Attached files
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EX-31.2 - EXHIBIT 31.2 - Cole Real Estate Investments, Inc. | c18162exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Cole Real Estate Investments, Inc. | c18162exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Cole Real Estate Investments, Inc. | c18162exv32w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Cole Real Estate Investments, Inc. | Financial_Report.xls |
Table of Contents
UNITED STATES 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 June 30, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-53960
COLE CREDIT PROPERTY TRUST III, INC.
(Exact name of registrant as specified in its charter)
Maryland | 26-1846406 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
2555 East Camelback Road, Suite 400 | (602) 778-8700 | |
Phoenix, Arizona, 85016 | (Registrants telephone number, including area code) | |
(Address of principal executive offices; zip 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 registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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 (§ 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).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of August 10, 2011, there were 316,784,907 shares of common stock, par value $0.01, of Cole
Credit Property Trust III, Inc. outstanding.
COLE CREDIT PROPERTY TRUST III, INC.
INDEX
INDEX
2
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
The accompanying condensed consolidated unaudited interim financial statements as of and
during the three and six months ended June 30, 2011, have been prepared by Cole Credit Property
Trust III, Inc. (the Company, we, us or our) pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC) regarding interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America (GAAP) for complete financial statements, and
should be read in conjunction with the audited consolidated financial statements and related notes
thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
The financial statements herein should also be read in conjunction with the notes to the financial
statements and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in this Quarterly Report on Form 10-Q. The results of operations during the
three and six months ended June 30, 2011 are not necessarily indicative of the operating results
expected for the full year. The information furnished in our accompanying condensed consolidated
unaudited balance sheets and condensed consolidated unaudited statements of operations,
stockholders equity, and cash flows reflects all adjustments that are, in our opinion, necessary
for a fair presentation of the aforementioned financial statements. Such adjustments are of a
normal recurring nature.
Forward-looking statements that were true at the time made may ultimately prove to be
incorrect or false. We caution readers not to place undue reliance on forward-looking statements,
which reflect our managements view only as of the date of this Quarterly Report on Form 10-Q. We
make no representation or warranty (expressed or implied) about the accuracy of any such
forward-looking statements contained in the Quarterly Report on Form 10-Q. Additionally, we
undertake no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future operating results. The
forward-looking statements should be read in light of the risk factors identified in the Item 1A
Risk Factors section of the Companys Annual Report on Form 10-K as of and for the year ended
December 31, 2010.
3
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands except share and per share amounts)
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands except share and per share amounts)
June 30, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Investment in real estate assets: |
||||||||
Land |
$ | 882,165 | $ | 722,698 | ||||
Buildings and improvements, less accumulated depreciation of $58,290
and $28,898, respectively |
2,392,203 | 1,850,690 | ||||||
Acquired intangible lease assets, less accumulated amortization of $36,546
and $19,004, respectively |
502,077 | 414,319 | ||||||
Total investment in real estate assets, net |
3,776,445 | 2,987,707 | ||||||
Investment in mortgage notes receivable, net |
64,431 | 63,933 | ||||||
Total investment in real estate and mortgage assets, net |
3,840,876 | 3,051,640 | ||||||
Cash and cash equivalents |
316,800 | 109,942 | ||||||
Restricted cash |
17,167 | 12,123 | ||||||
Investment in unconsolidated joint ventures |
22,239 | 14,966 | ||||||
Rents and tenant receivables, less allowance for doubtful accounts of
$160 and $89, respectively |
38,844 | 24,581 | ||||||
Property escrow deposits, prepaid expenses and other assets |
7,669 | 3,323 | ||||||
Deferred financing costs, less accumulated amortization of $5,925
and $2,918, respectively |
43,771 | 27,083 | ||||||
Total assets |
$ | 4,287,366 | $ | 3,243,658 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Notes payable and credit facility |
$ | 1,637,396 | $ | 1,061,207 | ||||
Accounts payable and accrued expenses |
18,089 | 15,744 | ||||||
Escrowed investor proceeds |
536 | 448 | ||||||
Due to affiliates |
2,643 | 804 | ||||||
Acquired below market lease intangibles, less accumulated amortization of
$5,619 and $3,066, respectively |
72,787 | 66,815 | ||||||
Distributions payable |
16,128 | 14,448 | ||||||
Derivative liabilities, deferred rent and other liabilities |
26,936 | 21,142 | ||||||
Total liabilities |
1,774,515 | 1,180,608 | ||||||
Commitments and contingencies |
||||||||
Redeemable common stock |
95,860 | 65,898 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued
and outstanding |
| | ||||||
Common stock, $0.01 par value; 990,000,000 and 490,000,000 shares authorized,
respectively, 306,114,421 and 248,070,364 shares issued and outstanding,
respectively |
3,061 | 2,481 | ||||||
Capital in excess of par value |
2,654,120 | 2,164,528 | ||||||
Accumulated distributions in excess of earnings |
(227,745 | ) | (163,040 | ) | ||||
Accumulated other comprehensive loss |
(13,095 | ) | (7,188 | ) | ||||
Total stockholders equity |
2,416,341 | 1,996,781 | ||||||
Noncontrolling interests |
650 | 371 | ||||||
Total equity |
2,416,991 | 1,997,152 | ||||||
Total liabilities and equity |
$ | 4,287,366 | $ | 3,243,658 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands except share and per share amounts)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands except share and per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rental and other property income |
$ | 75,161 | $ | 23,742 | $ | 140,720 | $ | 40,933 | ||||||||
Tenant reimbursement income |
4,891 | 1,346 | 9,731 | 2,362 | ||||||||||||
Interest income on mortgage notes receivable |
1,362 | 900 | 2,704 | 900 | ||||||||||||
Total revenue |
81,414 | 25,988 | 153,155 | 44,195 | ||||||||||||
Expenses: |
||||||||||||||||
General and administrative expenses |
2,111 | 1,145 | 4,090 | 2,656 | ||||||||||||
Property operating expenses |
5,526 | 1,399 | 10,739 | 2,539 | ||||||||||||
Property and asset management expenses |
6,808 | 2,243 | 13,013 | 3,921 | ||||||||||||
Acquisition related expenses |
14,128 | 11,083 | 22,721 | 17,929 | ||||||||||||
Depreciation |
15,774 | 4,371 | 29,437 | 7,281 | ||||||||||||
Amortization |
7,732 | 2,653 | 14,465 | 4,592 | ||||||||||||
Total operating expenses |
52,079 | 22,894 | 94,465 | 38,918 | ||||||||||||
Operating income |
29,335 | 3,094 | 58,690 | 5,277 | ||||||||||||
Other income (expense): |
||||||||||||||||
Equity in income (loss) of unconsolidated joint ventures |
470 | (516 | ) | 777 | (516 | ) | ||||||||||
Interest and other income |
145 | 429 | 222 | 769 | ||||||||||||
Interest expense |
(19,459 | ) | (4,610 | ) | (34,650 | ) | (7,297 | ) | ||||||||
Total other expense |
(18,844 | ) | (4,697 | ) | (33,651 | ) | (7,044 | ) | ||||||||
Net income (loss) |
10,491 | (1,603 | ) | 25,039 | (1,767 | ) | ||||||||||
Net income allocated to noncontrolling interests |
11 | | 299 | | ||||||||||||
Net income (loss) attributable to the Company |
$ | 10,480 | $ | (1,603 | ) | $ | 24,740 | $ | (1,767 | ) | ||||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic and diluted |
292,224,033 | 154,924,208 | 277,329,317 | 134,685,676 | ||||||||||||
Net income (loss) attributable to the Company per common share: |
||||||||||||||||
Basic and diluted |
$ | 0.04 | $ | (0.01 | ) | $ | 0.09 | $ | (0.01 | ) | ||||||
Distributions declared per common share: |
$ | 0.16 | $ | 0.17 | $ | 0.32 | $ | 0.34 | ||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands, except share amounts)
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands, except share amounts)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||
Common Stock | Capital in | Distributions | Other | Total | Non- | |||||||||||||||||||||||||||
Number of | Par | Excess | in Excess of | Comprehensive | Stockholders | controlling | Total | |||||||||||||||||||||||||
Shares | Value | of Par Value | Earnings | Loss | Equity | Interests | Equity | |||||||||||||||||||||||||
Balance, January 1, 2011 |
248,070,364 | $ | 2,481 | $ | 2,164,528 | $ | (163,040 | ) | $ | (7,188 | ) | $ | 1,996,781 | $ | 371 | $ | 1,997,152 | |||||||||||||||
Issuance of common stock |
60,073,253 | 600 | 596,750 | | | 597,350 | | 597,350 | ||||||||||||||||||||||||
Distributions to noncontrolling interests |
| | | | | | (20 | ) | (20 | ) | ||||||||||||||||||||||
Distributions to stockholders |
| | | (89,445 | ) | | (89,445 | ) | | (89,445 | ) | |||||||||||||||||||||
Commissions on stock sales and
related dealer manager fees |
| | (48,654 | ) | | | (48,654 | ) | | (48,654 | ) | |||||||||||||||||||||
Other offering costs |
| | (8,228 | ) | | | (8,228 | ) | | (8,228 | ) | |||||||||||||||||||||
Redemptions of common stock |
(2,029,196 | ) | (20 | ) | (19,607 | ) | | | (19,627 | ) | | (19,627 | ) | |||||||||||||||||||
Redeemable common stock |
| | (29,962 | ) | | | (29,962 | ) | | (29,962 | ) | |||||||||||||||||||||
Purchase of investment from
noncontrolling interest |
| | (707 | ) | | | (707 | ) | | (707 | ) | |||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Allocation of net income |
| | | 24,740 | | 24,740 | 299 | 25,039 | ||||||||||||||||||||||||
Net unrealized loss on interest
rate swaps |
| | | | (5,907 | ) | (5,907 | ) | | (5,907 | ) | |||||||||||||||||||||
Total comprehensive income |
| | | | | 18,833 | 299 | 19,132 | ||||||||||||||||||||||||
Balance, June 30, 2011 |
306,114,421 | $ | 3,061 | $ | 2,654,120 | $ | (227,745 | ) | $ | (13,095 | ) | $ | 2,416,341 | $ | 650 | $ | 2,416,991 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 25,039 | $ | (1,767 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation |
29,437 | 7,281 | ||||||
Amortization of intangible lease assets and below market lease intangibles, net |
15,021 | 4,613 | ||||||
Amortization of deferred financing costs |
3,007 | 911 | ||||||
Amortization of fair value adjustments of mortgage notes payable assumed |
37 | | ||||||
Net accretion on mortgage notes receivable |
(498 | ) | (156 | ) | ||||
Bad debt expense |
103 | 20 | ||||||
Equity in (income) loss of unconsolidated joint ventures |
(777 | ) | 516 | |||||
Return on investment in unconsolidated joint ventures |
777 | | ||||||
Changes in assets and liabilities: |
||||||||
Rents and tenant receivables |
(14,366 | ) | (3,939 | ) | ||||
Property escrow deposits, prepaid expenses and other assets |
740 | (202 | ) | |||||
Accounts payable and accrued expenses |
2,200 | 2,005 | ||||||
Deferred rent and other liabilities |
28 | 3,776 | ||||||
Due to affiliates |
1,744 | 140 | ||||||
Net cash provided by operating activities |
62,492 | 13,198 | ||||||
Cash flows from investing activities: |
||||||||
Investment in real estate and mortgage assets |
(823,009 | ) | (715,886 | ) | ||||
Investment in unconsolidated joint ventures |
(7,725 | ) | (16,126 | ) | ||||
Return of investment from unconsolidated joint ventures |
452 | | ||||||
Payment of property escrow deposits |
(18,550 | ) | | |||||
Refund of property escrow deposits |
12,603 | | ||||||
Change in restricted cash |
(5,044 | ) | (10,891 | ) | ||||
Net cash used in investing activities |
(841,273 | ) | (742,903 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
547,761 | 767,063 | ||||||
Offering costs on issuance of common stock |
(56,787 | ) | (74,838 | ) | ||||
Redemptions of common stock |
(19,627 | ) | (4,642 | ) | ||||
Distributions to investors |
(38,176 | ) | (17,352 | ) | ||||
Proceeds from notes payable and credit facilities |
646,589 | 225,823 | ||||||
Repayment of notes payable and credit facilities |
(75,300 | ) | (353 | ) | ||||
Payment of loan deposits |
(3,627 | ) | (8,406 | ) | ||||
Refund of loan deposits |
4,347 | 3,532 | ||||||
Escrowed investor proceeds liability |
88 | 238 | ||||||
Deferred financing costs paid |
(19,609 | ) | (9,928 | ) | ||||
Distributions to noncontrolling interests |
(20 | ) | | |||||
Net cash provided by financing activities |
985,639 | 881,137 | ||||||
Net increase in cash and cash equivalents |
206,858 | 151,432 | ||||||
Cash and cash equivalents, beginning of period |
109,942 | 278,717 | ||||||
Cash and cash equivalents, end of period |
$ | 316,800 | $ | 430,149 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2011
NOTE 1 ORGANIZATION AND BUSINESS
Cole Credit Property Trust III, Inc. (the Company) is a Maryland corporation that was formed
on January 22, 2008, which has elected to be taxed, and currently qualifies as a real estate
investment trust (REIT) for federal income tax purposes. Substantially all of the Companys
business is conducted through Cole REIT III Operating Partnership, LP (CCPT III OP), a Delaware
limited partnership. The Company is the sole general partner of, and owns a 99.99% partnership
interest in, CCPT III OP. Cole REIT Advisors III, LLC (CR III Advisors), the affiliate advisor
to the Company, is the sole limited partner and owner of an insignificant noncontrolling
partnership interest of less than 0.01% of CCPT III OP.
