Attached files
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EX-32 - EX-32 - Summit Healthcare REIT, Inc | a59500exv32.htm |
EX-31.1 - EX-31.1 - Summit Healthcare REIT, Inc | a59500exv31w1.htm |
EX-31.2 - EX-31.2 - Summit Healthcare REIT, Inc | a59500exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-52566
CORNERSTONE CORE PROPERTIES REIT, INC.
(Exact name of registrant as specified in its charter)
MARYLAND (State or other jurisdiction of incorporation or organization) |
73-1721791 (I.R.S. Employer Identification No.) |
|
1920 MAIN STREET, SUITE 400, IRVINE, CA (Address of principal executive offices) |
92614 (Zip Code) |
949-852-1007
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by section 13
or 15(d) of the 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.
þ Yes o 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 (Sec.232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
o Yes þ No
As of May 13, 2011, we had 23,027,235 shares issued and outstanding.
PART I FINANCIAL INFORMATION
FORM 10-Q
Cornerstone Core Properties REIT, Inc.
TABLE OF CONTENTS
FORM 10-Q
Cornerstone Core Properties REIT, Inc.
TABLE OF CONTENTS
2
Table of Contents
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 1,010,000 | $ | 2,014,000 | ||||
Investments in real estate |
||||||||
Land |
38,680,000 | 38,680,000 | ||||||
Buildings and improvements, net |
83,831,000 | 84,119,000 | ||||||
Intangible lease assets, net |
385,000 | 462,000 | ||||||
122,896,000 | 123,261,000 | |||||||
Notes receivable, net |
4,000,000 | 4,000,000 | ||||||
Note receivable from related party |
8,000,000 | 8,000,000 | ||||||
Deferred costs and deposits |
66,000 | 33,000 | ||||||
Deferred financing costs, net |
204,000 | 271,000 | ||||||
Tenant and other receivables, net |
633,000 | 748,000 | ||||||
Other assets, net |
639,000 | 670,000 | ||||||
Total assets |
$ | 137,448,000 | $ | 138,997,000 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities: |
||||||||
Notes payable |
$ | 35,440,000 | $ | 35,874,000 | ||||
Accounts payable and accrued liabilities |
1,602,000 | 925,000 | ||||||
Payable to related parties |
| 11,000 | ||||||
Prepaid rent, security deposits and deferred revenue |
770,000 | 933,000 | ||||||
Intangible lease liabilities, net |
108,000 | 127,000 | ||||||
Distributions payable |
156,000 | 157,000 | ||||||
Total liabilities |
38,076,000 | 38,027,000 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Equity: |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 10,000,000
shares authorized; no shares were issued or
outstanding at March 31, 2011 and December 31,
2010 |
| | ||||||
Common stock, $0.001 par value; 290,000,000
shares authorized; 23,027,235 and 23,074,381
shares issued and outstanding at March 31, 2011
and December 31, 2010, respectively |
23,000 | 23,000 | ||||||
Additional paid-in capital |
116,697,000 | 117,520,000 | ||||||
Accumulated deficit |
(17,462,000 | ) | (16,690,000 | ) | ||||
Total stockholders equity |
99,258,000 | 100,853,000 | ||||||
Noncontrolling interest |
114,000 | 117,000 | ||||||
Total equity |
99,372,000 | 100,970,000 | ||||||
Total liabilities and equity |
$ | 137,448,000 | $ | 138,997,000 | ||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
3
Table of Contents
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
||||||||
Rental revenues |
$ | 1,543,000 | $ | 1,960,000 | ||||
Tenant reimbursements and other income |
441,000 | 481,000 | ||||||
Interest income from notes receivable |
159,000 | 424,000 | ||||||
2,143,000 | 2,865,000 | |||||||
Expenses |
||||||||
Property operating and maintenance |
677,000 | 686,000 | ||||||
General and administrative |
615,000 | 609,000 | ||||||
Asset management fees and expenses |
416,000 | 420,000 | ||||||
Real estate acquisition costs |
| 6,000 | ||||||
Depreciation and amortization |
833,000 | 824,000 | ||||||
2,541,000 | 2,545,000 | |||||||
Operating (loss) income |
(398,000 | ) | 320,000 | |||||
Interest income |
| 1,000 | ||||||
Interest expense |
(374,000 | ) | (301,000 | ) | ||||
Net (loss) income |
(772,000 | ) | 20,000 | |||||
Less: Net (loss) income attributable to the noncontrolling interest |
| | ||||||
Net (loss) income attributable to common stockholders |
$ | (772,000 | ) | $ | 20,000 | |||
Basic and diluted net (loss) income per common share attributable to
common stockholders |
$ | (0.03 | ) | $ | 0.00 | |||
Weighted average number of common shares |
23,039,021 | 23,003,489 | ||||||
Dividend declared per common share |
$ | 0.02 | $ | 0.12 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
4
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CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Three Months Ended March 31, 2011 and 2010
For the Three Months Ended March 31, 2011 and 2010
(Unaudited)
Common Stock | ||||||||||||||||||||||||||||
Common | Total | |||||||||||||||||||||||||||
Number of | Stock Par | Additional | Accumulated | Stockholders | Noncontrolling | |||||||||||||||||||||||
Shares | Value | Paid-In Capital | Deficit | Equity | Interest | Total Equity | ||||||||||||||||||||||
Balance December
31, 2010 |
23,074,381 | $ | 23,000 | $ | 117,520,000 | $ | (16,690,000 | ) | $ | 100,853,000 | $ | 117,000 | $ | 100,970,000 | ||||||||||||||
Issuance of common
stock |
| | | | | | | |||||||||||||||||||||
Redeemed shares |
(47,146 | ) | | (369,000 | ) | | (369,000 | ) | | (369,000 | ) | |||||||||||||||||
Dividends declared |
| | (454,000 | ) | | (454,000 | ) | (3,000 | ) | (457,000 | ) | |||||||||||||||||
Net loss |
| | | (772,000 | ) | (772,000 | ) | | (772,000 | ) | ||||||||||||||||||
Balance March
31, 2011 |
23,027,235 | $ | 23,000 | $ | 116,697,000 | $ | (17,462,000 | ) | $ | 99,258,000 | $ | 114,000 | $ | 99,372,000 | ||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Common | Total | |||||||||||||||||||||||||||
Number of | Stock Par | Additional | Accumulated | Stockholders | Noncontrolling | |||||||||||||||||||||||
Shares | Value | Paid-In Capital | Deficit | Equity | Interest | Total Equity | ||||||||||||||||||||||
Balance December
31, 2009 |
23,114,201 | $ | 24,000 | $ | 128,559,000 | $ | (13,559,000 | ) | $ | 115,024,000 | $ | 131,000 | $ | 115,155,000 | ||||||||||||||
Issuance of common
stock |
283,916 | | 2,193,000 | | 2,193,000 | | 2,193,000 | |||||||||||||||||||||
Redeemed shares |
(509,624 | ) | | (3,866,000 | ) | | (3,866,000 | ) | | (3,866,000 | ) | |||||||||||||||||
Offering costs |
| | (135,000 | ) | | (135,000 | ) | | (135,000 | ) | ||||||||||||||||||
Dividends declared |
| | (2,711,000 | ) | | (2,711,000 | ) | (3,000 | ) | (2,714,000 | ) | |||||||||||||||||
Net income |
| | | 20,000 | 20,000 | | 20,000 | |||||||||||||||||||||
Balance March
31, 2010 |
22,888,493 | $ | 24,000 | $ | 124,040,000 | $ | (13,539,000 | ) | $ | 110,525,000 | $ | 128,000 | $ | 110,653,000 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
5
Table of Contents
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net (loss) income |
$ | (772,000 | ) | $ | 20,000 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||
Amortization of deferred financing costs |
84,000 | 53,000 | ||||||
Depreciation and amortization |
833,000 | 824,000 | ||||||
Straight-line rents and amortization of acquired above (below) market leases, net |
36,000 | (52,000 | ) | |||||
Provision for bad debt |
(15,000 | ) | (77,000 | ) | ||||
Change in operating assets and liabilities: |
||||||||
Tenant and other receivables |
103,000 | 140,000 | ||||||
Prepaid and other assets |
(9,000 | ) | 28,000 | |||||
Payable and accrued liabilities |
385,000 | 452,000 | ||||||
Payable to related parties |
| (217,000 | ) | |||||
Prepaid rent, security deposit and deferred revenues |
(164,000 | ) | (68,000 | ) | ||||
Net cash provided by operating activities |
481,000 | 1,103,000 | ||||||
Cash flows from investing activities |
||||||||
Real estate improvements |
(168,000 | ) | (9,000 | ) | ||||
Notes receivable |
| (250,000 | ) | |||||
Notes receivable to related parties |
| (364,000 | ) | |||||
Net cash used in investing activities |
(168,000 | ) | (623,000 | ) | ||||
Cash flows from financing activities |
||||||||
Issuance of common stock |
| 689,000 | ||||||
Redeemed shares |
(369,000 | ) | (3,866,000 | ) | ||||
Repayment of notes payable |
(434,000 | ) | (47,000 | ) | ||||
Offering costs |
(5,000 | ) | (125,000 | ) | ||||
Deferred offering costs |
(35,000 | ) | | |||||
Distributions paid to stockholders |
(454,000 | ) | (1,216,000 | ) | ||||
Distributions paid to noncontrolling interest |
(3,000 | ) | (3,000 | ) | ||||
Deferred financing costs |
(17,000 | ) | | |||||
Net cash used in financing activities |
(1,317,000 | ) | (4,568,000 | ) | ||||
Net decrease in cash and cash equivalents |
(1,004,000 | ) | (4,088,000 | ) | ||||
Cash and cash equivalents beginning of period |
2,014,000 | 18,673,000 | ||||||
Cash and cash equivalents end of period |
$ | 1,010,000 | $ | 14,585,000 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 210,000 | $ | 223,000 | ||||
Supplemental disclosure of non-cash financing and investing activities: |
||||||||
Distribution declared not paid |
$ | 156,000 | $ | 932,000 | ||||
Accrued real estate improvements |
$ | 291,000 | $ | | ||||
Distribution reinvested |
$ | | $ | 1,504,000 | ||||
Payable to related party |
$ | | $ | 10,000 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
6
Table of Contents
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
MARCH 31, 2011
UNAUDITED
1. Organization
Cornerstone Core Properties REIT, Inc., a Maryland Corporation, was formed on October 22, 2004
under the General Corporation Law of Maryland for the purpose of engaging in the business of
investing in and owning commercial real estate. As used in this report, the Company, we, us
and our refer to Cornerstone Core Properties REIT, Inc. and its consolidated subsidiaries except
where the context otherwise requires. Subject to certain restrictions and limitations, our business
is managed pursuant to an advisory agreement by an affiliate, Cornerstone Realty Advisors, LLC, a
Delaware limited liability company that was formed on November 30, 2004 (the Advisor).
