | ||||||||||||||||||
Mortgages
on real estate investments
|
3,921 | 15,382 | 35,929 | 131,486 | 69,445 | 691,569 | ||||||||||||||||||
Collateralized
debt obligations
|
(10 | ) | 24,913 | 11,452 | 12,163 | 12,300 | 202,482 | |||||||||||||||||
Credit
facility
|
7,897 | 121,291 | ||||||||||||||||||||||
Secured
term loan
|
2,627 | 12,191 | 13,737 | 15,380 | 13,602 | 59,160 | ||||||||||||||||||
Convertible
senior notes
|
(235 | ) | (991 | ) | (1,099 | ) | 51,541 | |||||||||||||||||
Other
long-term debt
|
– | – | – | – | – | 30,930 |
The above
table includes regularly scheduled principal amortization and balloon payments
due to maturity. See Note 9 in our consolidated financial
statements included in this Form 10-Q. Negative amounts with respect
to our convertible senior notes represent amortization of the equity component
of the instrument as measured in accordance with the new accounting guidance
applicable to the notes. See Note 9 in our consolidated financial
statements included in this Form 10-Q. Negative amounts shown with
respect to our collateralized debt obligations represent amortization of
original issue discount.
The
expected maturity dates shown for loan investments, commercial mortgage-backed
securities and structuring fees receivable are based on the contractual terms of
the underlying assets. These assets, based on our current operating
strategy, are held for investment. The material assumptions used to
determine fair value are included in footnotes 1 through 6 in the
immediately preceding table.
Item
4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Pursuant
to Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective.
Changes
in Internal Controls
There has
been no change in our internal control over financial reporting during the
quarter ended September 30, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II.
|
OTHER
INFORMATION
|
Item
1.
|
Legal
Proceedings
|
There
have been no material developments in the quarter ended September 30, 2009, to
the legal proceedings to which we are a party as detailed in our Form 10-Q for
the quarter ended March 31, 2009.
Item
1A.
|
Risk
Factors
|
The
following additional risk factor should be considered together with the other
Risk Factors included at Item 1A of our Form 10-K for the fiscal year ended
December 31, 2008 filed with the SEC on March 6, 2009.
45
REIT
distribution requirements could adversely affect our ability to execute our
business plan and may require us to incur debt or sell assets to make such
distributions.
To
maintain our status as a REIT, we must distribute annually at least 90% of our
taxable income. To the extent we satisfy this requirement but
distribute less than 100% of our taxable income, we will be subject to federal
corporate income tax and may be subject to a 4% nondeductible excise tax on our
undistributed taxable income. We generally intend to distribute each
year all or substantially all of our taxable income so as to comply with the
REIT requirements and to avoid federal income tax and nondeductible excise
tax.
From time
to time, we may generate less cash flow than taxable income, for example, if we
are required to use cash income we receive from our assets to make principal
payments on our indebtedness or due to timing differences in when we record
income for tax purposes.
As a
result of the foregoing, we may be required to take one or more of the following
steps in order to comply with the REIT distribution requirements and to avoid
corporate income tax and the 4% nondeductible excise tax:
|
·
|
sell
assets in adverse market
conditions;
|
|
·
|
borrow
on unfavorable terms;
|
|
·
|
distribute
amounts that would otherwise be invested in future investments, capital
expenditures or repayment of debt;
|
|
·
|
distribute
shares of our common stock rather than cash;
or
|
|
·
|
utilize
cash on hand to fund distributions.
|
|
|
Thus,
compliance with the REIT distribution requirements may hinder our ability
to grow, which could adversely affect the value of our common
stock.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
Item
3.
|
Defaults
Upon Senior Securities
|
None.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
Item
5.
|
Other
Information
|
None.
Item
6.
|
Exhibits
|
12.1
|
Computation
of ratio of earnings to fixed charges and ratio of earnings to combined
fixed charges and preferred stock dividends
|
|
31.1
|
Certification
of the Registrant’s Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
Certification
of the Registrant’s Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
|
Certification
of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
46
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
CAPLEASE,
INC.
|
||
Registrant
|
||
Date: November
6, 2009
|
/s/ Paul H. McDowell
|
|
Paul
H. McDowell
Chairman
and Chief Executive Officer
|
||
Date: November
6, 2009
|
/s/ Shawn P. Seale
|
|
Shawn
P. Seale
Senior
Vice President, Chief Financial Officer
and
Treasurer
|
47