As of June 30, 2011, the Company owned 539 properties, comprising 23.4 million rentable square
feet of single and multi-tenant retail and commercial space located in 42 states. As of June 30,
2011, the rentable space at these properties was 99% leased. As of June 30, 2011, the Company also
owned two mortgage notes receivable secured by two office buildings, each of which is subject to a
net lease. In addition, through four joint venture arrangements, as of June 30, 2011, the Company
had interests in eight properties comprising 1.1 million gross rentable square feet of commercial
space and a land parcel under development comprising 139,000 square feet of land.
On October 1, 2008, pursuant to a Registration Statement on Form S-11 under the Securities Act
of 1933, as amended, the Company commenced its initial public offering on a best efforts basis of
up to 230.0 million shares of its common stock at a price of $10.00 per share and up to 20.0
million additional shares pursuant to a distribution reinvestment plan (the DRIP), under which
its stockholders could elect to have distributions reinvested in additional shares at the higher of
$9.50 per share or 95% of the estimated value of a share of the Companys common stock (the
Initial Offering).
On January 6, 2009, the Company satisfied the conditions of its escrow agreement, issued
approximately 262,000 shares under the Initial Offering and commenced its principal operations.
The Company terminated the Initial Offering on October 1, 2010. At the completion of the Initial
Offering, a total of approximately 217.5 million shares of common stock had been issued, including
approximately 211.6 million shares issued in the primary offering and approximately 5.9 million
shares issued pursuant to the Companys DRIP. The remaining 32.5 million unsold shares in the
Initial Offering were deregistered.
On September 22, 2010, the registration statement for a follow-on offering of 275.0 million
shares of the Companys common stock was declared effective by the SEC (the Follow-on Offering,
and collectively with the Initial Offering, the Offerings). Of the shares registered in the
Follow-on Offering, the Company is offering up to 250.0 million shares in a primary offering at a
price of $10.00 per share and up to 25.0 million shares under an amended and restated DRIP, under
which its stockholders may elect to have distributions reinvested in additional shares at a price
of $9.50 per share during the Follow-on Offering and until such time as the Companys board of
directors has determined a reasonable estimate of the value of the shares of common stock, at which
time the shares of common stock will be offered under the DRIP at a purchase price equal to the
most recently disclosed per share value. The Company commenced sales of its common stock pursuant
to the Follow-on Offering after the termination of the Initial Offering on October 1, 2010. As of
June 30, 2011, the Company had issued approximately 91.9 million shares of its common stock in the
Follow-on Offering, including approximately 84.3 million shares issued in the primary offering and
approximately 7.5 million shares issued pursuant to the Companys DRIP. The Company had aggregate
gross proceeds from the Offerings of $3.1 billion (including shares issued pursuant to the
Companys DRIP) as of June 30, 2011, before share redemptions of $31.5 million and offering costs,
selling commissions, and dealer management fees of $297.9 million.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited financial statements of the Company have been prepared in
accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and
Article 10 of Regulation S-X, and do not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of management, the statements for the
interim periods presented include all adjustments, which are of a normal and recurring nature,
necessary to present a fair presentation of the results for such periods. Results for these
interim periods are not necessarily indicative of full year results. The information included in
this Quarterly Report on Form 10-Q should be read in conjunction with the Companys audited
consolidated financial statements as of and for the year ended December 31, 2010, and related notes
thereto set forth in the Companys Annual Report on Form 10-K.
8
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
The Company evaluates the need to consolidate joint ventures based on standards set forth in
the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810,
Consolidation (ASC 810). In determining whether the Company has a controlling interest in a
joint venture and the requirement to consolidate the accounts of that entity, management considers
factors such as ownership interest, authority to make decisions and contractual and substantive
participating rights of the partners/members as well as whether the entity is a variable interest
entity for which the Company is the primary beneficiary. As of June 30, 2011, the Company
consolidated the accounts of two joint ventures (the Consolidated Joint Ventures).
The condensed consolidated unaudited financial statements include the accounts of the Company,
its wholly-owned subsidiaries and the Consolidated Joint Ventures, in which the Company has
controlling financial interests. The portion of the Consolidated Joint Ventures not owned by the
Company is presented as noncontrolling interests as of and during the period consolidated. All
intercompany accounts and transactions have been eliminated in consolidation.
Investment in and Valuation of Real Estate and Related Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization.
Amounts capitalized to real estate assets consist of construction and any tenant improvements,
major improvements and betterments that extend the useful life of the related asset and leasing
costs. All repairs and maintenance are expensed as incurred.
Assets, other than land, are depreciated or amortized on a straight-line basis. The estimated
useful lives of our assets by class are generally as follows:
Building
|
40 years | |
Tenant improvements
|
Lesser of useful life or lease term | |
Intangible lease assets
|
Lesser of useful life or lease term |
The Company continually monitors events and changes in circumstances that could indicate that
the carrying amounts of its real estate and related intangible assets may not be recoverable.
Impairment indicators that the Company considers include, but are not limited to, bankruptcy or
other credit concerns of a propertys major tenant, such as a history of late payments, rental
concessions and other factors, a significant decrease in a propertys revenues due to lease
terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When
indicators of potential impairment are present, the Company assesses the recoverability of the
assets by determining whether the carrying value of the assets will be recovered through the
undiscounted operating cash flows expected from the use of the assets and their eventual
disposition. In the event that such expected undiscounted operating cash flows do not exceed the
carrying value, the Company will adjust the real estate and related intangible assets and
liabilities to their fair value and recognize an impairment loss. No impairment losses were
recorded during the three and six months ended June 30, 2011 and 2010.
Projections of expected future cash flows require the Company to use estimates such as future
market rental income amounts subsequent to the expiration of current lease agreements, property
operating expenses, terminal capitalization and discount rates, the number of months it takes to
re-lease the property, required tenant improvements and the number of years the property will be
held for investment. The use of alternative assumptions in the future cash flow analysis could
result in a different assessment of the propertys future cash flow and a different conclusion
regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying
value of the real estate and related intangible assets.
When a real estate asset is identified as held for sale, the Company will cease depreciation
of the asset and estimate the sales price, net of selling costs. If, in the Companys opinion, the
net sales price of the asset is less than the net book value of the asset, an adjustment to the
carrying value would be recorded to reflect the estimated fair value of the property, net of
selling costs. There were no assets identified as held for sale as of June 30, 2011 or December 31,
2010.
9
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Allocation of Purchase Price of Real Estate and Related Assets
Upon the acquisition of real properties, the Company allocates the purchase price of such
properties to acquired tangible assets, consisting of land, buildings and improvements, and
identified intangible assets and liabilities, consisting of the value of above market and below
market leases and the value of in-place leases, based in each case on their fair values.
Acquisition related expenses are expensed as incurred. The Company utilizes independent appraisals
to assist in the determination of the fair values of the tangible assets of an acquired property
(which includes land and building). The Company obtains an independent appraisal for each real
property acquisition. The information in the appraisal, along with any additional information
available to the Companys management, is used by its management in estimating the amount of the
purchase price that is allocated to land. Other information in the appraisal, such as building
value and market rents, may be used by the Companys management in estimating the allocation of
purchase price to the building and to intangible lease assets and liabilities. The appraisal firm
has no involvement in managements allocation decisions other than providing this market
information.
The fair values of above market and below market in-place lease values are recorded based on
the present value (using an interest rate which reflects the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place
leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, which
is generally obtained from independent appraisals, measured over a period equal to the remaining
non-cancelable term of the lease including any bargain renewal periods, with respect to a below
market lease. The above market and below market lease values are capitalized as intangible lease
assets or liabilities. Above market lease values are amortized as an adjustment of rental income
over the remaining terms of the respective leases. Below market leases are amortized as an
adjustment of rental income over the remaining terms of the respective leases, including any
bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts of above market and below market in-place lease values relating to that lease
would be recorded as an adjustment to rental income.
The fair values of in-place leases include direct costs associated with obtaining a new tenant
and opportunity costs associated with lost rentals which are avoided by acquiring an in-place
lease. Direct costs associated with obtaining a new tenant include commissions and other direct
costs and are estimated in part by utilizing information obtained from independent appraisals and
managements consideration of current market costs to execute a similar lease. The value of
opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place
leases over a market absorption period for a similar lease. These intangibles are capitalized as
intangible lease assets and are amortized to expense over the remaining term of the respective
leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts
of in-place lease assets relating to that lease would be expensed.
The determination of the fair values of the assets and liabilities acquired requires the use
of significant assumptions with regard to the current market rental rates, rental growth rates,
capitalization and discount rates, interest rates and other variables. The use of alternative
estimates would result in a different assessment of the Companys purchase price allocations, which
could impact the amount of its reported net income (loss).
The Company estimates the fair value of assumed mortgage notes payable based upon indications
of current market pricing for similar types of debt with similar maturities. Assumed mortgage
notes payable are initially recorded at their estimated fair value as of the assumption date, and
the difference between such estimated fair value and the mortgage notes outstanding principal
balance is amortized to interest expense over the term of the mortgage note payable.
Restricted Cash and Escrows
Included in restricted cash was $15.6 million and $9.6 million as of June 30, 2011 and
December 31, 2010, respectively, held by lenders in escrow accounts for tenant and capital
improvements, leasing commissions, repairs and maintenance and other lender reserves for certain
properties, in accordance with the respective lenders loan agreement. Also included in restricted
cash was $1.1 million and $2.1 million held by lenders in a lockbox account, as of June 30, 2011
and December 31, 2010, respectively. As part of certain debt agreements, rents from certain
encumbered properties are deposited directly into a lockbox account, from which the monthly debt
service payment is disbursed to the lender and the excess is disbursed to the Company. In addition,
the Company had escrowed investor proceeds for which shares of common stock had not been issued of
$536,000 and $448,000 in restricted cash as of June 30, 2011 and December 31, 2010, respectively.
10
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Investment in Unconsolidated Joint Ventures
Investment in unconsolidated joint ventures as of June 30, 2011 consists of the Companys
interest in two joint ventures that own seven multi-tenant properties (the Unconsolidated Joint
Ventures). Consolidation of these investments is not required as the entities do not qualify as
variable interest entities and do not meet the control requirements for consolidation, as defined
in ASC 810. Both the Company and the respective joint venture partner must approve significant
decisions about the applicable entitys activities. As of June 30, 2011, the Unconsolidated Joint
Ventures held total assets of $73.5 million and non-recourse mortgage notes payable of $46.0
million.
The Company accounts for the Unconsolidated Joint Ventures using the equity method of
accounting per guidance established under ASC 323, Investments Equity Method and Joint Ventures
(ASC 323). The equity method of accounting requires the investment to be initially recorded at
cost and subsequently adjusted for the Companys share of equity in the joint ventures earnings
and distributions. The Company evaluates the carrying amount of the investments for impairment in
accordance with ASC 323. Each of the Unconsolidated Joint Ventures is reviewed for potential
impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is
recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment
is other-than-temporary, the Company considers whether it has the ability and intent to hold the
investment until the carrying value is fully recovered. The evaluation of an investment in a joint
venture for potential impairment can require our management to exercise significant judgments. No
impairment losses were recorded related to the Unconsolidated Joint Ventures for the three and six
months ended June 30, 2011 and 2010.
Concentration of Credit Risk
As of June 30, 2011, the Company had cash on deposit, including restricted cash, in nine
financial institutions, eight of which had deposits in excess of current federally insured levels
totaling $316.0 million; however the Company has not experienced any losses in such accounts. The
Company limits investment of cash investments to financial institutions with high credit standing;
therefore, the Company believes it is not exposed to any significant credit risk on cash.
As of June 30, 2011, no single tenant accounted for greater than 10% of the Companys 2011
gross annualized rental revenues. As of June 30, 2011, tenants in the specialty retail, drugstore,
grocery and restaurant industries comprised 14%, 13%, 12%, and 10%, respectively, of 2011 gross
annualized rental revenues. Additionally, the Company has certain geographic concentrations in its
property holdings. In particular, as of June 30, 2011, 101 of the Companys properties were
located in Texas, accounting for 19% of its 2011 gross annualized rental revenues.
Redeemable Common Stock
The Companys share redemption program provides that the Company will not redeem in excess of
5% of the weighted average number of shares outstanding during the trailing twelve months prior to
the redemption date (the Trailing Twelve-month Cap); provided, however, that while shares subject
to a redemption requested upon the death of a stockholder will be included in calculating the
maximum number of shares that may be redeemed, such shares will not be subject to the Trailing
Twelve-month Cap. In addition, all redemptions, including those upon death or qualifying
disability, are limited to those that can be funded with cumulative net proceeds from the sale of
shares through the Companys DRIP. As of June 30, 2011 and December 31, 2010, the Company had
issued approximately 13.4 million and approximately 8.2 million shares of common stock under the
Companys DRIP, respectively, for cumulative proceeds of $127.4 million and $77.8 million,
respectively, which are recorded as redeemable common stock, net of redemptions, in the respective
condensed consolidated unaudited balance sheets. As of June 30, 2011 and December 31, 2010, the
Company had redeemed approximately 3.3 million and approximately 1.2 million shares of common
stock, respectively, for an aggregate price of $31.5 million and $11.9 million, respectively.