Cornerstone Operating Partnership, L.P., a Delaware limited partnership (the Operating
Partnership) was formed on November 30, 2004. At March 31, 2011, we owned a 99.88% general
partner interest in the Operating Partnership while the Advisor owned a 0.12% limited partnership
interest. We anticipate that we will conduct all or a portion of our operations through the
Operating Partnership. Our financial statements and the financial statements of the Operating
Partnership are consolidated in the accompanying condensed consolidated financial statements. All
intercompany accounts and transactions have been eliminated in consolidation.
2. Public Offerings
On January 6, 2006, we commenced a public offering of a minimum of 125,000 shares and a maximum of
55,400,000 shares of our common stock, consisting of 44,400,000 shares for sale to the public (the
Primary Offering) and 11,000,000 shares for sale pursuant to our distribution reinvestment plan.
We stopped making offers under our initial public offering on June 1, 2009 upon raising gross
offering proceeds of approximately $172.7 million from the sale of approximately 21.7 million
shares, including shares sold under the distribution reinvestment plan. On June 10, 2009, the U.S.
Securities Exchange Commission (SEC) declared our follow-on offering effective and we commenced a
follow-on offering of up to 77,350,000 shares of our common stock, consisting of 56,250,000 shares
for sale to the public (the Follow-On Offering) and 21,100,000 shares for sale pursuant to our
dividend reinvestment plan. The Primary Offering and Follow-On Offering are collectively referred
to as the Offerings. We retained Pacific Cornerstone Capital, Inc. (PCC), an affiliate of our
advisor, to serve as the dealer manager for the Offerings. PCC is responsible for marketing our
shares being offered pursuant to the Offerings.
On November 23, 2010 we informed our investors of several decisions made by the board of directors
for the health of our REIT.
Effective November 23, 2010, we stopped making and or accepting offers to purchase shares of our
stock while our board of directors evaluates strategic alternatives to maximize value. The board of
directors continues to evaluate such alternatives and has engaged consultants to assist in
identifying such alternatives
As of March 31, 2011, approximately 20.9 million shares of our common stock had been sold in our
Primary Offering and Follow-On Offering for aggregate gross proceeds of approximately $167.1
million. This excludes shares issued under our distribution reinvestment plan.
3. Summary of Significant Accounting Policies
The preparation of our condensed consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We
base these estimates on various assumptions that we believe to be reasonable under the
circumstances, and these estimates form the basis for our judgments concerning the carrying values
of assets and liabilities that are not readily apparent from other sources. We periodically
evaluate these estimates and judgments based on available information and experience. Actual
results could differ from our estimates under different assumptions and conditions. If actual
results significantly differ from our estimates, our financial condition and results of operations
could be materially impacted. For more information regarding our critical accounting policies and
estimates please refer to Summary of Significant Accounting Policies contained in our Annual
Report on Form 10-K for the year ended December 31, 2010. There have been no material changes to
the critical accounting policies previously disclosed in that report except as discussed below.
7
Table of Contents
Interim Financial Information
The accompanying interim condensed consolidated financial statements have been prepared by our
management in accordance with accounting principles generally accepted in the United States of
America (GAAP) and in conjunction with the rules and regulations of the SEC. Certain information
and footnote disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. The accompanying financial information reflects all adjustments which are,
in the opinion of our management, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
periods. Interim results of operations are not necessarily indicative of the results to be expected
for the full year. The accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes thereto included in
the 2010 Annual Report on Form 10-K as filed with the SEC. Operating results for the three months
ended March 31, 2011 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2011.
Fair Value of Financial Instruments
Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10, Financial
Instruments, requires the disclosure of fair value information about financial instruments whether
or not recognized on the face of the balance sheet, for which it is practical to estimate that
value.
We generally determine or calculate the fair value of financial instruments using quoted market
prices in active markets when such information is available or using appropriate present value or
other valuation techniques, such as discounted cash flow analyses, incorporating available market
discount rate information for similar types of instruments and our estimates for non-performance
and liquidity risk. These techniques are significantly affected by the assumptions used, including
the discount rate, credit spreads, and estimates of future cash flow.
Our condensed consolidated balance sheets include the following financial instruments: cash and
cash equivalents, notes receivable, note receivable from related party, tenant and other
receivables, other assets, deferred costs and deposits, deferred financing costs, payable to
related parties, prepaid rent, security deposits and deferred revenue, accounts payable and accrued
liabilities, distribution payable and notes payable. We consider the carrying values to approximate
fair value for such financial instruments, with the exception of notes receivable, note receivable
from related party and notes payable discussed below, because of the short period of time between
origination of the instruments and their expected payment.
The fair value of notes payable is estimated using lending rates available to us for financial
instruments with similar terms and maturities. As of March 31, 2011 and December 31, 2010, the fair
value of notes payable was approximately $35.5 million and $35.9 million, compared to the carrying
value of approximately $35.5 million and $35.9 million, respectively.
The fair value of notes receivable is estimated using current rates at which management believes
similar loans would be made and had been calculated to approximate the carrying value. As of March
31, 2011 and December 31, 2010, the fair value of notes receivable was approximately $4.0 million
and $3.9 million, compared to the carrying value of approximately $4.0 million and $4.0 million,
respectively.
The fair value of note receivable from related party is estimated using current rates at which
management believes similar loans would be made with similar terms and maturities. As March 31,
2011 and December 31, 2010, the fair value of notes receivable
was approximately $6.9 million and
$8.0 million, compared to the carrying value of approximately
$8.0 million and $8.0 million,
respectively.
8
Table of Contents
4. Investments in Real Estate
As of March 31, 2011, our portfolio consists of thirteen properties which were approximately 71.76%
leased. The following table provides summary information regarding our properties.
March 31, | ||||||||||||||||||||||||
Square | Purchase | 2011 | ||||||||||||||||||||||
Property | Location | Date Purchased | Footage | Price | Debt | % Leased | ||||||||||||||||||
2111 South Industrial Park |
North Tempe, AZ | June 1, 2006 | 26,800 | $ | 1,975,000 | $ | | 82.09 | % | |||||||||||||||
Shoemaker Industrial Buildings |
Santa Fe Springs, CA | June 30, 2006 | 18,921 | 2,400,000 | | 100.00 | % | |||||||||||||||||
15172 Goldenwest Circle |
Westminster, CA | December 1, 2006 | 102,200 | 11,200,000 | 2,257,000 | 0.00 | % | |||||||||||||||||
20100 Western Avenue |
Torrance, CA | December 1, 2006 | 116,433 | 19,650,000 | 3,757,000 | 74.23 | % | |||||||||||||||||
Mack Deer Valley |
Phoenix, AZ | January 21, 2007 | 180,985 | 23,150,000 | 3,092,000 | 97.30 | % | |||||||||||||||||
Marathon Center |
Tampa Bay, FL | April 2, 2007 | 52,020 | 4,450,000 | | 26.07 | % | |||||||||||||||||
Pinnacle Park Business Center |
Phoenix, AZ | October 2, 2007 | 159,661 | 20,050,000 | 3,639,000 | 100.00 | % | |||||||||||||||||
Orlando Small Bay Portfolio |
||||||||||||||||||||||||
Carter |
Winter Garden, FL | November 15, 2007 | 49,125 | 50.38 | % | |||||||||||||||||||
Goldenrod |
Orlando, FL | November 15, 2007 | 78,646 | 77.35 | % | |||||||||||||||||||
Hanging Moss |
Orlando, FL | November 15, 2007 | 94,200 | 91.08 | % | |||||||||||||||||||
Monroe South |
Sanford, FL | November 15, 2007 | 172,500 | 58.29 | % | |||||||||||||||||||
Orlando Small Bay Portfolio |
394,471 | 37,128,000 | 15,860,000 | 68.90 | % | |||||||||||||||||||
Monroe North Commerce Center |
Sanford, FL | April 17, 2008 | 181,348 | 14,275,000 | 6,835,000 | 73.16 | % | |||||||||||||||||
1830 Santa Fe |
Santa Ana, CA | August 5, 2010 | 12,200 | 1,315,000 | | 100.00 | % | |||||||||||||||||
1,245,039 | $ | 135,593,000 | $ | 35,440,000 | 71.76 | % | ||||||||||||||||||
As of March 31, 2011, cost and accumulated depreciation and amortization related to real
estate assets and related lease intangibles were as follows:
Acquired | Acquired | |||||||||||||||||||
Above- | Below- | |||||||||||||||||||
Buildings and | Market | In-Place | Market | |||||||||||||||||
Land | Improvements | Leases | Lease Value | Leases | ||||||||||||||||
Investment in real estate |
$ | 38,680,000 | $ | 93,993,000 | $ | 1,700,000 | $ | 1,992,000 | $ | (824,000 | ) | |||||||||
Less: accumulated depreciation and amortization |
| (10,162,000 | ) | (1,572,000 | ) | (1,735,000 | ) | 716,000 | ||||||||||||
Net investments in real estate and related lease intangibles |
$ | 38,680,000 | $ | 83,831,000 | $ | 128,000 | $ | 257,000 | $ | (108,000 | ) | |||||||||
As of December 31, 2010, cost and accumulated depreciation and amortization related to real
estate assets and related lease intangibles were as follows:
Acquired | Acquired | |||||||||||||||||||
Above- | Below- | |||||||||||||||||||
Buildings and | Market | In-Place | Market | |||||||||||||||||
Land | Improvements | Leases | Lease Value | Leases | ||||||||||||||||
Investment in real estate |
$ | 38,680,000 | $ | 93,534,000 | $ | 1,700,000 | $ | 1,992,000 | $ | (823,000 | ) | |||||||||
Less: accumulated depreciation and amortization |
| (9,415,000 | ) | (1,549,000 | ) | (1,681,000 | ) | 696,000 | ||||||||||||
Net investments in real estate and related lease intangibles |
$ | 38,680,000 | $ | 84,119,000 | $ | 151,000 | $ | 311,000 | $ | (127,000 | ) | |||||||||
Depreciation expense associated with buildings and improvements and site improvements for the three
months ended March 31, 2011 and 2010 was $0.7 million and $0.7 million, respectively.
Net amortization expense associated with the lease intangible assets and liabilities for the three
months ended March 31, 2011 and 2010 was $57,000 and $87,000, respectively. Estimated net
amortization expense for April 1, 2011 through December 31, 2011 and each of the four subsequent
years is as follows:
9
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Lease Intangibles Amortization | ||||
April 1, 2011 to December 31, 2011 |
$ | 123,000 | ||
2012 |
$ | 82,000 | ||
2013 |
$ | 51,000 | ||
2014 |
$ | 12,000 | ||
2015 |
$ | 9,000 |
The estimated useful lives for lease intangibles range from approximately one month to four years.
As of March 31, 2011, the weighted-average amortization period for in-place leases, acquired above
market leases and acquired below market leases were
4.1 years, 4.7 years and 3.5 years, respectively.
Leasing Commissions
Leasing commissions are stated at cost and amortized on a straight-line basis over the related
lease term. As of March 31, 2011 and December 31, 2010, we had recorded approximately $0.5 million
and $0.5 million in leasing commissions, respectively. Amortization expense for the three months
ended March 31, 2011 and 2010 was approximately $32,000 and $27,000, respectively.
5. Allowance for Doubtful Accounts
Our allowance for doubtful accounts was $0.4 million as of March 31, 2011 and December 31, 2010.
6. Concentration of Risk
Financial instruments that potentially subject us to a concentration of credit risk are primarily
cash investments, notes receivable and note receivable from related party. Refer to Notes 7 and 8
below with regard to credit risk evaluation of notes receivable and note receivable from related
party. Cash is generally invested in investment-grade short-term instruments. On July 21, 2010,
President Obama signed into law the sweeping financial regulatory reform act entitled the
Dodd-Frank Wall Street Reform and Consumer Protection Act that implements far-reaching changes to
the regulation of the financial services industry, including provisions that made permanent the
$250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor
Protection Corporation protection from $100,000 to $250,000, and provided unlimited federal deposit
insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all
insured depository institutions. As of March 31, 2011, none of our depository accounts are in
excess of the federal deposit insurance nor SIPC insured limits, as such, we do not have credit
risks related to these depository accounts.
As of March 31, 2011, we owned four properties in the state of California, three properties in the
state of Arizona and six properties in the state of Florida. Accordingly, there is a geographic
concentration of risk subject to fluctuations in each States economy.
7. Notes Receivable
Pursuant to agreements originally entered into in May 2008, and amended in March 2009 and May 2010,
we committed to loan up to $8.75 million at a rate of 10% per year to two real estate operating
companies, Servant Investments, LLC and Servant Healthcare Investments, LLC (collectively,
Servant). The commitment was fully funded in December 2010, and the loans mature on May 19, 2013.
Servant is party to an alliance with the managing member of our Advisor.
On a quarterly basis, we evaluate the collectability of our notes receivable. Our evaluation of
collectability involves judgment, estimates, and a review of the
underlying collateral as of March 31, 2011 and
borrowers business models and future. During the quarter ended September 30, 2009, we concluded
that the collectability of one note cannot be reasonably assured and therefore, we recorded a note
receivable reserve of approximately $4.8 million against the
balance of the note related to Servant Investment, LLC.
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The following table reconciles notes receivable from January 1, 2011 to March 31, 2011 and January
1, 2010 to March 31, 2010:
2011 | 2010 | |||||||
Balance at
January 1, |
$ | 4,000,000 | $ | 2,875,000 | ||||
Additions: |
||||||||
Additions to note receivable |
| 250,000 | ||||||
Deductions: |
||||||||
Note receivable repayments |
| | ||||||
Note receivable impairments |
| | ||||||
Balance at March 31, |
$ | 4,000,000 | $ | 3,125,000 | ||||
As of March 31, 2011 and December 31, 2010, the impaired notes receivable had a net zero balance.
It is our policy to recognize interest income on the reserved loan advances on a cash basis. We
continue to explore repayment alternatives with the borrower. Interest
accruals are resumed on this note receivable only when they are
brought current with respect to interest and when in the
judgement of management, the loan is estimated to be fully
collectible as to all principal and interest. For the three months ended March 31,
2011 and 2010, interest income related to the impaired note receivable was approximately $0 and
$0.2 million, respectively.
As of March 31, 2011 and December 31, 2010, the note receivable
related to Servant Healthcare, LLC had a balance of approximately $4.0 million and $3.1 million respectively.
Interest income for the three months ended March 31, 2011 and 2010, was approximately
$0.1 million and $75,000 respectively. This note is secured by fees to be earned by Servant under a subadvisory agreement with our Advisor that is currently under renegotiation. The fees securing our note may be at risk. A significant
change in Servants role in the arrangement could negatively affect Servants cash flow and their ability to repay the loan.
Management has assessed this increased credit risk at March 31, 2011 and has concluded impairment is not probable at this time.
8. Note Receivable from Related Party
On December 14, 2009, we made a participating first mortgage loan commitment of $8.0 million to
Nantucket Acquisition LLC, a Delaware limited liability company owned and managed by Cornerstone
Ventures Inc., an affiliate of our advisor. The loan was made in connection with Nantucket
Acquisitions purchase of a 60-unit senior living community known as Sherburne Commons located on
the exclusive island of Nantucket, MA. The loan matures on January 1, 2015, with no option to
extend and bears interest at a fixed rate of 8.0% for the term of the loan. Interest will be paid
monthly with principal due at maturity. Under the terms of the loan, we are entitled to receive
additional interest in the form of a 40% participation in the shared appreciation of the
property, which is calculated based on the net sales proceeds if the property is sold, or the
propertys appraised value, less ordinary disposition costs, if the property has not been sold by
the time the loan matures. Prepayment of the loan is not permitted without our consent and the loan
is not assumable.
On a quarterly basis, we evaluate the collectability of our notes receivable from related parties.
Our evaluation of collectability involves judgment, estimates, and a review of the underlying
collateral as of March 31, 2011 and borrowers business models and future. For the three months ended March 31, 2011 and
March 31, 2010, we did not record any impairment on the note receivable from related parties.
The following table reconciles the note receivable from related parties from January 1, 2011 to
March 31, 2011 and January 1, 2010 to March 31, 2010:
2011 | 2010 | |||||||
Balance at
January 1, |
$ | 8,000,000 | $ | 6,911,000 | ||||
Additions: |
||||||||
Additions to note receivable from related parties |
| 364,000 | ||||||
Deductions: |
||||||||
Repayments of note receivable from related
parties |
| | ||||||
Balance at March 31, |
$ | 8,000,000 | $ | 7,275,000 |
As of March 31, 2011 and December 31, 2010, the loan balance was approximately $8.0 million.
Leasing at the Sherburne Commons has been lower than budgeted and, to preserve cash flow for
operating requirements, the borrower has suspended interest payments. Accordingly, we began
recording interest on a cash receipt basis on the first quarter of 2011 for this loan. For the
three months ended March 31, 2011 and 2010, interest income from this mortgage loan commitment was
approximately $59,000 and $145,000, respectively. In light of this increased credit risk, we have performed a
review of the underlying collateral and borrowers business models and future strategies for the property.
Based on this assessment we have concluded that there is no impairment at March 31, 2011. However, should
conditions worsen an impairment charge could be required in the future.
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Nantucket Acquisition LLC is considered a variable interest entity because the equity owners of the
Nantucket Acquisition LLC do not have sufficient equity at risk, and our mortgage loan commitment
was determined to be a variable interest. We have determined that we are not the primary
beneficiary of this Variable Interest Entity (VIE) since we do not have the power to direct the
activities of this VIE.
9. Payable to Related Parties
Payable to related parties at December 31, 2010 consists of offering costs, acquisition fees,
expense reimbursements, sales commissions and dealer manager fees payable to the Advisor and PCC.