Redeemable common stock is recorded at the greater of the carrying amount or redemption value each
reporting period. Changes in the value from period to period are recorded as an adjustment to
capital in excess of par value.
In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the
weighted average number of shares outstanding during the trailing twelve-month period. In addition,
the funding for redemptions each quarter generally will be limited to the net proceeds the Company
receives from the sale of shares in the respective quarter under the Companys DRIP. The amended
share redemption program further provides that while shares subject to a redemption requested upon
the death of a stockholder will be included in calculating the maximum number of shares that may be
redeemed, such shares will not be subject to the quarterly caps. The Companys board of directors
may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.
11
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTE 3 FAIR VALUE MEASUREMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended
to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. Depending on the nature of the asset or liability, various techniques and assumptions can be
used to estimate the fair value. Assets and liabilities are measured using inputs from three levels
of the fair value hierarchy, as follows:
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date. An active market is
defined as a market in which transactions for the assets or liabilities occur with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Level 2 Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active
(markets with few transactions), inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally
from or corroborated by observable market data correlation or other means (market corroborated
inputs).
Level 3 Unobservable inputs, only used to the extent that observable inputs are not
available, reflect the Companys assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the
Companys financial assets and liabilities:
Cash and cash equivalents, restricted cash, rents and tenant receivables, property escrow
deposits, prepaid expenses and mortgage loan deposits and accounts payable and accrued expenses
The Company considers the carrying values of these financial instruments, assets and liabilities to
approximate fair value because of the short period of time between origination of the instruments
and their expected realization.
Mortgage notes receivable The fair value is estimated by discounting the expected cash
flows on the notes at current rates at which management believes similar loans would be made. The
estimated fair value of these notes was $71.1 million and $64.0 million as of June 30, 2011 and
December 31, 2010, respectively, as compared to the carrying values of $64.4 million and $63.9
million as of June 30, 2011 and December 31, 2010, respectively.
Notes payable and credit facility The fair value is estimated using a discounted cash flow
technique based on estimated borrowing rates available to the Company as of June 30, 2011 and
December 31, 2010. The estimated fair value of the notes payable and credit facility was $1.6
billion and $1.0 billion as of June 30, 2011 and December 31, 2010, respectively, as compared to
the carrying value of $1.6 billion and $1.1 billion as of June 30, 2011 and December 31, 2010,
respectively.
Derivative Instruments The Companys derivative instruments represent interest rate swaps.
All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair
value of these instruments is determined using interest rate market pricing models. The Company
includes the impact of credit valuation adjustments on derivative instruments measured at fair
value.
Considerable judgment is necessary to develop estimated fair values of financial instruments.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Company could realize, or be liable for, on disposition of the financial instruments.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys financial assets and liabilities that are required to be measured at
fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (in thousands):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||||||
June 30, 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | (13,095 | ) | $ | | $ | (13,905 | ) | $ | | ||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Interest rate swap |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | (7,329 | ) | $ | | $ | (7,329 | ) | $ | | ||||||
NOTE 4 REAL ESTATE ACQUISITIONS
2011 Property Acquisitions
During the six months ended June 30, 2011, the Company acquired a 100% interest in 92
commercial properties for an aggregate purchase price of $831.0 million (the 2011 Acquisitions).
The Company purchased the 2011 Acquisitions with net proceeds from the Offerings and through the
issuance of mortgage notes. The Company allocated the purchase price of these properties to the
fair value of the assets acquired and liabilities assumed. The following table summarizes the
purchase price allocation (in thousands):
June 30, 2011 | ||||
Land |
$ | 159,618 | ||
Building and improvements |
574,254 | |||
Acquired in-place leases |
82,234 | |||
Acquired above-market leases |
23,029 | |||
Acquired below-market leases |
(8,596 | ) | ||
Fair value adjustment of assumed notes payable |
438 | |||
Total purchase price |
$ | 830,977 | ||
The Company recorded revenue for the three and six months ended June 30, 2011 of $12.0 million
and $14.0 million, respectively, and a net loss for the three and six months ended June 30, 2011 of
$7.7 million and $14.8 million, respectively, related to the 2011 Acquisitions. The Company expensed
$14.1 million and $22.7 million of acquisition costs for the three and six months ended June 30,
2011, respectively.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
The following information summarizes selected financial information of the Company, as if all
of the 2011 Acquisitions were completed on January 1, 2010 for each period presented below. The
table below presents the Companys estimated revenue and net income (loss), on a pro forma basis,
for the three and six months ended June 30, 2011 and 2010 (in thousands):
Three Months Ended, | Six Months Ended, | |||||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||||
Pro forma basis: |
||||||||||||||||
Revenue |
$ | 102,895 | $ | 59,476 | $ | 174,983 | $ | 80,031 | ||||||||
Net income (loss)
attributable to the
Company |
$ | 39,300 | $ | 19,444 | $ | 56,660 | $ | (6,697 | ) |
The unaudited pro forma information is presented for informational purposes only and may not
be indicative of what actual results of operations would have been had the transactions occurred at
the beginning of each year, nor does it purport to represent the results of future operations.
2011 Investments in Joint Ventures
During the six months ended June 30, 2011, the Company acquired a single tenant retail store
for an aggregate purchase price of $5.9 million through the repayment of a construction loan
facility (the Rice Lake JV Construction Facility) and the purchase of the joint venture partners
noncontrolling interest. This purchase is included in the 2011 Acquisitions.
The Company also acquired a controlling financial interest in one of the Consolidated Joint
Ventures, which purchased a land parcel for $1.0 million, upon which a single tenant commercial
store will be developed (the Marana Joint Venture), during the six months ended June 30, 2011.
Upon completion of the building, the Company will be obligated to purchase the property from the
joint venture subject to certain criteria being met, as discussed in Note 9. The construction will
be funded by a construction loan facility of $5.2 million (the Marana JV Construction Facility).
As of June 30, 2011, no amounts had been drawn on the construction loan facility.
In addition, during the six months ended June 30, 2011, the Company acquired an interest in a
joint venture arrangement, which has $34.0 million of real estate assets and $20.4 million of
mortgage notes payable, which is secured by the real estate assets. This joint venture is included
in the Unconsolidated Joint Ventures as discussed in Note 2.
2010 Property Acquisitions
During the six months ended June 30, 2010, the Company acquired a 100% interest in 133
commercial properties, for an aggregate purchase price of $656.9 million (the 2010 Acquisitions).
The Company purchased the 2010 Acquisitions with net proceeds of the Initial Offering and through
the issuance of mortgage notes. The Company allocated the purchase price of these properties to the
fair value of the assets acquired and liabilities assumed. The following table summarizes the
purchase price allocation (in thousands):
June 30, 2010 | ||||
Land |
$ | 156,657 | ||
Building and improvements |
426,923 | |||
Acquired in-place leases |
75,972 | |||
Acquired above-market leases |
7,140 | |||
Acquired below-market leases |
(10,737 | ) | ||
Fair value adjustment of assumed notes |
965 | |||
Total purchase price |
$ | 656,920 | ||
The Company recorded revenue for the three and six months ended June 30, 2010 of $9.6 million
and $11.3 million, respectively, and net loss for the three and six months ended June 30, 2010 of
$5.5 million and $11.0 million, respectively, related to the 2010 Acquisitions. In addition, the
Company expensed $11.1 million and $17.9 million of acquisition costs for the three and six months
ended June 30, 2010, respectively.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
2010
Investments in Joint Ventures
During the six months ended June 30, 2010, the Company acquired a controlling financial
interest in a joint venture arrangement, which included an investment of $1.4 million in land and
related construction costs. As of June 30, 2010, $38,000 had been drawn on the Rice Lake JV
Construction Facility used to develop a single tenant retail store.
In addition, during the six months ended June 30, 2010, the Company acquired an interest in a
joint venture arrangement, which acquired six multi-tenant properties for $42.6 million. The
acquisitions were financed with a mortgage note payable of $26.0 million, which is secured by the
properties on which the debt was placed. This joint venture is included in the Unconsolidated Joint
Ventures as discussed in Note 2.
NOTE 5 INVESTMENT IN MORTGAGE NOTES RECEIVABLE
As of June 30, 2011, the Company owned two mortgage notes receivable, each of which is secured
by an office building. As of June 30, 2011, the mortgage notes balance of $64.4 million consisted
of the face amount of the mortgage notes of $74.0 million, a $12.0 million discount, $1.3 million
of acquisition costs and net accumulated accretion of discounts and amortization of acquisition
costs of $1.1 million. As of December 31, 2010, the mortgage notes balance of $63.9 million
consisted of the face amount of the mortgage notes of $74.0 million, a $12.0 million discount, $1.3
million of acquisition costs and net accumulated accretion of discounts and amortization of
acquisition costs of $642,000. The discount is accreted and acquisition costs are amortized over
the terms of each respective mortgage note using the effective interest rate method. The mortgage
notes have a fixed interest rate of 5.93% per annum and mature on October 1, 2018. Interest only
payments are due each month until September 1, 2011, and interest and principal payments are due
each month from October 1, 2011 until October 1, 2018. There were no amounts past due as of June
30, 2011.
The Company evaluates the collectability of both interest and principal on each mortgage note
receivable to determine whether it is collectible, primarily through the evaluation of credit
quality indicators, such as underlying collateral and payment history. No impairment losses or
allowances were recorded related to mortgage notes receivable for the six months ended June 30,
2011 and 2010.
NOTE 6 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for
the purpose of managing or hedging its interest rate risks. The following table summarizes the
notional amount and fair value of the Companys derivative instruments (in thousands):
Fair Value of Liability | ||||||||||||||||||||||
Balance Sheet | Notional | Interest | Effective | Maturity | June 30, | December 31, | ||||||||||||||||
Location | Amount | Rate | Date | Date | 2011 | 2010 | ||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||||||||
Interest Rate Swaps(1)
|
Derivative liabilities, deferred rent and other liabilities | $ | 19,400 | 5.95 | % | 9/8/2009 | 8/29/2012 | $ | (400 | ) | $ | (505 | ) | |||||||||
Interest Rate Swap
|
Derivative liabilities, deferred rent and other liabilities | 17,500 | 5.75 | % | 12/18/2009 | 1/1/2017 | (921 | ) | (716 | ) | ||||||||||||
Interest Rate Swap
|
Derivative liabilities, deferred rent and other liabilities | 156,000 | 3.99 | % | 7/30/2010 | 8/5/2015 | (5,991 | ) | (4,155 | ) | ||||||||||||
Interest Rate Swap(2)
|
Derivative liabilities, deferred rent and other liabilities | 15,000 | 4.31 | % | 7/30/2010 | 7/15/2017 | (112 | ) | 141 | |||||||||||||
Interest Rate Swap
|
Derivative liabilities, deferred rent and other liabilities | 105,000 | 4.72 | % | 8/25/2010 | 9/5/2015 | (2,821 | ) | (1,440 | ) | ||||||||||||
Interest Rate Swaps(3)
|
Derivative liabilities, deferred rent and other liabilities | 23,200 | 6.83 | % | 12/16/2010 | 7/6/2016 | (835 | ) | (513 | ) | ||||||||||||
Interest Rate Swap
|
Derivative liabilities, deferred rent and other liabilities | 7,800 | 5.73 | % | 3/4/2011 | 4/1/2021 | (412 | ) | |
15
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Fair Value of Liability | ||||||||||||||||||||||
Balance Sheet | Notional | Interest | Effective | Maturity | June 30, | December 31, | ||||||||||||||||
Location | Amount | Rate | Date | Date | 2011 | 2010 | ||||||||||||||||
Derivatives designated as hedging instruments continued |
||||||||||||||||||||||
Interest Rate Swaps (4)
|
Derivative liabilities, deferred rent and other liabilities | $ | 30,000 | 6.06 | % | 3/30/2011 | 3/30/2016 | $ | (1,001 | ) | $ | | ||||||||||
Interest Rate Swap
|
Derivative liabilities, deferred rent and other liabilities | 200,000 | 3.45 | % | 6/30/2011 | 6/27/2014 | (602 | ) | | |||||||||||||
$ | 573,900 | $ | (13,095 | ) | $ | (7,188 | ) | |||||||||||||||
(1) | On September 8, 2009, the Company executed 15 swap agreements with identical terms and with an aggregate notional amount of $20.0 million. | |
(2) | As of December 31, 2010, the fair value of the interest rate swap agreement was in a financial asset position and was included in the accompanying December 31, 2010 consolidated balance sheet in property escrow deposits, prepaid expenses and other assets. | |
(3) | On December 16, 2010, the Company executed 17 swap agreements with identical terms and with an aggregate notional amount of $23.2 million. | |
(4) | On March 30, 2011, the Company executed 23 swap agreements with identical terms and with an aggregate notional amount of $30.0 million. | |
Additional disclosures related to the fair value of the Companys derivative instruments are
included in Note 3 above. The notional amount under the agreements is an indication of the extent
of the Companys involvement in each instrument at the time, but does not represent exposure to
credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended
use and designation of the derivative instrument. The Company designated the interest rate swaps
as cash flow hedges, to hedge the variability of the anticipated cash flows on its variable rate
notes payable. The change in fair value of the effective portion of the derivative instrument that
is designated as a hedge is recorded as other comprehensive income or loss.