10. Equity
Common Stock
Our articles of incorporation authorize 290,000,000 shares of common stock with a par value of
$0.001 and 10,000,000 shares of preferred stock with a par value of $0.001. As of March 31, 2011,
we had cumulatively issued approximately 20.9 million shares of common stock for a total of
approximately $167.1 million of gross proceeds, exclusive of shares issued under our distribution
reinvestment plan. As of December 31, 2010, we had issued approximately 20.9 million shares of
common stock for a total of approximately $167.1 million of gross proceeds, exclusive of shares
issued under our distribution reinvestment plan. On November 23, 2010, we stopped making and
accepting offers to purchase shares of our stock.
Distributions
Distributions paid to stockholders for the three months ended March 31, 2011 were approximately
$0.5 million, all of which was paid in cash. Total cash distributions paid for the three months
ended March 31, 2011 was 100% funded from cash provided by operating activities.
We have adopted a distribution reinvestment plan that allows our stockholders to have distributions
and other distributions otherwise distributable to them invested in additional shares of our common
stock. We have registered 21,100,000 shares of our common stock for sale pursuant to the
distribution reinvestment plan. The purchase price per share is 95% of the price paid by the
purchaser for our common stock, but not less than $7.60 per share. As of March 31, 2011 and
December 31, 2010, approximately 2.3 million shares had been issued under the distribution
reinvestment plan. On November 23, 2010, our board of directors approved the amendment of our
operating agreement to terminate the distribution reinvestment plan indefinitely effective December
14, 2010. As a result, distributions were paid entirely in cash during the period December 14, 2010
and March 31, 2011.
We cannot provide any assurance regarding if or when we will resume our distribution reinvestment
plan.
The following are the distributions declared during the three months ended March 31, 2011 and 2010:
Cash flows from | ||||||||||||||||
Distribution Declared (2) | operating | |||||||||||||||
Period | Cash | Reinvested | Total | activities | ||||||||||||
First quarter
2010 (1) |
$ | 1,221,000 | $ | 1,490,000 | $ | 2,711,000 | $ | 1,103,000 | ||||||||
First quarter 2011 |
$ | 454,000 | $ | | $ | 454,000 | $ | 481,000 |
(1) | Distributions declared represented a return of capital for tax purposes. | |
(2) | In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our shareholders each taxable year equal to at least 90% of our net ordinary taxable income. Some of our distributions have been paid from sources other than operating cash flow, such as offering proceeds. Until proceeds from our offering are fully invested and generating operating cash flow sufficient to fully cover distributions to stockholders, we intend to pay a portion of our distributions from the proceeds of our offering or from borrowings in anticipation of future cash flow. |
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The declaration of distributions is at the discretion of our board of directors and our board will
determine the amount of distributions on a regular basis. The amount of distributions will depend
on our funds from operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other factors our board of
directors deem relevant. On November 23, 2010, our board of directors resolved to lower our
distributions to an annualized rate of $0.08 per share (1% based on a share price of $8.00). The
rate and frequency of distributions is subject to the discretion of our board of directors and may
change from time to time based on our operating results and cash flow.
From our inception in October 2004 through March 31, 2011, we declared aggregate distributions of
$32.4 million and our cumulative net loss during the same period was $17.5 million.
Stock Repurchase Program
On November 23, 2010, our board of directors concluded that we would not have sufficient funds
available to us to fund any redemptions during 2011. Accordingly, our board of directors suspended
our stock repurchase program to suspend redemptions under the program effective December 31, 2010.
We can make no assurance as to when and on what terms redemptions will resume. Our board has the
authority to resume, suspend again, or terminate the share redemption program at any time upon 30
days written notice to our stockholders. Our board of directors may modify our stock repurchase
program so that we can redeem stock using the proceeds from the sale of our real estate investments
or other sources.
During the three months ended March 31, 2011, we redeemed shares pursuant to our stock repurchase
program as follows:
Total Number of Shares | ||||||||
Period | Redeemed (1) | Average Price Paid per Share | ||||||
January 2011 |
47,146 | $ | 7.82 | |||||
February 2011 |
| $ | | |||||
March 2011 |
| $ | | |||||
47,146 | ||||||||
During the three months ended March 31, 2011, we received requests to have an aggregate of 19,694
shares redeemed pursuant to our stock repurchase program, however, due to the current suspension of
the stock repurchase program we were not able to fulfill any of these requests.
During the three months ended March 31, 2010, we redeemed shares pursuant to our stock repurchase
program as follows:
Total Number of Shares | ||||||||
Period | Redeemed (1) | Average Price Paid per Share | ||||||
January 2010 |
249,146 | $ | 7.46 | |||||
February 2010 |
100,999 | $ | 7.63 | |||||
March 2010 |
159,479 | $ | 7.76 | |||||
509,624 | ||||||||
(1) | As long as our common stock is not listed on a national securities exchange or traded on an over -the-counter market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares redeemed in accordance with the procedures outlined in the prospectus relating to the shares they purchased. As noted above, this program was suspended effective December 31, 2010 for an indefinite period. |
Employee and Director Incentive Stock Plan
We have adopted an Employee and Director Incentive Stock Plan (the Plan) which provides for the
grant of awards to our directors and full-time employees, as well as other eligible participants
that provide services to us. We have no employees, and we do not intend to grant awards under the
Plan to persons who are not directors of ours. Awards granted under the Plan may consist of
nonqualified stock options, incentive stock options, restricted stock, share appreciation rights,
and distribution equivalent rights. The term of the Plan is 10 years. The total number of shares of
common stock reserved for issuance under the Plan is equal to 10% of our outstanding shares of
stock at any time.
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Effective January 1, 2006, we adopted the provisions of, FASB ASC 718-10, Compensation Stock
Compensation, which requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors based on estimated fair values. On August 6,
2008 and August 8, 2007, we granted our non-employee directors nonqualified stock options to
purchase an aggregate of 20,000 and 20,000 shares of common stock, respectively, at an exercise
price of $8.00 per share. Of these options, 15,000 lapsed on November 8, 2008 due to the
resignation of one director from the board of directors on August 6, 2008. Outstanding stock
options became immediately exercisable in full on the grant date, expire in ten years after the
grant date, and have no intrinsic value as of March 31, 2011. For the three months ended March 31,
2011 and 2010, we did not incur any non-cash compensation expenses. No stock options were exercised
or canceled during the three months ended March 31, 2011. In connection with the registration of
the shares in our follow-on offering, we have suspended the issuance of options to our independent
directors under the Plan, and we do not expect to issue additional options to our independent
directors until we cease offering shares pursuant to our offering.
11. Related Party Transactions
Our company has no employees. The Advisor is primarily responsible for managing our business
affairs and carrying out the directives of our board of directors. We have an advisory agreement
with the Advisor and a dealer manager agreement with PCC which entitle the Advisor and PCC to
specified fees upon the provision of certain services with regard to our offerings and investment
of funds in real estate projects, among other services, as well as reimbursement for organizational
and offering costs incurred by the Advisor and PCC on our behalf and reimbursement of certain costs
and expenses incurred by the Advisor in providing services to us.
Advisory Agreement
Under the terms of the advisory agreement, the Advisor will use commercially reasonable efforts to
present to us investment opportunities to provide a continuing and suitable investment program
consistent with the investment policies and objectives adopted by our board of directors. The
advisory agreement calls for the Advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of directors, and to
perform other duties.
The fees and expense reimbursements payable to the Advisor under the advisory agreement are
described below.
Organizational and Offering Costs. Organizational and offering costs of our offerings are
being paid by the Advisor on our behalf and will be reimbursed to the Advisor from the proceeds of
our offerings. Organizational and offering costs consist of all expenses (other than sales
commissions and the dealer manager fee) to be paid by us in connection with our offerings,
including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder
and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse
the Advisor for all marketing related costs and expenses such as salaries and direct expenses of
employees of the Advisor and its affiliates in connection with registering and marketing our shares
(ii) technology costs associated with our offering of our shares; (iii) our costs of conducting our
training and education meetings; (iv) our costs of attending retail seminars conducted by
participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses.
In no event will we have any obligation to reimburse the Advisor for organizational and offering
costs totaling in excess of 3.5% of the gross proceeds from our initial public offering and
follow-on offering. At times during our offering stage, before the maximum amount of gross proceeds
has been raised, the amount of organization and offering expenses that we incur, or that our
advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering proceeds then
raised. In no event will we have any obligation to reimburse the advisor for organizational and
offering costs totaling in excess of 3.5% of the gross proceeds from our public offerings at the
conclusion of our offerings.
As of March 31, 2011, the Advisor and its affiliates had incurred on our behalf organizational and
offering costs totaling approximately $5.6 million, including approximately $0.1 million of
organizational costs that was expensed and approximately $5.5 million of offering costs which
reduce net proceeds of our offerings. Of this amount, $4.4 million reduced the net proceeds of our
initial public offering and $1.1 million reduced the net proceeds of our follow-on offering. As of
December 31, 2010, the Advisor and its affiliates had incurred on our behalf organizational and
offering costs totaling approximately $5.6 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $5.5 million of offering costs which
reduced net proceeds of our offerings. Of this amount, $4.5 million reduced the net proceeds of our
initial public offering and $1.1 million reduced the net proceeds of our follow-on offering.
Acquisition Fees and Expenses. The advisory agreement requires us to pay the Advisor
acquisition fees in an amount equal to 2% of the gross proceeds of our primary
offering. We will pay the acquisition fees upon receipt of the gross proceeds from our primary
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offering. However, if
the advisory agreement is terminated or not renewed, the Advisor must return acquisition fees not
yet allocated
to one of our investments. In addition, we are required to reimburse the Advisor for direct costs
the Advisor incurs and amounts the Advisor pays to third parties in connection with the selection
and acquisition of a property, whether or not ultimately acquired. For the three months ended March
31, 2011 and 2010, the Advisor earned approximately $0 and $13,000 of acquisition fees,
respectively, and are included in real estate acquisition costs of our condensed consolidated
statement of operations.
Management Fees. The advisory agreement requires us to pay the Advisor a monthly asset
management fee of one-twelfth of 1.0% of the sum of the aggregate book basis carrying values of our
assets invested, directly or indirectly, in equity interests in and loans secured by real estate
before reserves for depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with generally accepted accounting principles in the United States of America (GAAP).
For the three months ended March 31, 2011 and 2010, the Advisor earned $0.4 million and $0.4
million, respectively of asset management fees, which were expensed and included in asset
management fees and expenses in our condensed consolidated statement of operations. In addition, we
will reimburse the Advisor for the direct and indirect costs and expenses incurred by the Advisor
in providing asset management services to us, including personnel and related employment costs
related to providing asset management services on our behalf. These fees and expenses are in
addition to management fees that we pay to third party property managers. For the three months
ended March 31, 2011 and 2010, the Advisor earned $45,000 and $38,000, respectively, of such direct
and indirect costs and expenses on our behalf, which are included in asset management fees and
expenses in our condensed consolidated statement of operations.
Operating Expenses. The advisory agreement provides for reimbursement of the Advisors
direct and indirect costs of providing administrative and management services to us. For the three
months ended March 31, 2011 and 2010, $0.2 million and $0.2 million of such costs, respectively,
were reimbursed and included in general and administrative expenses in our condensed consolidated
statement of operations. The Advisor must pay or reimburse us the amount by which our aggregate
annual operating expenses exceed the greater of 2% of our average invested assets or 25% of our net
income unless a majority of our independent directors determine that such excess expenses were
justified based on unusual and non-recurring factors.
Property Management Fees. The advisory agreement provides that if we retain our advisor or
an affiliate to manage and lease some of our properties, we will pay a market-based property
management fee or property leasing fee, which may include reimbursement of our advisors or
affiliates personnel costs and other costs of managing the properties. For the three months ended
March 31, 2011 and 2010, the advisor earned approximately $5,000
and $8,000, respectively, of such
property management fees, which are included in property operating and maintenance expenses.
Disposition Fee. The advisory agreement provides that if the Advisor or its affiliates
provide a substantial amount of the services (as determined by a majority of our directors,
including a majority of our independent directors) in connection with the sale of one or more
properties, we will pay the Advisor or such affiliate shall receive at closing a disposition fee up
to 3% of the sales price of such property or properties. This disposition fee may be paid in
addition to real estate commissions paid to non-affiliates, provided that the total real estate
commissions (including such disposition fee) paid to all persons by us for each property shall not
exceed an amount equal to the lesser of (i) 6% of the aggregate contract sales price of each
property or (ii) the competitive real estate commission for each property. We will pay the
disposition fees for a property at the time the property is sold. For the three months ended March
31, 2011 and 2010, we did not incur any of such fees.
Subordinated Participation Provisions. The Advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or termination of the
Advisor, as follows:
| After stockholders have received cumulative distributions equal to $8.00 per share (less any returns of capital) plus cumulative, non-compounded annual returns on net invested capital, the Advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized returns of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more. | ||
| Upon termination of the advisory agreement, the Advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total distributions (other than stock distributions) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of our assets minus its liabilities plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 10% or more. |
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| In the event we list our stock for trading, the Advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of our common stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of our stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 10% or more. |
Dealer Manager Agreement
PCC, as dealer manager, is entitled to receive a sales commission of up to 7% of gross proceeds
from sales in our primary offerings. PCC, as dealer manager, is also entitled to receive a dealer
manager fee equal to up to 3% of gross proceeds from sales in our primary offerings. The dealer
manager is also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5%
of the gross proceeds from sales in our primary offerings. The advisory agreement requires the
Advisor to reimburse us to the extent that offering expenses including sales commissions, dealer
manager fees and organization and offering expenses (but excluding acquisition fees and acquisition
expenses discussed above) in excess of 13.5% of gross proceeds from our offerings. For the three
months ended March 31, 2011 and 2010, our dealer manager earned sales commission and dealer manager
fees of approximately
$0 and $53,000, respectively. Dealer manager fees and sales commissions paid to PCC are a cost of
capital raised and, as such, are included as a reduction of additional paid in capital in the
accompanying condensed consolidated balance sheets.
12. Notes Payable
We have total debt obligations of $28.6 million that will mature in August and September of 2011.
We are pursuing options for restructuring these debts and other repayment alternatives, including
asset sales, sourcing additional equity capital and obtaining new financing that will reposition
the assets. However, there can be no assurance that we will be successful in executing such debt
restructuring or repayment options. If we are unable to obtain alternative financing or sell
properties in order to repay the debt, this could result in the lenders foreclosing on properties.
Based on the various options available to us and ongoing discussions with our lenders, management
believes that we will be able to meet or successfully restructure our debt obligations.
In connection with our notes payable, we had incurred financing costs totaling approximately $2.0
million and $2.0 million, as of March 31, 2011 and December 31, 2010, respectively. These financing
costs have been capitalized and are being amortized over the life of the agreements. For the three
months ended March 31, 2011 and 2010, approximately $84,000 and $53,000, respectively, of deferred
financing costs were amortized and included in interest expense in the consolidated statements of
operations.
HSH Nordbank AG
We amended our credit agreement with HSH Nordbank AG, New York Branch in September, October and
November 2010, extending the credit facility maturity date from September 20, 2010 to September 30,
2011. As a part of these amendments, we made a principal reduction payment of approximately $2.8
million and paid extension fees of $130,000 during 2010. We may not draw additional funds under
this credit agreement. The other terms of the credit agreement remain in full force and effect. We
made principal reduction payments of $0.4 million during the three months ended March 31, 2011 and
are required make additional principal reduction payments of $0.3 million between July 1, 2011 and
September 30, 2011. In addition, the amendment to the credit agreement requires us to use
commercially reasonable efforts to pay off the outstanding principal balance of the loan with
proceeds from refinancing with an unaffiliated lender or from the sale of one or more of our
properties in one or more arms length all-cash transactions. The borrowing rate is based on 30-day
LIBOR plus a margin ranging from 350 to 375 basis points. As of March 31, 2011 and December 31,
2010, the outstanding principal amount of our obligations under the credit agreement was
approximately $12.7 million and $13.1 million, respectively. The weighted average interest rate as
of March 31, 2011 and December 31, 2010 was 3.76% and 2.11%, respectively. The facility contains
various covenants including financial covenants with respect to consolidated interest and fixed
charge coverage and secured debt to secured asset value. As of March 31, 2011, we were in
compliance with all these financial covenants.
Wells Fargo Bank, National Association
On November 13, 2007, we entered into a loan agreement with Wells Fargo Bank, National Association,
successor by merger to Wachovia Bank, N.A to facilitate the acquisition of properties during our
offering period. The terms of the secured loan agreement provided for a borrowing amount of up to
$22.4 million, which was reduced to $15.9 million as of November 31, 2009, at an interest rate of
140 basis points over 30-day LIBOR, secured by specified real estate properties. The loan agreement
had a maturity date of
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November 13, 2010, and provided for prepayment without penalty. Through a series of amendments, we
have extended the maturity date from November 13, 2010 to
August 13, 2011. We are working with the
lender to implement a longer term refinancing plan that may require us to pledge additional
properties as collateral for the loan. The entire $22.4 million available under the terms of the
loan was used to finance an acquisition of properties that closed on November 15, 2007. As of March
31, 2011 and December 31, 2010, we had net borrowings of approximately $15.9 million and $15.9
million, respectively under the loan agreement. The weighted average interest rate as of March 31,
2011 and December 31, 2010 was 1.66%. This loan agreement contains various reporting covenants
including providing periodic balance sheet, statements of income and expenses of borrower and each
guarantor, statement of income and expenses and changes in financial position of each secured
property and cash flow statements of borrower and each guarantor.
Transamerica Life Insurance Company
In connection with our acquisition of Monroe North CommerCenter, on April 17, 2008, we entered into
an assumption and amendment of note, mortgage and other loan documents (the Loan Assumption
Agreement) with Transamerica Life Insurance Company (Transamerica). Pursuant to the Loan
Assumption Agreement, we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica secured mortgage loan. The loan matures on November 1, 2014 and bears interest at
a fixed rate of 5.89% per annum. As of March 31, 2011 and December 31, 2010, we have an outstanding
balance of approximately
$6.8 million and $6.9 million, respectively, under this loan agreement. This Loan Assumption
Agreement contains various reporting covenants including annual income statement, rent roll,
operating budget and narrative summary of leasing prospects for vacant spaces. As of March 31,
2011, we were in compliance with all these reporting covenants. The monthly payment on this loan is
approximately $50,370. During the three months ended March 31, 2011 and 2010, we incurred $0.1
million and $0.1 million of interest expense, respectively, related this loan.
The principal payments due on Monroe North CommerCenter mortgage loan for April 1, 2011 to December
31, 2011 and each of the subsequent years is as follows:
Year | Principal amount | |||
April 1, 2011 to December 31, 2011 |
$ | 154,000 | ||
2012 |
$ | 217,000 | ||
2013 |
$ | 230,000 | ||
2014 and thereafter |
$ | 6,234,000 |
13. Commitments and Contingencies
We monitor our properties for the presence of hazardous or toxic substances. While there can be no
assurance that a material environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a material effect on our
financial condition, results of operations and cash flows. Further, we are not aware of any
environmental liability or any unasserted claim or assessment with respect to an environmental
liability that we believe would require additional disclosure or the recording of a loss
contingency.