The following table summarizes the unrealized losses on the Companys derivative instruments
and hedging activities (in thousands):
Amount of Loss Recognized in | ||||||||||||||||
Other Comprehensive Loss on Derivatives | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest Rate Swaps (1) |
$ | (8,068 | ) | $ | (903 | ) | $ | (5,907 | ) | $ | (1,237 | ) |
(1) | There were no portions of the change in the fair value of the interest rate swap agreements that were considered ineffective during the six months ended June 30, 2011 and 2010. No previously effective portion of gains or losses that were recorded in accumulated other comprehensive loss during the term of the hedging relationship was reclassified into earnings during the six months ended June 30, 2011 and 2010. |
The Company has agreements with each of its derivative counterparties that contain a provision
whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could
also be declared in default on its derivative obligations resulting in an acceleration of payment.
16
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
In addition, the Company is exposed to credit risk in the event of non-performance by its
derivative counterparties. The Company believes it mitigates its credit risk by entering into
agreements with credit-worthy counterparties. The Company records credit risk
valuation adjustments on its interest rate swaps based on the respective credit quality of the
Company and the counterparty. As of June 30, 2011 and December 31, 2010, respectively, there were
no termination events or events of default related to the interest rate swaps.
NOTE 7 NOTES PAYABLE AND CREDIT FACILITY
As of June 30, 2011, the Company and Consolidated Joint Ventures had $1.6 billion of debt
outstanding, consisting of $1.5 billion with fixed interest rates, which
included $373.9 million of variable rate debt and $200.0 million of variable credit facility
borrowings swapped to fixed rates (the Fixed Rate Debt), and $91.5 million of variable rate debt (the Variable Rate
Debt). The aggregate balance of gross real estate assets, net of gross intangible lease
liabilities, securing the total debt outstanding was $3.5 billion as of June 30, 2011.
Additionally, the combined weighted average interest rate was 4.95%.
The Fixed Rate Debt has a weighted average interest rate of 5.33%, with interest rates ranging
from 3.99% to 6.83% per annum. The Variable Rate Debt has variable interest rates ranging from
LIBOR plus 275 basis points to 300 basis points per annum, with certain debt containing LIBOR
floors. The debt outstanding matures on various dates from August 2012 through July 2021, with a
weighted average years to maturity of 6.4 years. Each of the mortgage notes payable is secured by
the respective properties on which the debt was placed.
During the six months ended June 30, 2011, the Company and one of the Consolidated Joint
Ventures entered into mortgage notes payable totaling $334.3 million, with fixed interest rates,
which includes $37.8 million of variable rate debt swapped to fixed rates, ranging from 4.50% to
6.06% per annum through the maturity dates, ranging from December 2016 to July 2021. In addition,
the Company and the Marana Joint Venture entered into variable rate debt of $91.5 million with
variable interest rates ranging from LIBOR plus 275 to 300 basis points per annum, with certain
debt containing LIBOR floors, maturing on various dates from October 2012 to April 2016. The
Marana JV Construction Facility is expected to be used to fund the development of a single tenant
commercial store and drawn upon as construction costs are incurred. As of June 30, 2011, no
amounts had been drawn on the Marana JV Construction Facility. Also during the six months ended
June 30, 2011, $1.0 million was drawn on the Rice Lake JV Construction Facility, and subsequently
the outstanding balance of $4.4 million was repaid.
In addition, on June 27, 2011, the Companys operating partnership, CCPT III OP, entered into
a senior unsecured credit facility (the Credit Facility) providing for up to $700.0 million of
borrowings with a syndication of banks. Concurrently, the obligations under CCPT III OPs existing
$100.0 million credit agreement (the Previous Credit Facility) dated as of January 6, 2010 were
terminated. During the six months ended June 30, 2011, the Company repaid $45.0 million under the
Previous Credit Facility. No amounts were outstanding under the Previous Credit Facility as of June
27, 2011, and all liens securing obligations under the Previous Credit Facility were released. In
addition, the Company repaid $25.0 million under the existing $25.0 million credit agreement with
TCF National Bank dated December 16, 2009 (the TCF Loan) and subsequently converted the TCF Loan
to a term loan, receiving $25.0 million, with a fixed interest rate of 5.0% and maturity date of
December 16, 2014.
The Credit Facility includes a $200.0 million term loan (the Term Loan) and allows CCPT III
OP to borrow up to $500.0 million in revolving loans (the Revolving Loans). As of June 27, 2011,
the borrowing base under the Credit Facility was approximately $441.9 million based on the
underlying collateral pool. In addition, up to 15.0% of the total amount available may be used for
issuing letters of credit and up to $50.0 million may be used for swingline loans. The Credit
Facility may also be increased to a maximum of $950.0 million, with each increase being no less
than $25.0 million. CCPT III OP borrowed the initial $200.0 million Term Loan under the Credit
Facility on June 27, 2011. The Credit Facility matures on June 27, 2014.
The Revolving Loans will bear interest at rates depending upon the type of loan specified and
overall leverage ratio, with possible base rates of one, two or three month LIBOR, one, two or
three month LIBOR plus 1.0%, Bank of America N.A.s Prime Rate or the Federal Funds Rate plus 0.5%
and spreads ranging from 1.25% to 3.00%. As of June 30, 2011, the Company executed a swap agreement
associated with the Term Loan, which had the effect of fixing the variable interest rate per annum
through the maturity date of the respective loan at 3.45%. CCPT III OP will be required to make
quarterly interest payments on the Term Loan, and the outstanding principal and any accrued and
unpaid interest is due on June 27, 2014. During the six months ended June 30, 2011, no amounts had been drawn on the Revolving Loans.
17
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
As of June 30, 2011, the Company had $442.1 million available under the Credit Facility based
on the underlying collateral pool and $200.0 million outstanding under the Credit Facility. The
aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing
the Credit Facility was $714.5 million as of June 30, 2011.
CCPT III OP has the right to prepay the outstanding amounts under the Credit Facility, in
whole or in part, without premium or penalty provided that prior written notice is received by Bank
of America, N.A. and the payment of any principal amount then outstanding. The Credit Facility and
certain notes payable contain customary affirmative, negative and financial covenants,
representations, warranties and borrowing conditions. These agreements also include usual and
customary events of default and remedies for facilities of this nature. Based on the Companys
analysis and review of its results of operations and financial condition, the Company
believes it was in compliance with the covenants of the Credit Facility and such mortgage notes
payable as of June 30, 2011.
NOTE 8 SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the six months ended June 30, 2011 and 2010 are as
follows (in thousands):
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Supplemental Disclosures of Non-Cash Investing and Financing
Activities: |
||||||||
Distributions declared and unpaid |
$ | 16,128 | $ | 9,785 | ||||
Fair value of mortgage notes assumed in real estate acquisitions
at date of assumption |
$ | 4,863 | $ | 4,875 | ||||
Common stock issued through distribution reinvestment plan |
$ | 49,589 | $ | 24,294 | ||||
Net unrealized loss on interest rate swaps |
$ | (5,907 | ) | $ | (1,237 | ) | ||
Accrued other offering costs |
$ | 277 | $ | 336 | ||||
Accrued deferred financing costs |
$ | 86 | $ | | ||||
Accrued capital expenditures |
$ | 59 | $ | | ||||
Supplemental Cash Flow Disclosures: |
||||||||
Interest paid, net of capitalized interest |
$ | 29,601 | $ | 5,289 |
NOTE 9 COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims.
The Company is not aware of any pending legal proceedings of which the outcome is reasonably likely
to have a material effect on its results of operations, financial condition or liquidity.
Purchase Commitments
As of June 30, 2011, the Company had entered into agreements of purchase and sale, with
unaffiliated third-party sellers, to purchase a 100% interest in ten retail properties, subject to
meeting certain criteria, for an aggregate purchase price of $220.4 million, exclusive of closing
costs. As of June 30, 2011, the Company had $6.5 million of property escrow deposits held by
escrow agents in connection with these future property acquisitions, of which $323,000 will be
forfeited if the transactions are not completed. As of August 10, 2011, the Company had purchased
16 of these properties for $130.9 million, exclusive of closing costs, and no escrow deposits were
forfeited.
In addition, the Company will be obligated to purchase a property from the Marana Joint
Venture for an expected purchase price of $7.7 million, subject to certain criteria being met,
including the completion of the building.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Environmental Matters
In connection with the ownership and operation of real estate, the Company potentially may be
liable for costs and damages related to environmental matters. The Company owns certain properties
that are subject to environmental remediation. In each case, the seller of the property, the tenant
of the property and/or another third party has been identified as the responsible party for
environmental remediation costs related to the property. Additionally, in connection with the
purchase of certain of the properties, the respective sellers and/or tenants have indemnified the
Company against future remediation costs. The Company also carries environmental liability
insurance on our properties which provides limited coverage for remediation liability and pollution
liability for third-party bodily injury and property damage claims. The Company does not believe
that the environmental matters identified at such properties will have a material effect on
its results of operations, financial condition or liquidity, nor is it aware of any environmental
matters at other properties which it believes will have a material effect on its results of
operations, financial condition or liquidity.
NOTE 10 RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred, and will continue to incur, commissions, fees and expenses payable
to its advisor and certain affiliates in connection with the Offerings and the acquisition,
management and sale of the assets of the Company.
Offerings
In connection with the Offerings, Cole Capital Corporation (Cole Capital), the Companys
affiliated dealer manager, received and expects to continue to receive, a selling commission of up
to 7.0% of gross offering proceeds, before reallowance of commissions earned by participating
broker-dealers. Cole Capital intends to reallow 100% of selling commissions earned to participating
broker-dealers. In addition, Cole Capital received, and will continue to receive, 2.0% of gross
offering proceeds, before reallowance to participating broker-dealers, as a dealer manager fee in
connection with the Offerings. Cole Capital, in its sole discretion, may reallow all or a portion
of its dealer manager fee to such participating broker-dealers as a marketing and due diligence
expense reimbursement, based on factors such as the volume of shares sold by such participating
broker-dealers and the amount of marketing support provided by such participating broker-dealers.
No selling commissions or dealer manager fees are paid to Cole Capital or other broker-dealers with
respect to shares sold under the Companys DRIP.
All other organization and offering expenses associated with the sale of the Companys common
stock (excluding selling commissions and the dealer manager fee) are paid for by CR III Advisors or
its affiliates and are reimbursed by the Company up to 1.5% of aggregate gross offering proceeds. A
portion of the other organization and offering expenses may be underwriting compensation. As of
June 30, 2011, CR III Advisors had paid organization and
offering costs of $3.6 million in
connection with the Follow-on Offering. These costs were not included in the financial statements
of the Company because such costs were not a liability of the Company as they exceeded 1.5% of
gross proceeds from the Follow-on Offering. As the Company raises additional proceeds from the
Follow-on Offering, these costs may become payable.
The Company recorded commissions, fees and expense reimbursements as shown in the table below
for services provided by CR III Advisors and its affiliates related to the services described above
during the periods indicated (in thousands).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Offering: |
||||||||||||||||
Selling commissions |
$ | 18,308 | $ | 29,668 | $ | 37,707 | $ | 52,491 | ||||||||
Selling commissions reallowed by Cole Capital |
$ | 18,308 | $ | 29,668 | $ | 37,707 | $ | 52,491 | ||||||||
Dealer manager fee |
$ | 5,307 | $ | 8,591 | $ | 10,947 | $ | 15,276 | ||||||||
Dealer manager fee reallowed by Cole Capital |
$ | 2,720 | $ | 4,223 | $ | 5,595 | $ | 7,551 | ||||||||
Other organization and offering expenses |
$ | 3,983 | $ | 3,675 | $ | 8,228 | $ | 6,917 |
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Acquisitions and Operations
CR III Advisors or its affiliates also receive acquisition and advisory fees of up to 2.0% of
the contract purchase price of each asset for the acquisition, development or construction of
properties and will be reimbursed for acquisition expenses incurred in the process of acquiring
properties, so long as the total acquisition fees and expenses relating to the transaction does not
exceed 6.0% of the contract purchase price.
The Company paid, and expects to continue to pay, CR III Advisors a monthly asset management
fee of 0.0417%, which is one-twelfth of 0.5%, of the Companys average invested assets for that
month (the Asset Management Fee). The Company will reimburse costs and expenses incurred by Cole
Realty Advisors in providing asset management services.
The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (Cole Realty
Advisors), its affiliated property manager, fees for the management and leasing of the Companys
properties. Property management fees are up to 2.0% of gross revenue for single-tenant properties
and 4.0% of gross revenue for multi-tenant properties and leasing commissions will be at prevailing
market rates; provided however, that the aggregate of all property management and leasing fees paid
to affiliates plus all payments to third parties will not exceed the amount that other
nonaffiliated management and leasing companies generally charge for similar services in the same
geographic location. Cole Realty Advisors may subcontract its duties for a fee that may be less
than the fee provided for in the property management agreement. The Company reimburses Cole Realty
Advisors costs of managing and leasing the properties.
The Company reimburses CR III Advisors for all expenses it paid or incurred in connection with
the services provided to the Company, subject to the limitation that the Company will not reimburse
CR III Advisors for any amount by which its operating expenses (including the Asset Management Fee)
at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested
assets, or (ii) 25% of net income other than any additions to reserves for depreciation, bad debts
or other similar non-cash reserves and excluding any gain from the sale of assets for that period,
unless the Companys independent directors find that a higher level of expense is justified for
that year based on unusual and non-recurring factors. The Company will not reimburse CR III
Advisors for personnel costs in connection with services for which CR III Advisors receives
acquisition fees and real estate commissions.
If CR III Advisors, or its affiliates, provides substantial services, as determined by the
independent directors, in connection with the origination or refinancing of any debt financing
obtained by the Company that is used to acquire properties or to make other permitted investments,
or that is assumed, directly or indirectly, in connection with the acquisition of properties, the
Company will pay CR III Advisors or its affiliates a financing coordination fee equal to 1% of the
amount available and/or outstanding under such financing; provided however, that CR III Advisors or
its affiliates shall not be entitled to a financing coordination fee in connection with the
refinancing of any loan secured by any particular property that was previously subject to a
refinancing in which CR III Advisors or its affiliates received such a fee. Financing coordination
fees payable from loan proceeds from permanent financing will be paid to CR III Advisors or its
affiliates as the Company acquires and/or assumes such permanent financing. With respect to any
revolving line of credit, no financing coordination fees will be paid on loan proceeds from any
line of credit unless all net offering proceeds received as of the date proceeds from the line of
credit are drawn for the purpose of acquiring properties have been invested. In addition, with
respect to any revolving line of credit, CR III Advisors or its affiliates will receive financing
coordination fees only in connection with amounts being drawn for the first time and not upon any
re-drawing of amounts that had been repaid by the Company.
The Company recorded fees and expense reimbursements as shown in the table below for services
provided by CR III Advisors and its affiliates related to the services described above during the
periods indicated (in thousands).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Acquisitions and Operations: |
||||||||||||||||
Acquisition fees and expenses |
$ | 11,105 | $ | 10,535 | $ | 18,147 | $ | 16,011 | ||||||||
Asset management fees and expenses |
$ | 4,529 | $ | 1,473 | $ | 8,557 | $ | 2,562 | ||||||||
Property management and leasing
fees and expenses |
$ | 2,125 | $ | 749 | $ | 4,074 | $ | 1,305 | ||||||||
Operating expenses |
$ | 518 | $ | 328 | $ | 1,081 | $ | 864 | ||||||||
Financing coordination fees |
$ | 4,876 | $ | 2,181 | $ | 6,357 | $ | 2,524 |
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
Liquidation/Listing
If CR III Advisors or its affiliates provides a substantial amount of services, as determined
by the Companys independent directors, in connection with the sale of one or more properties, the
Company will pay CR III Advisors or its affiliates up to one-half of the brokerage commission paid,
but in no event to exceed an amount equal to 3% of the sales price of each property sold. In no
event will the combined real estate commission paid to CR III Advisors, its affiliates and
unaffiliated third parties exceed 6% of the contract sales price. In addition, after investors have
received a return of their net capital contributions and an 8% cumulative, non-compounded annual
return, then CR III Advisors is entitled to receive 15% of the remaining net sale proceeds.
Upon listing of the Companys common stock on a national securities exchange, a fee equal to
15% of the amount by which the market value of the Companys outstanding stock plus all
distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital
raised from investors and the amount of cash flow necessary to generate an 8% cumulative,
non-compounded annual return to investors will be paid to CR III Advisors (the Subordinated
Incentive Listing Fee).
Upon termination of the advisory agreement with CR III Advisors, other than termination by the
Company because of a material breach of the advisory agreement by CR III Advisors, a performance
fee of 15% of the amount, if any, by which the appraised asset value at the time of such
termination plus total distributions paid to stockholders through the termination date exceeds the
aggregate capital contribution contributed by investors less distributions from sale proceeds plus
payment to investors of an 8% annual, cumulative, non-compounded return on capital. No subordinated
performance fee will be paid to the extent that the Company has already paid or become obligated to
pay CR III Advisors a subordinated participation in net sale proceeds or the Subordinated Incentive
Listing Fee.
During the three and six months ended June 30, 2011, and 2010, no commissions or fees were
incurred for services provided by CR III Advisors and its affiliates related to the services
described above.
Other
As of June 30, 2011 and December 31, 2010, $2.6 million and $804,000, respectively, had been
incurred primarily for other organization and offering, operating and acquisition expenses by CR
III Advisors and its affiliates, but had not yet been reimbursed by the Company and were included
in due to affiliates on the condensed consolidated balance sheets.
NOTE 11 ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage CR III Advisors and its
affiliates to provide certain services that are essential to the Company, including asset
management services, supervision of the management and leasing of properties owned by the Company,
asset acquisition and disposition decisions, the sale of shares of the Companys common stock
available for issue, as well as other administrative responsibilities for the Company including
accounting services and investor relations. As a result of these relationships, the Company is
dependent upon CR III Advisors and its affiliates. In the event that these companies are unable to
provide the Company with these services, the Company would be required to find alternative
providers of these services.
NOTE 12 NEW ACCOUNTING PRONOUNCEMENTS
In December 2010, FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information
for Business Combinations, (ASU 2010-29), which clarifies the manner in which pro forma
disclosures are calculated and provides additional disclosure requirements regarding material
nonrecurring adjustments recorded as a result of a business combination. ASU 2010-20 was effective
for the Company beginning on January 1, 2011, and its provisions were applied to the pro forma
information presented in Note 4. The adoption of ASU 2010-29 has not had a material impact on the
Companys consolidated financial statements.
In May 2011, FASB issued ASU 2011-04, Fair Value Measurements and Disclosures (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRS, (ASU 2011-04), which converges guidance between GAAP and International Financial Reporting
Standards (IFRS) on how to measure fair value and on what disclosures to provide about fair value
measurements. ASU 2011-04 is effective for the Company on January 1, 2012. The adoption of ASU
2011-04 is not expected to have a material impact on the Companys consolidated financial
statements.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, (ASU 2011-05), which improves the comparability, consistency, and
transparency of financial reporting and increases the prominence of items reported in other
comprehensive income. ASU 2011-05 is effective for the Company on January 1, 2012. The adoption
of ASU 2011-05 is not expected to have a material impact on the Companys consolidated financial
statements.
NOTE 13 SUBSEQUENT EVENTS
Status of the Offerings
As of August 10, 2011, the Company had received $1.0 billion in gross offering proceeds
through the issuance of approximately 103.8 million shares of its common stock in the Follow-on
Offering (including shares issued pursuant to the Companys DRIP). As of August 10, 2011,
approximately 154.7 million shares remained available for sale to the public in the Follow-on
Offering, exclusive of shares available under the Companys DRIP. Combined with the Initial
Offering, the Company had received a total of $3.2 billion in gross offering proceeds as of August
10, 2011.
Subsequent to June 30, 2011, the Company redeemed approximately 1.3 million shares for $12.2
million.
Real Estate Acquisitions
Subsequent
to June 30, 2011, the Company acquired a 100% interest in 40 commercial real estate
properties for an aggregate purchase price of $367.4 million. The acquisitions were funded with net
proceeds of the Offerings. The Company has not completed its initial purchase price allocations
with respect to these properties and therefore cannot provide the disclosures included in Note 4
for these properties. Acquisition related expenses totaling $8.7 million were expensed as incurred.
Notes Payable and Credit Facility
Subsequent to June 30, 2011, the Company borrowed $73.0 million
under the Credit Facility. As of August 10, 2011, the
Company had $273.0 million outstanding under the Credit Facility
and $369.1 million available for borrowing. Also
subsequent to June 30, 2011, $102,000 was drawn on the Marana JV Construction Facility.
22
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated unaudited financial statements and
the notes thereto, included in this Quarterly Report on Form 10-Q. The following discussion should
be read in conjunction with our audited consolidated financial statements and the notes thereto,
and Managements Discussion and Analysis of Financial Condition and Results of Operations included
in our Annual Report on Form 10-K for the year ended December 31, 2010. The terms we, us,
our and the Company refer to Cole Credit Property Trust III, Inc. and unless defined herein,
capitalized terms used herein shall have the same meetings as set forth in our condensed
consolidated unaudited financial statements and the notes thereto.
Forward-Looking Statements
Except for historical information, this section contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, including discussion
and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures,
amounts of anticipated cash distributions to our stockholders in the future and other matters.
These forward-looking statements are not historical facts but are the intent, belief or current
expectations of our management based on their knowledge and understanding of our business and
industry. Words such as may, will, anticipates, expects, intends, plans, believes,
seeks, estimates, would, could, should or comparable words, variations and similar
expressions are intended to identify forward-looking statements. All statements not based on
historical fact are forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ materially from those
expressed or implied in the forward-looking statements. A full discussion of our risk factors may
be found under Item 1A Risk Factors in our Annual Report on Form 10-K as of and for the year
ended December 31, 2010.
Forward-looking statements that were true at the time made may ultimately prove to be
incorrect or false. Investors are cautioned not to place undue reliance on forward-looking
statements, which reflect our managements view only as of the date of this Quarterly Report on
Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any forward-looking statements
made in this Quarterly Report on Form 10-Q include, among others, changes in general economic
conditions, changes in real estate conditions, construction costs that may exceed estimates,
construction delays, increases in interest rates, lease-up risks, rent relief, inability to obtain
new tenants upon the expiration or termination of existing leases, and the potential need to fund
tenant improvements or other capital expenditures out of operating cash flows. The forward-looking
statements should be read in light of the risk factors identified in the Risk Factors section of
our Annual Report on Form 10-K for the year ended December 31, 2010.
Managements discussion and analysis of financial condition and results of operations are
based upon our condensed consolidated unaudited financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires our management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we
evaluate these estimates. These estimates are based on managements historical industry experience
and on various other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.
Overview
We were formed on January 22, 2008 to acquire and operate a diverse portfolio of core
commercial real estate investments primarily consisting of necessity retail properties located
throughout the United States, including U.S. protectorates. We commenced our principal operations
on January 6, 2009. Prior to such date, we were considered a development stage company. We
acquired our first real estate property on January 6, 2009. We commenced sales under our Follow-on
Offering after the termination of the Initial Offering on October 1, 2010. We have no paid
employees and are externally advised and managed by our advisor. We elected to be taxed, and
currently qualify, as a real estate investment trust for federal income tax purposes.
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Our operating results and cash flows are primarily influenced by rental income from our
commercial properties, interest expense on our property acquisition indebtedness and acquisition
and operating expenses. Rental and other property income accounted for 92% and 91% of total revenue
during the three months ended June 30, 2011 and 2010, respectively, and 92% and 93% of total
revenue during the six months ended June 30, 2011 and 2010, respectively. As 99% of our rentable
square feet was under lease as of June 30, 2011, with an average remaining lease term of 14.6
years, we believe our exposure to changes in commercial rental rates on our portfolio is
substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Our
advisor regularly monitors the creditworthiness of our tenants by reviewing the tenants financial
results, credit rating agency reports (if any) on the tenant or guarantor, the operating history of
the property with such tenant, the tenants market share and track record within its industry
segment, the general health and outlook of the tenants industry segment, and other information for
changes and possible trends. If our advisor identifies significant changes or trends that may
adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the
tenants financial condition and, if necessary, attempt to mitigate the tenant credit risk by
evaluating the possible sale of the property, or identifying a possible replacement tenant should
the current tenant fail to perform on the lease. As of June 30, 2011, the debt leverage ratio of
our consolidated real estate assets, which is the ratio of debt to total gross real estate and
related assets net of gross intangible lease liabilities, was 42%. As we acquire additional
commercial real estate, we will be subject to changes in real estate prices and changes in interest
rates on any new indebtedness used to acquire the properties. We may manage our risk of changes in
real estate prices on future property acquisitions by entering into purchase agreements and loan
commitments simultaneously, or through loan assumption, so that our operating yield is determinable
at the time we enter into a purchase agreement, by contracting with developers for future delivery
of properties, or by entering into sale-leaseback transactions. We manage our interest rate risk by
monitoring the interest rate environment in connection with future property acquisitions or
upcoming debt maturities to determine the appropriate financing or refinancing terms, which may
include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire
suitable properties or obtain suitable financing for future acquisitions or refinancing, our
results of operations may be adversely affected.
Recent Market Conditions
Beginning in late 2007, domestic and international financial markets experienced significant
disruptions that were brought about in large part by challenges in the world-wide banking system.
These disruptions severely impacted the availability of credit and have contributed to rising costs
associated with obtaining credit. In 2010, the volume of mortgage lending for commercial real
estate began increasing and lending terms improved; however, such lending activity is
significantly less than previous levels. Although lending market conditions have improved, we have
experienced, and may continue to experience, more stringent lending criteria, which may affect our
ability to finance certain property acquisitions or refinance our debt at maturity. Additionally,
for properties for which we are able to obtain financing, the interest rates and other terms on
such loans may be unacceptable. We have managed, and expect to continue to manage, the current
mortgage lending environment by considering alternative lending sources, including the
securitization of debt, utilizing fixed rate loans, borrowing on the Credit Facility, short-term
variable rate loans, assuming existing mortgage loans in connection with property acquisitions, or
entering into interest rate lock or swap agreements, or any combination of the foregoing. We have
acquired, and expect to continue to acquire, our properties for cash without financing. If we are
unable to obtain suitable financing for future acquisitions or we are unable to identify suitable
properties at appropriate prices in the current credit environment, we may have a larger amount of
uninvested cash, which may adversely affect our results of operations. We will continue to
evaluate alternatives in the current market, including purchasing or originating debt backed by
real estate, which could produce attractive yields in the current market environment.