Our commitments and contingencies include the usual obligations of real estate owners and operators
in the normal course of business. In the opinion of management, these matters are not expected to
have a material impact on our consolidated financial position, results of operations, and cash
flows. We are also subject to contingent losses related to the notes receivable and note receivable
from related party. For further details see Note 7 and 8. We are not presently subject to any
material litigation nor, to our knowledge, any material litigation threatened against us which if
determined unfavorably to us would have a material adverse effect on our cash flows, financial
condition or results of operations.
14. Subsequent Event
On April 14, 2011, we amended our promissory note with Wells Fargo Bank, National Association, to
extend the maturity date from May 13, 2011 to August 13, 2011. All other terms of the promissory
note remain in full force and effect.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial statements and notes thereto contained
elsewhere in this report.
This section contains forward-looking statements, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and the assumptions upon
which those statements are based. These forward-looking statements generally are identified by the
words believes, project, expects, anticipates, estimates, intends, strategy, plan,
may, will, would, will be, will continue, will likely result, and similar expressions.
Forward-looking statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from the
forward-looking statements. Forward-looking statements that were true at the time made may
ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future events or otherwise.
All forward-looking statements should be read in light of the risks identified herein and in Part
II, Item 1A herein and Part I, Item 1A of our annual report on Form 10-K for the year ended
December 31, 2010 filed with the Securities and Exchange Commission (the SEC).
Overview
We were incorporated on October 22, 2004 for the purpose of engaging in the business of investing
in and owning commercial real estate. On January 6, 2006, we commenced an initial public offering
of up to 55,400,000 shares of our common stock, consisting of 44,400,000 shares for sale pursuant
to a primary offering and 11,000,000 shares for sale pursuant to our distribution reinvestment
plan. We stopped making offers under our initial public offering on June 1, 2009 upon raising gross
offering proceeds of approximately $172.7 million from the sale of approximately 21.7 million
shares, including shares sold under the distribution reinvestment plan. On June 10, 2009, we
commenced a follow-on offering of up 77,350,000 shares of our common stock, consisting of
56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares for sale pursuant
to our dividend reinvestment plan.
On November 23, 2010, management informed investors of several decisions made by our board of
directors:
| Effective November 23, 2010, we discontinued making or accepting offers to purchase shares of stock in our public offering while our board of directors evaluates strategic alternatives to maximize value. |
| Effective December 14, 2010, we suspended our distribution reinvestment plan. As a result, all distributions paid after that date will be in cash until further notice. |
| Effective December 1, 2010, our board of directors resolved to reduce distributions on our common stock to a current annualized rate of $0.08 per share (1% based on a share price of $8.00), from the prior annualized rate of $0.48 per share (6% based on a share price of $8.00), in order to preserve capital that may be needed for capital improvements, debt repayment or other corporate purposes. |
| Our board of directors approved an amendment to our stock repurchase program to suspend redemptions under the program, effective December 31, 2010. |
Our board of directors continues to evaluate strategic alternatives to reposition the company and
preserve and increase shareholders value.
We used the net proceeds from our initial public offering to invest primarily in investment real
estate including multi-tenant industrial real estate located in major metropolitan markets in the
United States. At such time we resume the follow-on offering, we intend to use the net proceeds
from our follow-on offering to acquire additional real estate investments and pay down temporary
acquisition financing on our existing asset.
As of March 31, 2011, we had raised approximately $167.1 million of gross proceeds from the sale of
approximately 20.9 million shares of our common stock in our initial public offering and follow-on
offering and had acquired thirteen properties.
Our revenues, which are comprised largely of rental income, include rents reported on a
straight-line basis over the initial term of the lease. Our growth depends, in part, on our ability
to increase rental income and other earned income from leases by increasing rental
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rates and occupancy levels and control operating and other expenses. Our operations are impacted by
property specific, market specific, general economic and other conditions.
Market Outlook Real Estate and Real Estate Finance Markets
During 2010, significant and widespread concerns about credit risk and access to capital
experienced during 2009 began to subside. Concerns of a double-dip recession have diminished as a
number of economic indicators have improved. Increased trade volume in 2010 spurred increased
leasing activity in many west coast industrial markets. However, if economic uncertainty persists,
we may continue to experience significant vacancies and expect to be required to reduce rental
rates on occupied space.
Despite recent positive economic indicators, both the national and most global economies have
experienced continued volatility throughout 2010. These conditions, combined with stagnant business
activity and low consumer confidence, have resulted in a challenging operating environment.
As a result of the decline in general economic conditions, the U.S. commercial real estate industry
has also been experiencing deteriorating fundamentals across all major property types and most
geographic markets. These market conditions have and will likely continue to have a significant
impact on our real estate investments. In addition, these market conditions have impacted our
tenants businesses, which makes it more difficult for them to meet current lease obligations and
places pressure on them to negotiate favorable lease terms upon renewal in order for their
businesses to remain viable. Increases in rental concessions given to retain tenants and maintain
our occupancy level, which is vital to the continued success of our portfolio, has resulted in
lower current cash flow. Projected future declines in rental rates, slower or potentially negative
net absorption of leased space and expectations of future rental concessions, including free rent
to retain tenants who are up for renewal or to sign new tenants, would result in additional
decreases in cash flows.
Until market conditions are more stable, we expect to continue to limit capital expenditures,
focusing on those capital expenditures that preserve value or generate rental revenue. However, if
we experience an increase in vacancies, we may incur costs to re-lease properties and pay leasing
commissions.
Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC except
as discussed in Note 3 to our financial statements contained in this report.
Results of Operations
As of March 31, 2011, we owned thirteen properties. Twelve of these properties were acquired from
June of 2006 through April 2008.
In August 2010, we acquired an additional property for a purchase price of approximately $1.3
million.
Three months ended March 31, 2011 and 2010
Rental revenues and tenant reimbursements decreased to $2.0 million for the first quarter of 2011
from $2.4 million for the first quarter of 2010. The decrease is due to lower overall occupancy
rate. In the fourth quarter of 2010, one property, representing approximately 8% of total rentable
square feet in our portfolio was vacated and has not yet been re-leased. In addition, lower average
lease rental rates and longer lease up periods for vacant space had a negative effect on the first
quarter 2011 rental revenues and tenant reimbursements. This effect was partially offset by
approximately $26,000 of revenue from the acquisition of the Santa Fe property in the third quarter
of 2010.
Interest income from notes receivable decreased to $0.2 million for the three months ended March
31, 2011 from $0.4 million for the three months ended March 31, 2010 due to non-payment of interest
on the loan receivable from Servant Investments LLC and only partial payment of interest due on the
related party loan during in the first quarter of 2011.
Property operating and maintenance expense for the first quarter of 2011 was comparable to the
first quarter of 2010. This was primarily due to a lower reversal of bad debt expense as first
quarter of 2010 benefited from the substantial collection of previously reserved tenant
receivables, while only a small recovery was received in the first quarter of 2011, offset by lower
property taxes, refurbishment costs and management expense.
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General
and administrative expense were comparable for the first quarter of 2011 and 2010 in the
aggregate. Lower Advisor cost reimbursements and professional fees in the first quarter of 2011
were partially offset by higher insurance costs.
Asset management fees were comparable for the first quarter of 2011 and 2010.
Real estate acquisition costs decreased to $0 for the first quarter of 2011 from $6,000 for the
first quarter of 2010 as no proceeds were raised in our public offering during the first quarter of
2011. Acquisition fees are incurred based on proceeds raised.
Depreciation and amortization was $0.8 million for the first quarter of 2011 and the first quarter
of 2010. An increase in depreciation and amortization expense resulting from the acquisition of the
Santa Fe property in the third quarter of 2011 was offset by lower expense resulting from property
impairments recorded during 2010.
Interest expense increased to $0.4 million for the first quarter of 2011 from $0.3 million for the
first quarter of 2010, due to an increase in the interest rate associated with the HSH Nordbank
note payable extension and the amortization of the deferred financing costs related to the this
extension. This increase was partially offset by the lower interest expense as a result of the
principal payments of $2.7 million and $0.4 million made on the HSH Nordbank note during the fourth
quarter of 2010 and first quarter of 2011, respectively.
Liquidity and Capital Resources
On November 23, 2010, our board of directors made a decision to stop making or accepting offers to
purchase shares of our stock in our follow-on offering while evaluating strategic alternatives to
maximize values and preserve the capital of our stockholders. During this time, we expect the
primary sources of cash to be rental revenues, tenant reimbursements and interest income. We also
expect our primary uses of cash to be for the (1) repayment of notes payable principal, (2) payment
of tenant improvements and leasing commissions, (3) operating expenses, (4) interest expense on any
outstanding indebtedness, and (5) cash distributions. To the extent cash flow from operations is
not enough to satisfy debt obligations and we are not able to refinance or obtain new financing, we
may have to raise cash by selling one or more properties.
As of March 31, 2011, we had sold 0.4 million shares in our follow-on offering for gross proceeds
of approximately $3.4 million. Our board of directors is currently evaluating strategic
alternatives for our follow-on offering, but we do not expect our follow-on offering to be a
material source of capital until such evaluation is completed.
As of March 31, 2011, we had approximately $1.0 million in cash and cash equivalents on hand.