The economic downturn has led to high unemployment rates and a decline in consumer spending.
These economic trends have adversely impacted the retail and real estate markets, causing higher
tenant vacancies, declining rental rates and declining property values. Recently, the economy has
improved and continues to show signs of recovery. Additionally, the real estate markets have
recently observed an improvement in property values, occupancy and rental rates; however, in most markets property values, occupancy and rental rates continue
to be below those previously experienced before the economic downturn. As of June 30, 2011, 99% of
our rentable square feet was under lease. However, if the recent improvements in economic conditions do not continue,
we may experience significant vacancies or be required to reduce rental rates on occupied space.
If we do experience significant vacancies, our advisor will actively seek to lease our vacant
space; however, such space may be leased at lower rental rates and for shorter lease terms than
previously experienced. In addition, as many retailers and other tenants have been delaying or
eliminating their store expansion plans, the amount of time required to re-lease a property may
increase as a result.
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Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating
performance of our real estate investments. The following table shows the property statistics of
our real estate assets as of June 30, 2011 and 2010.
June 30, 2011(1) | June 30, 2010(1) | |||||||
Number of commercial properties |
539 | 266 | ||||||
Approximate rentable square feet (2) |
23.4 million | 9.1 million | ||||||
Percentage of rentable square feet leased |
99.0 | % | 99.9 | % |
(1) | Excludes properties owned through joint venture arrangements. | |
(2) | Including square feet of the buildings on land that is subject to ground leases. |
The following table summarizes our real estate investment activity during the six months ended
June 30, 2011 and 2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Commercial properties acquired |
69 | 76 | 92 | 133 | ||||||||||||
Approximate purchase price of acquired
properties |
$ | 501.1 million | $ | 397.0 million | $ | 831.0 million | $ | 656.9 million | ||||||||
Approximate rentable square feet (1) |
3.5 million | 2.8 million | 5.9 million | 4.2 million |
(1) | Including square feet of the buildings on land that is subject to ground leases. |
As shown in the tables above, we owned 539 commercial properties as of June 30, 2011, compared
to 266 commercial properties as of June 30, 2010. Accordingly, our results of operations for the
three and six months ended June 30, 2011, as compared to the three and six months ended June 30,
2010, reflect significant increases in most categories.
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Revenue. Revenue increased $55.4 million, or 213%, to $81.4 million for the three months
ended June 30, 2011, compared to $26.0 million for the three months ended June 30, 2010. Our
revenue consisted primarily of rental and other property income from net leased commercial
properties, which accounted for 92% and 91% of total revenues during the three months ended June
30, 2011 and 2010, respectively.
Rental and other property income increased $51.5 million, or 217%, to $75.2 million for the
three months ended June 30, 2011, compared to $23.7 million for the three months ended June 30,
2010. The increase was primarily due to the acquisition of 273 rental income-producing properties
subsequent to June 30, 2010. We also pay certain operating expenses subject to reimbursement by the
tenant, which resulted in $4.9 million of tenant reimbursement income during the three months ended
June 30, 2011, compared to $1.3 million during the three months ended June 30, 2010. In addition,
interest income on mortgage notes receivable increased $462,000, or 51%, to $1.4 million for the
three months ended June 30, 2011, compared to $900,000 for the three months ended June 30,
2010 as we acquired the mortgage notes receivable on April 30, 2010.
General and Administrative Expenses. General and administrative expenses increased $966,000,
or 84%, to $2.1 million for the three months ended June 30, 2011, compared to $1.1 million for the
three months ended June 30, 2010. The increase was primarily due to increased accounting and
trustee fees as a result of acquiring 273 rental income-producing properties subsequent to June 30,
2010 and an increase in the number of stockholders of record. The primary general and
administrative expense items were trustee fees, accounting fees, operating expenses
reimbursable to our advisor and legal fees.
Property Operating Expenses. Property operating expenses increased $4.1 million, or 293%, to
$5.5 million for the three months ended June 30, 2011, compared to $1.4 million for the three
months ended June 30, 2010. The increase was primarily due to increased property taxes, repairs and
maintenance and insurance expenses relating to the acquisition of 273 rental income-producing
properties subsequent to June 30, 2010. The primary property operating expense items are property
taxes, repairs and maintenance and insurance.
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Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor,
we are required to pay to our advisor a monthly asset management fee equal to one-twelfth
of 0.50% of the average invested assets. Additionally, we may be required to reimburse
expenses incurred by our advisor in providing asset management services, subject to limitations as
set forth in the advisory agreement. Pursuant to the property management agreement with our
affiliated property manager, we are required to pay to our property manager a property management
fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4%
of gross revenues from each of our multi-tenant properties. We may also be required to reimburse
our property manager expenses it incurred relating to managing or leasing the properties, subject
to limitations as set forth in the advisory agreement.
Property and asset management expenses increased $4.6 million, or 209%, to $6.8 million for
the three months ended June 30, 2011, compared to $2.2 million for the three months ended June 30,
2010. Property management fees increased $1.3 million, or 260%, to $1.8 million for the three
months ended June 30, 2011 from $497,000 for the three months ended June 30, 2010. The increase in
property management fees was primarily due to an increase in rental and other property income to
$75.2 million for the three months ended June 30, 2011, from $23.7 million for the three months
ended June 30, 2010, related to revenues from the 273
properties, including 21 multi-tenant properties, acquired subsequent to June 30,
2010.
Asset management fees increased $3.1 million, or 221%, to $4.5 million for the three months
ended June 30, 2011, from $1.4 million for the three months ended June 30, 2010. The increase in
asset management fees was primarily due to an increase in the average invested assets to $3.6
billion for the three months ended June 30, 2011, from $1.2 billion for the three months ended June
30, 2010.
In addition, during the three months ended June 30, 2011, we recorded $466,000 million related
to reimbursement of expenses incurred by our advisor in performing property and asset management
services, compared to $341,000 for the three months ended June 30, 2010. The increase was
primarily due to expenses incurred by our advisor related to management of 273 rental
income-producing properties acquired subsequent to June 30, 2010.
Acquisition Related Expenses. Acquisition related expenses increased $3.0 million, or 27%, to
$14.1 million for the three months ended June 30, 2011, compared to $11.1 million for the three
months ended June 30, 2010. The increase is due to the recording of acquisition related expenses
incurred in connection with the purchase of 69 commercial properties, for an aggregate purchase
price of $501.1 million, during the three months ended June 30, 2011, compared to 76 commercial
properties, for an aggregate purchase price of $397.0 million, during the three months ended June
30, 2010. Pursuant to the advisory agreement with our advisor, we pay an acquisition fee to our
advisor of 2% of the contract purchase price of each property or asset acquired. We also reimburse our advisor for acquisition expenses incurred in the process of acquiring
property or in the origination or acquisition of a loan, other than for personnel costs for which
our advisor receives acquisition fees.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $16.5
million, or 236%, to $23.5 million for the three months ended June 30, 2011, compared to $7.0
million for the three months ended June 30, 2010. The increase was primarily due to an increase in
the average invested assets to $3.6 billion for the three months ended June 30, 2011, from $1.2
billion for the three months ended June 30, 2010.
Equity in Income (Loss) of Unconsolidated Joint Ventures. We recorded income of $470,000 for
the three months ended June 30, 2011, which represented our share of the Unconsolidated Joint
Ventures net income. During the three months ended June 30, 2010, we recorded our share of one of
the Unconsolidated Joint Ventures net loss of $516,000. The net loss was primarily due to
acquisition related expenses.
Interest and Other Income. Interest and other income decreased $284,000, or 66%, to $145,000
for the three months ended June 30, 2011, compared to $429,000 for the three months ended June 30,
2010. The decrease was primarily due to lower average uninvested cash of $212.6 million during
the three months ended June 30, 2011, as compared to $389.6 million during the three months ended
June 30, 2010, as a result of acquiring 273 rental income-producing properties subsequent to June
30, 2010.
Interest Expense. Interest expense increased $14.9 million, or 324%, to $19.5 million for the
three months ended June 30, 2011, compared to $4.6 million during the three months ended June 30,
2010. The increase was primarily due to an increase in the average aggregate amount of notes
payable outstanding to $1.4 billion during the three months ended June 30, 2011, from $261.6
million for the three months ended June 30, 2010.
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Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Revenue. Revenue increased $109.0 million, or 247%, to $153.2 million for the six months
ended June 30, 2011, compared to $44.2 million for the six months ended June 30, 2010. Our revenue
consisted primarily of rental and other property income from net leased commercial properties,
which accounted for 92% and 93% of total revenues during the six months ended June 30, 2011 and
2010, respectively.
Rental and other property income increased $99.8 million, or 244%, to $140.7 million for the
six months ended June 30, 2011, compared to $40.9 million for the six months ended June 30, 2010.
The increase was primarily due to the acquisition of 273 rental income-producing properties
subsequent to June 30, 2010. We also pay certain operating expenses subject to reimbursement by the
tenant, which resulted in $9.7 million of tenant reimbursement income during the six months ended
June 30, 2011, compared to $2.4 million during the six months ended June 30, 2010. In addition,
interest income on mortgage notes receivable increased $1.8 million, or 200%, to $2.7 million for
the six months ended June 30, 2011, compared to $900,000 for the six months ended June 30,
2010 as we acquired the mortgage notes receivable on April 30, 2010.
General and Administrative Expenses. General and administrative expenses increased $1.4
million, or 52%, to $4.1 million for the six months ended June 30, 2011, compared to $2.7 million
for the six months ended June 30, 2010. The increase was primarily due to increased accounting and
trustee fees as a result of acquiring 273 rental income-producing properties subsequent to June 30,
2010 and an increase in the number of stockholders of record. The primary general and
administrative expense items were trustee fees, accounting fees, operating expenses
reimbursable to our advisor, state franchise and income taxes and legal fees.
Property Operating Expenses. Property operating expenses increased $8.2 million, or 328%, to
$10.7 million for the six months ended June 30, 2011, compared to $2.5 million for the six months
ended June 30, 2010. The increase was primarily due to increased property taxes, repairs and
maintenance and insurance expenses relating to the acquisition of 273 rental income-producing
properties subsequent to June 30, 2010. The primary property operating expense items are property
taxes, repairs and maintenance and insurance.
Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor,
we are required to pay to our advisor a monthly asset management fee equal to one-twelfth
of 0.50% of the average invested assets. Additionally, we may be required to reimburse
expenses incurred by our advisor in providing asset management services, subject to limitations as
set forth in the advisory agreement. Pursuant to the property management agreement with our
affiliated property manager, we are required to pay to our property manager a property management
fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4%
of gross revenues from each of our multi-tenant properties. We may also be required to reimburse
our property manager expenses it incurred relating to managing or leasing the properties, subject
to limitations as set forth in the advisory agreement.
Property and asset management expenses increased $9.1 million, or 233%, to $13.0 million for
the six months ended June 30, 2011, compared to $3.9 million for the six months ended June 30,
2010. Property management fees increased $2.6 million, or 325%, to $3.5 million for the six months
ended June 30, 2011 from $864,000 for the six months ended June 30, 2010. The increase in property
management fees was primarily due to an increase in rental and other property income to $140.7
million for the six months ended June 30, 2011, from $40.9 million for the six months ended June
30, 2010, related to revenues from the 273 properties, including 21
multi-tenant properties, acquired subsequent to June 30, 2010.
Asset management fees increased $6.1 million, or 254%, to $8.5 million for the six months
ended June 30, 2011, from $2.4 million for the six months ended June 30, 2010. The increase in
asset management fees was primarily due to an increase in the average invested assets to $3.5
billion for the six months ended June 30, 2011, from $1.1 billion for the six months ended June 30,
2010.
In addition, during the six months ended June 30, 2011, we recorded $1.1 related to
reimbursement of expenses incurred by our advisor in performing property and asset management
services, compared to $672,000 for the six months ended June 30, 2010. The increase was primarily
due to expenses incurred by our advisor related to management of 273 rental income-producing
properties acquired subsequent to June 30, 2010.
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Acquisition Related Expenses. Acquisition related expenses increased $4.8 million, or 27%, to
$22.7 million for the six months ended June 30, 2011, compared to $17.9 million for the six months
ended June 30, 2010. The increase is due to the recording of acquisition related expenses incurred
in connection with the purchase of 92 commercial properties, for an aggregate purchase price of
$831.0 million, during the six months ended June 30, 2011, compared to 133 commercial properties,
for an aggregate purchase price of $656.9 million, during the six months ended June 30, 2010.
Pursuant to the advisory agreement with our advisor, we pay an acquisition fee to our advisor of 2%
of the contract purchase price of each property or asset acquired. We also
reimburse our advisor for acquisition expenses incurred in the process of acquiring property or in
the origination or acquisition of a loan, other than for personnel costs for which our advisor
receives acquisition fees.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $32.0
million, or 269%, to $43.9 million for the six months ended June 30, 2011, compared to $11.9
million for the six months ended June 30, 2010. The increase was primarily due to an increase in
the average invested assets to $3.5 billion for the six months ended June 30, 2011, from $1.1
billion for the six months ended June 30, 2010.