Short Term Liquidity Requirements
In addition to the capital requirements for recurring capital expenditures, tenant improvements and
leasing commissions, we may have to incur expenditures for renovation of our properties such as
increasing the size of the properties by developing additional rentable square feet and or making
the space more appealing to potential industrial tenants.
Credit Facilities
We have total debt obligations of $28.6 million that mature in August and September of 2011. Of
this amount, $12.7 million is outstanding on a credit facility with HSH Nordbank and $15.9 million
is outstanding on a credit facility with Wells Fargo Bank. We are pursuing options for
restructuring and repaying these debts including asset sales, sourcing additional equity capital
and obtaining new financing that will reposition the assets. We expect to repay HSH Nordbank loan
upon maturity with proceeds from a sale of real estate or refinancing of assets. We have extended
the Wells Fargo Bank loan maturity date from November 13, 2010 to August 13, 2011 in a series of
short-term extensions, while working with the lender to implement a plan that may include one or a
combination of further extension of the loan, paying down a portion of the principal, sale of real
estate assets and or pledging additional properties as collateral.
However, there can be no assurance that we will be successful in executing such restructuring or
repayment to allow us to meet our debt obligations during the twelve months ending March 31, 2012.
If we are unable to obtain alternative financing or sell properties in order to repay the debt,
this could result in the lenders foreclosing on properties. Based on the various options available
to us and
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ongoing discussions with its lenders, management believes that we will be able to meet or
successfully restructure our debt obligations.
Distributions
Our board of directors resolved to reduce distributions on our common stock to a current annualized
rate of $0.08 per share (1% based on a share price of $8.00) from the prior annualized rate of
$0.48 per share (6% based on a share price of $8.00), effective December 1, 2010. We expect to pay
these distributions from cash flow from operations. The rate and frequency of distributions is
subject to the discretion of our board of directors and may change from time to time based on our
operating results and cash flow.
For the three months ended March 31, 2011, cash distributions to stockholders of approximately $0.5
million were paid from cash flow from operations.
Organization and offering costs
As of March 31, 2011, our advisor and its affiliates had incurred on our behalf cumulative
organizational and offering costs totaling approximately $5.6 million, including approximately $0.1
million of organizational costs that was expensed and approximately $5.5 million of offering costs
which reduce net proceeds of our offerings. Of this amount, $4.4 million reduced the net proceeds
of our initial public offering and $1.1 million reduced the net proceeds of our follow-on offering.
In no event will we have any obligation to reimburse the advisor for these costs totaling in excess
of 3.5% of the gross proceeds from our initial public offering and our follow-on public offering at
the conclusion of the offerings. As of December 31, 2010, we had reimbursed to our advisor a total
of $4.5 million for our initial public offering and $1.1 million for our follow-on offering.
At times during our offering stage, the amount of organization and offering expenses that we incur,
or that the advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering
proceeds then raised, but our advisor has agreed to reimburse us to the extent that our
organization and offering expenses exceed this 3.5% limitation at the conclusion of our offerings.
In addition, the
advisor will pay all of our organization and offering expenses that, when combined with the sales
commissions and dealer manager fees that we incur exceed 13.5% of the gross proceeds from our
public offerings.
We will not rely on advances from the advisor to acquire properties but the advisor and its
affiliates may loan funds to special purpose entities that may acquire properties on our behalf
pending our raising sufficient proceeds from our public offerings to purchase the properties from
the special purpose entity.
We will endeavor to repay any temporary acquisition debt financing by raising additional equity or
selling properties so that we will own our properties with no permanent financing. Financial
markets have recently experienced unusual volatility and uncertainty. Liquidity has tightened in
all financial markets, including the debt and equity markets. Our ability to fund property
acquisitions or development projects, as well as our ability to repay or refinance debt maturities
could be adversely affected by an inability to secure financing at reasonable terms, if at all.
Other than the conditions discussed above and market conditions discussed under the caption Market
OutlookReal Estate and Real Estate Finance Markets, we are not aware of any material trends or
uncertainties, favorable or unfavorable, affecting real estate generally, which we anticipate may
have a material impact on either capital resources or the revenues or income to be derived from the
operation of real estate properties.
Funds from Operations and Modified Funds from Operations
Funds from operations (FFO) is a non-GAAP financial measure that is widely recognized as a
measure of REIT operating performance. We compute FFO in accordance with the definition outlined by
the National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net
income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by the
accounting principles generally accepted in the United States of America (GAAP) , and gains (or
losses) from sales of property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships, joint ventures, noncontrolling interests and
subsidiaries. Our FFO may not be comparable to FFO reported by other REITs that do not define the
term in accordance with the current NAREIT definition or that interpret the current NAREIT
definition differently than we do. We believe that FFO is helpful to investors and our management
as a measure of operating performance because it excludes depreciation and amortization, gains and
losses from property dispositions, and extraordinary items, and as a result, when compared
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year to year, reflects the impact on operations from trends in occupancy rates, rental rates,
operating costs, development activities, general and administrative expenses, and interest costs,
which is not immediately apparent from net income. Historical cost accounting for real estate
assets in accordance with GAAP implicitly assumes that the value of real estate diminishes
predictably over time. Since real estate values have historically risen or fallen with market
conditions, many industry investors and analysts have considered the presentation of operating
results for real estate companies that use historical cost accounting alone to be insufficient. As
a result, our management believes that the use of FFO, together with the required GAAP
presentations, provide a more complete understanding of our performance. Factors that impact FFO
include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts
pending investment, income from portfolio properties and other portfolio assets, interest rates on
acquisition financing and operating expenses. FFO should not be considered as an alternative to net
income (loss), as an indication of our performance, nor is it indicative of funds available to fund
our cash needs, including our ability to make distributions.
Changes in the accounting and reporting rules under GAAP have prompted a significant increase in
the amount of non-cash and non-operating items included in FFO, as defined. Therefore, we use
modified funds from operations (MFFO), which excludes from FFO acquisition expenses, reversal of
amortization of above/below rent, non-cash amounts related to straight line rent, impairments of
real estate assets and impairment of note receivable to further evaluate our operating performance.
We compute MFFO in accordance with the definition suggested by the Investment Program Association
(the IPA), the trade association for direct investment programs (including non-listed REITs).
However, certain adjustments included in the IPAs definition are not applicable to us and are
therefore not included in the foregoing definition.
We believe that MFFO is a helpful measure of operating performance because it excludes costs that
management considers more reflective of investing activities or non-operating changes. Accordingly,
we believe that MFFO can be a useful metric to assist management, investors and analysts in
assessing the sustainability of our operating performance. As explained below, managements
evaluation of our operating performance excludes the items considered in the calculation based on
the following considerations:
| Real estate acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, managements investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. These acquisition costs have been funded from the proceeds of our initial public offering and other financing sources and not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with managements analysis of the investing and operating performance of our properties. Real estate acquisition expenses include those paid to our advisor and to third parties. | ||
| Adjustments for amortization of above or below market rent. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of lease assets diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the operating performance of our real estate. |
| Adjustments for straight line rents. Under GAAP, rental income recognition can be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the economic impact of our lease terms and presents results in a manner more consistent with managements analysis of our operating performance. | ||
| Impairment charges. Impairment charges relate to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and the specific performance of the holding, which may not be directly attributable to our current operating performance. As these losses relate to underlying long-term assets and liabilities, where we are not speculating or trading assets, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to the sustainability of rental rates, occupancy and other core operating fundamentals. |
FFO or MFFO should not be considered as an alternative to net income (loss) nor as an indication of
our liquidity. Nor is either indicative of funds available to fund our cash needs, including our
ability to make distributions. Both FFO and MFFO should be
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reviewed along with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to
amounts calculated by other REITs.
We believe that MFFO is helpful as a measure of operating performance because it excludes costs
that management considers more reflective of investing activities or non-operating changes.
Our calculations of FFO and MFFO for the three months ended March 31, 2011 and 2010 are presented
below:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net (loss) income |
$ | (772,000 | ) | $ | 20,000 | |||
Adjustments: |
||||||||
Net (loss) income attributable to noncontrolling interest |
| | ||||||
Real estate assets depreciation and amortization |
833,000 | 824,000 | ||||||
Funds from operations (FFO) |
$ | 61,000 | $ | 844,000 | ||||
Adjustments: |
||||||||
Real estate acquisition costs |
$ | | $ | 6,000 | ||||
Reverse amortization of above/below market rent |
4,000 | 15,000 | ||||||
Straight line rent |
32,000 | (67,000 | ) | |||||
Modified funds from operations (MFFO) |
$ | 97,000 | $ | 798,000 | ||||
Weighted average shares |
23,039,021 | 23,003,489 | ||||||
FFO per weighted average shares |
$ | 0.00 | $ | 0.04 | ||||
MFFO per weighted average shares (1) |
$ | 0.00 | $ | 0.03 |
(1) | Effective November 23, 2010, we stopped making and or accepting offers to purchase shares of our stock, as a result, we did not raise capital in the first quarter of 2011. The results presented for the periods in this table are not directly comparable and should not be considered an indication of our historical operating performance. |
The following are the distributions declared during the three months ended March 31, 2011 and 2010:
Cash flows from | ||||||||||||||||||||
Distribution Declared (2) | Funds from | operating | ||||||||||||||||||
Period | Cash | Reinvested | Total | Operations | activities | |||||||||||||||
First quarter 2010 (1) |
$ | 1,221,000 | $ | 1,490,000 | $ | 2,711,000 | $ | 844,000 | $ | 1,103,000 | ||||||||||
First quarter 2011 |
$ | 454,000 | $ | | $ | 454,000 | $ | 61,000 | $ | 481,000 |
(1) | Distributions declared represented a return of capital for tax purposes. | |
(2) | In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our shareholders each taxable year equal to at least 90% of our net ordinary taxable income. Some of our distributions have been paid from sources other than operating cash flow, such as offering proceeds. Until proceeds from our offering are fully invested and generating operating cash flow sufficient to fully cover distributions to stockholders, we intend to pay a portion of our distributions from the proceeds of our offering or from borrowings in anticipation of future cash flow. |
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Contractual Obligations
The following table reflects our contractual obligations as of March 31, 2011, specifically our
obligations under long-term debt agreements and notes receivable:
Payment due by period | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 3-5 years | years | |||||||||||||||
Long-Term Debt Obligations (1) |
$ | 35,440,000 | $ | 28,812,000 | $ | 6,628,000 | $ | | $ | | ||||||||||
Interest expense related to long term debt (2) |
$ | 1,698,000 | $ | 703,000 | $ | 995,000 | $ | | $ | |
(1) | This represents the sum of a credit agreement with HSH Nordbank, AG and loan agreements with Wells Fargo Bank National Association and Transamerica Life Insurance Company. | |
(2) | Interest expenses related to the credit agreement with HSH Nordbank, AG and loan agreement with Wells Fargo National Association are calculated based on the loan balances outstanding at March 31, 2011, one month LIBOR at March 31, 2011 plus appropriate margin ranging from 1.40% and 3.75%. Interest expense related to loan agreement with Transamerica Life Insurance Company is based on a fixed rate of 5.89% per annum. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. We are exposed to the effects of interest rate changes as a result of borrowings used
to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate
investment portfolio and operations. Our profitability and the value of our investment portfolio
may be adversely affected during any period as a result of interest rate changes. We invest our
cash and cash equivalents in government backed securities and FDIC insured savings account which,
by its nature, are subject to interest rate fluctuations. However, we believe that the primary
market risk to which we will be exposed is interest rate risk relating to our credit facilities.
We borrow funds and make investments at a combination of fixed and variable rates. Interest rate
fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt or
fixed rate loans receivable unless such instruments mature or are otherwise
terminated. Conversely, movements in interest rates on variable rate debt would change our future
earnings and cash flows, but not significantly affect the fair value of those instruments. However,
changes in required risk premiums would result in changes in the fair value of floating rate
instruments.
As of March 31, 2011, we had borrowed approximately $28.6 million under our variable rate credit
facility and loan agreement. An increase in the variable interest rate on the facilities
constitutes a market risk as a change in rates would increase or decrease interest incurred and
therefore cash flows available for distribution to shareholders. Based on the debt outstanding as
of March 31, 2011, a 1% change in interest rates would result in a change in interest expense of
approximately $286,000 per year.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations
based on changes in the real estate capital markets, market rental rates for office space, local,
regional and national economic conditions and changes in the credit worthiness of tenants. All of
these factors may also affect our ability to refinance our debt if necessary.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures 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 SECs rules and forms, and that such information
is accumulated and communicated to our senior management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures and have concluded that the disclosure controls and procedures
were effective as of the end of the period covered by this report.
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Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934. In
designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
their evaluation as of the end of the period covered by this report, our Chief Executive Officer
and Chief Financial Officer have concluded that we maintained effective internal control over
financial reporting, at the reasonable assurance level, as of the end of the period covered by this
report.
There have been no changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors
The following risk supplements the risks disclosed in our annual report on Form 10-K for the fiscal
year ended December 31, 2010.
We have, and may in the future, pay distributions from sources other than cash provided from
operations.
Until proceeds from our offering are invested and generating operating cash flow sufficient to make
distributions to stockholders, we intend to pay a substantial portion of our distributions from the
proceeds of our offerings or from borrowings in anticipation of future cash flow. To the extent
that we use offering proceeds to fund distributions to stockholders, the amount of cash available
for investment in properties will be reduced. The distributions paid for the four quarters ended
March 31, 2011 were approximately $8.7 million. Of this amount approximately $3.9 million was
reinvested through our dividend reinvestment plan and approximately $4.8 million was paid in cash
to stockholders. For the four quarters ended March 31, 2011 cash flow from operations and FFO were
approximately $1.7 million and a loss of $0.5 million, respectively. Accordingly, for the four
quarters ended March 31, 2011, total distributions exceeded cash flow from operations and FFO for
the same period. During the four quarters ended March 31, 2011, total distributions paid in cash
exceeded cash flow from operations and FFO for the same period. We used offering proceeds to pay
cash distributions in excess of cash flow from operations during the fourth quarters ended March
31, 2011.
Any adverse changes in the financial health of our advisor or its affiliates or our relationship
with them could hinder our operating performance and the return on your investment. The dealer
manager of our currently suspended public offering has recently experienced significant personnel
reductions. As a result, we do not expect that we will be able to recommence our public offering
unless and until we are able to engage a new dealer manager. We may have difficulty finding a
qualified dealer manager and/or advisor, and any successor dealer manager or advisor may not be as
well suited to manage us or our offering. These potential changes could result in a significant
disruption of our business and may adversely affect the value of your investment in us.
We are dependent on our advisor to manage our operations and our portfolio of real estate assets.
Our advisor depends upon the fees and other compensation that it receives from us in connection
with the purchase, management and sale of our properties to conduct its operations. To date, the
fees we pay to our advisor have been inadequate to cover its operating expenses. To cover its
operational shortfalls, our advisor has relied on cash raised in private offerings of its sole
member. If our advisor is unable to secure additional capital, it may become unable to meet its
obligations and we might be required to find alternative service providers, which could result in a
significant disruption of our business and may adversely affect the value of your investment in us.
We may have difficulty finding a new qualified dealer manager, and any change in the dealer manager
will require our public offering to remain suspended until regulatory approvals are obtained. Such
a suspension could last months, and we cannot assure you that the necessary regulatory approvals
would be obtained. In addition, any new dealer manager we engage may fail to raise significant
capital. If we fail to raise significant capital, our portfolio will be less diversified and the
value of your investment in us will vary more greatly with changes in the value of any one asset.
Moreover, our general and administrative expenses will be greater in proportion to our assets,
which will adversely affect your returns.
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We no longer have funds available from the distribution reinvestment plan offering to use for
general corporate purposes, therefore we may have to use a greater proportion of our cash flow from
operations to meet our general cash requirements, which would reduce cash available for
distributions.
Historically, we used a portion of the proceeds from our distribution reinvestment plan for general
corporate purposes, including capital expenditures on our real estate investments, tenant
improvement costs and leasing costs related to our investments in real estate properties; reserves
required by financings of our investments in real estate properties; and the repayment of debt.
Because our distribution reinvestment plan was suspended on December 14, 2010, we no longer have
distribution reinvestment plan proceeds available for such general corporate purposes. Because such
funds are not available from the distribution reinvestment plan offering, we may have to use a
greater proportion of our cash flow from operations to meet our general cash requirements, which
would reduce cash available for distributions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a ) We did not sell any equity securities that were not registered under the Securities Act of
1933 during the period covered by this Form 10-Q.
(b) Not applicable
(c) During the three months ended March 31, 2011, we redeemed shares pursuant to our stock
repurchase program as follows:
Approximate Dollar Value of | ||||||||||||
Shares Available That May Yet | ||||||||||||
Total Number of Shares | Average Price Paid | Be Redeemed Under the | ||||||||||
Period | Redeemed (1) | per Share | Program | |||||||||
January 2011 |
47,146 | $ | 7.82 | $ | | |||||||
February 2011 |
| $ | | $ | | |||||||
March 2011 |
| $ | | $ | | |||||||
47,146 | ||||||||||||
(1) | As long as our common stock is not listed on a national securities exchange or traded on an over the-counter market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares redeemed in accordance with the procedures outlined in the prospectus relating to the shares they purchased. |
On November 23, 2010, our board of directors concluded that we would not have sufficient funds
available to us to fund any redemptions during 2011. Accordingly, our board of directors approved
an amendment to our stock repurchase program to suspend redemptions under the program effective
December 31, 2010. We can make no assurance as to when and on what terms redemptions will resume.
The share redemption program may be amended, resumed, suspended again, or terminated at any time
based in part on our cash and debt position. Our board has the authority to terminate the program
at any time upon 30 days written notice to our stockholders.
During the three months ended March 31, 2011, we received requests to have an aggregate of 19,694
shares redeemed pursuant to our stock repurchase program, however, due to the current suspension of
the stock repurchase program we were not able to fulfill any of these requests.
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Item 6. Exhibits
Ex. | Description | |
3.1 | Articles of Amendment and Restatement of Articles of Incorporation (incorporated by reference to Exhibit 3.2
to the Registrants Annual Report on Form 10-K for the year ended December 31, 2005) |
|
3.2 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-11 (No. 333-121238) filed on December 23, 2005) |
|
4.1 | Form of Subscription Agreement (incorporated by reference to Appendix A to the prospectus dated April 16, 2010) |
|
4.2 | Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate
or to be sent upon request and without charge to stockholders issued shares without certificates)
(incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-11 (No. 333-121238) filed on
December 14, 2004) |
|
4.3 | Distribution Reinvestment Plan (incorporated by reference to Appendix B to the prospectus dated April 16, 2010) |
|
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized this 16th day of May, 2011.
CORNERSTONE CORE PROPERTIES REIT, INC. |
||||
By: | /s/ Terry G. Roussel | |||
Terry G. Roussel, Chief Executive Officer | ||||
By: | /s/ Sharon C. Kaiser | |||
Sharon C. Kaiser, Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) |
||||
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