Equity in Income (Loss) of Unconsolidated Joint Ventures. We recorded income of $777,000 for
the six months ended June 30, 2011 which represented our share of the Unconsolidated Joint
Ventures net income. During the six months ended June 30, 2010, we recorded our share of one of
the Unconsolidated Joint Ventures net loss of $516,000. The net loss was primarily due to
acquisition related expenses.
Interest and Other Income. Interest and other income decreased $547,000, or 71%, to $222,000
for the six months ended June 30, 2011, compared to $769,000 for the six months ended June 30,
2010. The decrease was primarily due to lower average uninvested cash of $213.4 million during
the six months ended June 30, 2011, as compared to $354.4 million during the six months ended June
30, 2010, as a result of acquiring 273 rental income-producing properties subsequent to June 30,
2010.
Interest Expense. Interest expense increased $27.4 million, or 375%, to $34.7 million for the
six months ended June 30, 2011, compared to $7.3 million during the six months ended June 30, 2010.
The increase was primarily due to an increase in the average aggregate amount of notes payable
outstanding to $1.3 billion during the six months ended June 30, 2011, from $244.5 million for the
six months ended June 30, 2010.
Funds From Operations and Modified Funds From Operations
Funds From Operations (FFO) is a non-GAAP financial performance measure defined by the
National Association of Real Estate Investment Trusts (NAREIT) and widely recognized by investors
and analysts as one measure of operating performance of a real estate company. The FFO calculation
excludes items such as real estate depreciation and amortization, and gains and losses on the sale
of real estate assets. Depreciation and amortization as applied in accordance with GAAP implicitly
assumes that the value of real estate assets diminishes predictably over time. Since real estate
values have historically risen or fallen with market conditions, it is managements view, and we
believe the view of many industry investors and analysts, that the presentation of operating
results for real estate companies by using the cost accounting method alone is insufficient. In
addition, FFO excludes gains and losses from the sale of real estate, which we believe provides
management and investors with a helpful additional measure of the performance of our real estate
portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from
trends in items such as occupancy rates, rental rates, operating costs, general and administrative
expenses, and interest costs.
In addition to FFO, we use Modified Funds From Operations (MFFO) as a non-GAAP supplemental
financial performance measure to evaluate the operating performance of our real estate portfolio.
MFFO, as defined by our company, excludes from FFO acquisition related costs and real estate
impairment charges, which are required to be expensed in accordance with GAAP. In evaluating the
performance of our portfolio over time, management employs business models and analyses that
differentiate the costs to acquire investments from the investments revenues and expenses.
Management believes that excluding acquisition costs from MFFO provides investors with supplemental
performance information that is consistent with the performance models and analysis used by
management, and provides investors a view of the performance of our portfolio over time, including
after the company ceases to acquire properties on a frequent and regular basis. MFFO also allows
for a comparison of the performance of our portfolio with other REITs that are not currently
engaging in acquisitions, as well as a comparison of our performance with that of other non-traded
REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe
often used by analysts and investors for comparison purposes.
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Additionally, impairment charges are items that management does not include in its evaluation
of the operating performance of its real estate investments, as management believes that the impact
of these items will be reflected over time through changes in rental income or other related costs.
As many other non-traded REITs exclude impairments in reporting their MFFO, we believe that our
calculation and reporting of MFFO will assist investors and analysts in comparing our performance
versus other non-traded REITs.
For all of these reasons, we believe FFO and MFFO, in addition to net income and cash flows
from operating activities, as defined by GAAP, are helpful supplemental performance measures and
useful in understanding the various ways in which our management evaluates the performance of our
real estate portfolio over time. However, not all REITs calculate FFO and MFFO the same way, so
comparisons with other REITs may not be meaningful. FFO and MFFO should not be considered as
alternatives to net income or to cash flows from operating activities, and are not intended to be
used as a liquidity measure indicative of cash flow available to fund our cash needs.
MFFO may provide investors with a useful indication of our future performance, particularly
after our acquisition stage, and of the sustainability of our current distribution policy.
However, because MFFO excludes acquisition expenses, which are an important component in an
analysis of the historical performance of a property, MFFO should not be construed as a historic
performance measure. Neither the SEC, NAREIT, nor any other regulatory body has evaluated the
acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use
as a non-GAAP financial performance measure.
Our calculation of FFO and MFFO, and reconciliation to net income (loss), which is the most
directly comparable GAAP financial measure, is presented in the table below for the three and six
months ended June 30, 2011 and 2010 (in thousands). FFO and MFFO are influenced by the timing of
acquisitions and the operating performance of our real estate investments.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY |
$ | 10,480 | $ | (1,603 | ) | $ | 24,740 | $ | (1,767 | ) | ||||||
Depreciation of real estate assets |
15,774 | 4,371 | 29,437 | 7,281 | ||||||||||||
Amortization of lease related costs |
7,732 | 2,653 | 14,465 | 4,592 | ||||||||||||
Depreciation and amortization of real estate assets in
unconsolidated joint ventures |
491 | 28 | 829 | 28 | ||||||||||||
Funds from operations (FFO) |
34,477 | 5,449 | 69,471 | 10,134 | ||||||||||||
Acquisition related expenses |
14,128 | 11,083 | 22,721 | 17,929 | ||||||||||||
Acquisition related expenses in unconsolidated joint ventures |
| 738 | | 738 | ||||||||||||
Modified funds from operations (MFFO) |
$ | 48,605 | $ | 17,270 | $ | 92,192 | $ | 28,801 | ||||||||
Set forth below is additional information that may be helpful in assessing our operating
results:
| In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of $6.1 million and $11.1 million during the three and six months ended June 30, 2011, respectively, and $1.7 million and $2.8 million during the three and six months ended June 30, 2010, respectively. In addition, related to the Unconsolidated Joint Ventures, straight-line revenue of $8,000 and $12,000 for the three and six months ended June 30, 2011, respectively, and $1,000 for each of the three and six months ended June 30, 2010 is included in equity in income (loss) of unconsolidated joint ventures on the consolidated statements of operations. |
| Amortization of deferred financing costs and amortization of fair value adjustments of mortgage notes assumed totaled $1.7 million and $3.0 million during the three and six months ended June 30, 2011, respectively, and $555,000 and $911,000 during the three and six months ended June 30, 2010, respectively. In addition, related to the Unconsolidated Joint Ventures, amortization of deferred financing costs of $16,000 and $27,000 for the three and six months ended June 30, 2011, respectively, and $2,000 for each of the three and six months ended June 30, 2010 is included in equity in income (loss) of unconsolidated joint ventures on the consolidated statements of operations. |
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Distributions
In March 2011, the Companys board of directors authorized a daily distribution, based on 365
days in the calendar year, of $0.001781016 per share (which equates to 6.50% on an annualized basis
calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of
record as of the close of business on each day of the period, commencing on April 1, 2011 and
ending on June 30, 2011. In May 2011, the Companys board of directors authorized a daily
distribution, based on 365 days in the calendar year, of $0.001781016 per share (which equates to
6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase
price) for stockholders of record as of the close of business on each day of the period, commencing
on July 1, 2011 and ending on September 30, 2011.
During the six months ended June 30, 2011 and 2010, respectively, we paid distributions of
$87.8 million and $41.7 million, including $49.6 million and $24.3 million, respectively, through
the issuance of shares pursuant to our DRIP. The distributions paid during the six months ended
June 30, 2011 were funded by net cash provided by operating activities of $62.5 million, proceeds
from the issuance of common stock of $22.7 million, return of capital from the Unconsolidated Joint
Ventures of $452,000 and borrowings of $2.1 million. The distributions paid during the six months
ended June 30, 2010 were funded by net cash provided by operating activities of $13.2 million,
proceeds from the issuance of common stock of $17.9 million and borrowings of $10.6 million. Net
cash provided by operating activities for the six months ended June 30, 2011 and 2010, reflects a
reduction for real estate acquisition related expenses incurred and expensed of $22.7 million and
$17.9 million, respectively, in accordance with ASC 805, Business Combinations. As set forth in
the Estimated Use of Proceeds section of the prospectuses for the Offerings, we treat our real
estate acquisition expenses as funded by proceeds from the offering of our shares. Therefore, for
consistency, proceeds from the issuance of common stock for the six months ended June 30, 2011 and
2010, respectively, have been reported as a source of distributions to the extent that acquisition
expenses have reduced net cash flows from operating activities.
Share Redemptions
Our share redemption program provides that we will not redeem in excess of 5% of the weighted
average number of shares outstanding during the trailing twelve months prior to the redemption
date; provided, however, that while shares subject to a redemption requested upon the death of a
stockholder will be included in calculating the maximum number of shares that may be redeemed, such
shares will not be subject to the Trailing Twelve-month Cap. In addition, all redemptions,
including those upon death or qualifying disability, are limited to those that can be funded with
cumulative net proceeds from the sale of shares through our DRIP. During the six months ended June
30, 2011, we received valid redemption requests relating to approximately 2.0 million shares, which
we redeemed in full for $19.6 million (an average of $9.67 per share). A valid redemption request
is one that complies with the applicable requirements and guidelines of our current share
redemption program set forth in the prospectus relating to the Follow-on Offering. We have funded
and intend to continue funding share redemptions with proceeds of our DRIP. Subsequent to June 30,
2011, we redeemed approximately 1.3 million shares for a total of $12.2 million, or an average
price per share of $9.69.
In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the
weighted average number of shares outstanding during the trailing twelve-month period. In
addition, the funding for redemptions each quarter generally will be limited to the net proceeds we
receive from the sale of shares in the respective quarter under our DRIP. The amended share
redemption program further provides that while shares subject to redemption requested upon the
death of a stockholder will be included in calculating the maximum number of shares that may be
redeemed, such shares will not be subject to the quarterly caps. Our board of directors may waive
these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.
Liquidity and Capital Resources
As of June 30, 2011, we had cash and cash equivalents of $316.8 million
and available borrowings of $442.1 million under our Credit Facility. Additionally, as of
June 30, 2011, we had unencumbered properties with a gross book value of $1.0 billion,
including $714.5 million of assets that are part of the Credit Facilitys unencumbered borrowing base
(the Borrowing Base Assets), which may be
used as collateral to secure additional financing in future periods, subject to certain covenants and leverage and borrowing
base restrictions related to our Credit Facility; however, the use of any Borrowing Base Assets as collateral would reduce the available
borrowings under our Credit Facility.
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Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for operating expenses,
distributions and redemptions to stockholders and interest and principal on current and any future
indebtedness. In addition, as of June 30, 2011, we had entered into agreements of purchase and
sale to acquire ten retail properties for an aggregate purchase price of $220.4 million, as
discussed in Note 9 to our condensed consolidated unaudited financial statements included in this
Quarterly Report on Form 10-Q. We expect to meet our short-term liquidity requirements through cash
provided by property operations and proceeds from the Follow-on Offering. Operating cash flows are
expected to increase as additional properties are added to our portfolio. The offering and
organization costs associated with the Offerings are initially paid by our advisor, which will be
reimbursed for such costs up to 1.5% of the aggregate gross capital raised by us in the Offerings.
As of June 30, 2011, we recorded $35.6 million of such offering and organization costs.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real
estate and real estate-related investments and the payment of acquisition related expenses,
operating expenses, distributions and redemptions to stockholders and interest and principal on any
future indebtedness. Generally, we expect to meet cash needs for items other than acquisitions and
acquisition related expenses and debt maturities from our cash flow from operations, and we expect
to meet cash needs for acquisitions and debt maturities from the net proceeds from the Follow-on
Offering and from secured or unsecured borrowings on our current unencumbered properties and future
properties, refinancing of current debt and borrowings on our Credit Facility. We expect that
substantially all cash generated from operations will be used to pay distributions to our
stockholders after certain capital expenditures, including tenant improvements and leasing
commissions, are paid at the properties; however, we may use other sources to fund distributions as
necessary, including the proceeds of the Follow-on Offering, cash advanced to us by our advisor,
borrowing on the Credit Facility and/or future borrowings on our unencumbered assets. During the
six months ended June 30, 2011, we funded distributions to our stockholders with cash flows from
operations, offering proceeds and debt financings as discussed above in the section captioned
Distributions. The Credit Facility and certain notes payable contain customary affirmative,
negative and financial covenants, including requirements for minimum net worth, debt service
coverage ratios, and leverage ratios. These covenants may limit our ability to incur additional
debt and make borrowings on the Credit Facility.
As of June 30, 2011, we had received and accepted subscriptions for approximately 309.4
million shares of common stock in the Offerings for gross proceeds of $3.1 billion. As of June 30,
2011, we had redeemed a total of approximately 3.3 million shares of common stock for a cost of
$31.5 million, or an average price per share of $9.68.
As of June 30, 2011, we and the Consolidated Joint Ventures had $1.6 billion of debt
outstanding. See Note 7 to our condensed consolidated unaudited financial statements in this
Quarterly Report on Form 10-Q for certain terms of the debt outstanding. Additionally, the ratio of
debt to total gross real estate assets net of gross intangible lease liabilities, as of June 30,
2011, was 42% and the weighted average years to maturity was 6.4 years.
Our contractual obligations as of June 30, 2011, were as follows (in thousands):
Payments due by period (1) (2) (3) | ||||||||||||||||||||
Less Than 1 | More Than 5 | |||||||||||||||||||
Total | Year | 1-3 Years | 4-5 Years | Years (7) | ||||||||||||||||
Principal payments fixed rate debt(4) |
$ | 1,347,017 | $ | 4,074 | $ | 152,622 | $ | 359,721 | $ | 830,600 | ||||||||||
Interest payments fixed rate debt |
515,262 | 72,557 | 207,198 | 101,565 | 133,942 | |||||||||||||||
Principal payments variable rate debt |
91,500 | | 625 | 90,875 | | |||||||||||||||
Interest payments variable rate debt(5) |
13,955 | 2,901 | 8,688 | 2,366 | | |||||||||||||||
Principal payments credit facility |
200,000 | | 200,000 | | | |||||||||||||||
Interest payments credit facility(6) |
20,643 | 6,900 | 13,743 | | | |||||||||||||||
Total |
$ | 2,188,377 | $ | 86,432 | $ | 582,876 | $ | 554,527 | $ | 964,542 | ||||||||||
(1) | The table above does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable. | |
(2) | As of June 30, 2011, we had $573.9 million of variable rate debt fixed through the use of interest rate swaps. We used the fixed rates under the swap agreement to calculate the debt payment obligations in future periods. |
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(3) | The table above does not include loan amounts associated with the Unconsolidated Joint Ventures of $46.0 million, which mature on various dates ranging from July 2020 to July 2021, as the loans are non-recourse to us. | |
(4) | Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties and our Consolidated Joint Ventures. As of June 30, 2011, the fair value adjustment, net of amortization, of mortgage notes assumed was $1.1 million. | |
(5) | Rates ranging from 2.94% to 3.19% were used to calculate the variable debt payment obligations in future periods. These were the rates effective as of June 30, 2011. | |
(6) | Payment obligations for the Term Loan outstanding under the Credit Facility based on interest rate of 3.25% in effect as of June 30, 2011. | |
(7) | Assumes the Company accepts the interest rates that one lender may reset on September 1, 2013 and February 1, 2015, respectively, related to mortgage notes payable of $30.0 million and $32.0 million, respectively. |
Our charter prohibits us from incurring debt that would cause our borrowings to exceed the
greater of 75% of our gross assets, valued at the greater of the aggregate cost (before
depreciation and other non-cash reserves) or fair value of all assets owned by us, unless approved
by a majority of our independent directors and disclosed to our stockholders in our next quarterly
report.
As of June 30, 2011, we had entered into agreements of purchase and sale, with unaffiliated
third-party sellers, to purchase a 100% interest in ten retail properties, subject to meeting
certain criteria, for an aggregate purchase price of $220.4 million, exclusive of closing costs.
As of June 30, 2011, we had $6.5 million of property escrow deposits held by escrow agents in
connection with these future property acquisitions, of which $323,000 will be forfeited if the
transactions are not completed. As of August 10, 2011, we had
purchased 16 of these properties for
$130.9 million, exclusive of closing costs, and no escrow deposits were forfeited.
In addition, we will be obligated to purchase a property from the Marana Joint Venture for an
expected purchase price of $7.7 million, subject to certain criteria being met, including the
completion of the building.
Cash Flow Analysis
Operating Activities. During the six months ended June 30, 2011, net cash provided by
operating activities increased $49.3 million to $62.5 million, compared to $13.2 for the six months
ended June 30, 2010. The change was primarily due to a increase in net income of $26.8 million and
depreciation and amortization expenses totaling $32.5 million, partially offset by an increase in
the change in rents and tenant receivables of $10.4 million and a decrease in the change in
deferred rent and other liabilities of $3.7 million for the six months ended June 30, 2011. See
Results of Operations for a more complete discussion of the factors impacting our operating
performance.
Investing Activities. Net cash used in investing activities increased $98.4 million to $841.3
million for the six months ended June 30, 2011 compared to $742.9 million for the six months ended
June 30, 2010. The increase was primarily due to the acquisition of 92 properties for an aggregate purchase price of $831.0 million during the six months ended June
30, 2011, compared to the acquisition of 133 properties and mortgage assets for an
aggregate purchase price of $732.0 million during the six months ended June 30, 2010.
Financing Activities. Net cash provided by financing activities increased $104.5 million to
$985.6 million for the six months ended June 30, 2011, compared to $881.1 million for the six
months ended June 30, 2010. The change was primarily due to an increase in proceeds from mortgage
notes payable of $420.8 million, partially offset by a decrease in the issuance of common stock of
$219.3 million and an increase in repayment of notes payable of $74.9 million and distributions to
investors of $20.8 million.
Election as a REIT
We are taxed as a REIT under the Internal Revenue Code of 1986, as amended. To maintain our
qualification as a REIT, we must meet, and continue to meet, certain requirements relating to our
organization, sources of income, nature of assets, distributions of income to our stockholders and
recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income
that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable
income (computed with regard to the dividends paid deduction excluding net capital gains).
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If we fail to maintain our qualification as a REIT for any reason in a taxable year and
applicable relief provisions do not apply, we will be subject to tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to
deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT.
We also will be disqualified for the four taxable years following the year during which
qualification was lost unless we are entitled to relief under specific statutory provisions. Such
an event could materially adversely affect our net income and net cash available for distribution
to stockholders. However, we believe that we are organized and operate in such a manner as to
maintain our qualification for treatment as a REIT for federal income tax purposes. No provision
for federal income taxes has been made in our accompanying condensed consolidated unaudited
financial statements. We are subject to certain state and local taxes related to the operations of
properties in certain locations, which have been provided for in our accompanying condensed
consolidated unaudited financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform to GAAP. The preparation of financial
statements in conformity with GAAP requires us to use judgment in the application of accounting
policies, including making estimates and assumptions. These judgments affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the reporting periods.
If our judgment or interpretation of the facts and circumstances relating to the various
transactions had been different, it is possible that different accounting policies would have been
applied, thus resulting in a different presentation of the financial statements. Additionally,
other companies may utilize different estimates that may impact comparability of our results of
operations to those of companies in similar businesses. We consider our critical accounting
policies to be the following:
| Investment in and Valuation of Real Estate and Related Assets; | ||
| Allocation of Purchase Price of Real Estate and Related Assets; | ||
| Revenue Recognition; | ||
| Investment in Unconsolidated Joint Ventures; | ||
| Investment in Mortgage Notes Receivable; | ||
| Income Taxes; and | ||
| Derivative Instruments and Hedging Activities. |
A complete description of such policies and our considerations is contained in our Annual
Report on Form 10-K for the year ended December 31, 2010, and our critical accounting policies have
not changed during the six months ended June 30, 2011. The information included in this Quarterly
Report on Form 10-Q should be read in conjunction with our audited consolidated financial
statements as of and for the year ended December 31, 2010, and related notes thereto.
Commitments and Contingencies
We may be subject to certain contingencies and commitments with regard to certain
transactions. Refer to Note 9 to our condensed consolidated unaudited financial statements in this
Quarterly Report on Form 10-Q for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with CR III Advisors and its affiliates, whereby we have paid
and may continue to pay certain fees to, or reimburse certain expenses of, CR III Advisors or its
affiliates such as acquisition and advisory fees and expenses, financing coordination fees,
organization and offering costs, sales commissions, dealer manager fees, asset and property
management fees and expenses, leasing fees and reimbursement of certain operating costs. See Note
10 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form
10-Q for a discussion of the various related-party transactions, agreements and fees.
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Subsequent Events
Certain events occurred subsequent to June 30, 2011 through the filing date of this Quarterly
Report on Form 10-Q. Refer to Note 13 to our condensed consolidated unaudited financial statements
in this Quarterly Report on Form 10-Q for further explanation. Such events are:
| Status of the Offerings; | ||
| Real estate acquisitions; and | ||
| Notes payable and credit facility |
New Accounting Pronouncements
There are no accounting pronouncements that have been issued but not yet adopted by us that
will have a material impact on our consolidated financial statements.
Off Balance Sheet Arrangements
As of June 30, 2011 and December 31, 2010, we had no material off-balance sheet arrangements
that had or are reasonably likely to have a current or future effect on our financial condition,
results of operations, liquidity or capital resources.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As of June 30, 2011, we and a consolidated joint venture had $91.5 million of variable rate
debt and therefore we are exposed to interest rate changes in LIBOR. As of June 30, 2011, a change
of 50 basis points in interest rates would result in a change in interest expense of $458,000 per
annum, assuming all of our derivatives remain effective hedges. In the future we may obtain
additional variable rate debt financing to fund certain property acquisitions, and may be further
exposed to interest rate changes. Our objectives in managing interest rate risks will be to limit
the impact of interest rate changes on operations and cash flows, and to lower overall borrowing
costs. To achieve these objectives, we will borrow primarily at interest rates with the lowest
margins available and, in some cases, with the ability to convert variable interest rates to fixed
rates. We have entered, and expect to continue to enter, into derivative financial instruments,
such as interest rate swaps, in order to mitigate our interest rate risk on a given variable rate
financial instrument. We will not enter into derivative or interest rate transactions for
speculative purposes. We may also enter into rate lock arrangements to lock interest rates on
future borrowings.
As of June 30, 2011, we had 61 interest rate swap agreements outstanding, which mature on
various dates from August 2012 through April 2021, with an aggregate notional amount under the swap
agreements of $573.9 million and an aggregate net fair value of
$(13.1) million. The fair value of
these interest rate swap agreements is dependent upon existing market interest rates and swap
spreads. As of June 30, 2011, an increase of 50 basis points in interest rates would result in an
increase to the fair value of these interest rate swaps of $12.1 million.
We do not have any foreign operations and thus we are not exposed to foreign currency
fluctuations.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision
and with the participation of our chief executive officer and chief financial officer, carried out
an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures, as of June 30, 2011, were effective
to ensure that information required to be disclosed by us in this
Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time
periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and
communicated to management, including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosures.
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Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) in connection with the foregoing evaluations that
occurred during the three months ended June 30, 2011 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business, we may become subject to litigation or claims. We are not
aware of any material pending legal proceedings, other than ordinary routine litigation incidental
to our business.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors set forth in our Annual Report on
Form 10-K for the year ended December 31, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
As of June 30, 2011, we had issued approximately 309.4 million shares in the Offerings for
gross proceeds of $3.1 billion, out of which we paid $262.3 million in selling commissions and
dealer manager fees and $35.6 million in organization and offering costs to our advisor or its
affiliates. With the net offering proceeds, we and the Consolidated Joint Ventures acquired $3.8
billion in real estate and related assets and an interest in the Unconsolidated Joint Venture of
$23.8 million and paid costs of $99.8 million in acquisition related expenses. As of August 10,
2011, we have sold approximately 321.3 million shares in the Offerings for gross offering proceeds
of $3.2 billion.
Our board of directors has adopted a share redemption program that enables our stockholders
who hold their shares for more than one year to sell their shares to us in limited circumstances.
The purchase price we will pay for redeemed shares is set forth in the prospectuses for our
Offerings of common stock, as supplemented from time to time. Our board of directors reserves the
right in its sole discretion at any time, and from time to time, to waive the one-year holding
period in the event of death, bankruptcy or other exigent circumstances or terminate, suspend or
amend the share redemption program. Under the terms of the share redemption program, share
redemptions are subject to the Trailing Twelve-month Cap; provided, however shares subject to
redemption requests upon death of a stockholder will not be subject to the Trailing Twelve-month
Cap. In addition, all redemptions, including those upon death or qualifying disability, are
limited to those that can be funded with the cumulative net proceeds from our DRIP. In addition to
these caps, the redemptions are limited quarterly to 1.25% of the weighted average number of shares
outstanding during the trailing twelve-month period. In addition, the funding for redemptions each
quarter generally will be limited to the net proceeds we receive from the sale of shares in the
respective quarter under the DRIP. The amended share redemption program further provides that
while shares subject to a redemption requested upon the death of a stockholder will be included in
calculating the maximum number of shares that may be redeemed, such shares will not be subject to
the quarterly caps. Our board of directors may waive these quarterly caps in its sole discretion,
subject to the Trailing Twelve-month Cap.
The provisions of the share redemption program in no way limit our ability to repurchase
shares from stockholders by any other legally available means for any reason that our board of
directors, in its discretion, deems to be in our best interest. During the three months ended June
30, 2011, we redeemed shares as follows:
Total Number of Shares | Maximum Number of | |||||||||||||||
Total Number | Purchased as Part | Shares that May Yet Be | ||||||||||||||
of Shares | Average Price | of Publicly Announced | Purchased Under the | |||||||||||||
Redeemed | Paid per Share | Plans or Programs | Plans or Programs | |||||||||||||
April 2011 |
| $ | | | (1 | ) | ||||||||||
May 2011 |
1,236,278 | $ | 9.66 | 1,236,278 | (1 | ) | ||||||||||
June 2011 |
| $ | | | (1 | ) | ||||||||||
Total |
1,236,278 | 1,236,278 | (1 | ) | ||||||||||||
(1) | A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table. |
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Item 3. | Defaults Upon Senior Securities |
No events occurred during the three months ended June 30, 2011 that would require a response
to this item.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
No events occurred during the three months ended June 30, 2011 that would require a response
to this item.
Item 6. | Exhibits |
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q) are included herewith, or incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cole Credit Property Trust III, Inc. (Registrant) |
||||
By: | /s/ Simon J. Misselbrook | |||
Name: | Simon J. Misselbrook | |||
Title: | Vice President of Accounting (Principal Accounting Officer) |
Date: August 12, 2011
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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | ||
3.1
|
Third Articles of Amendment and Restatement of Cole Credit Property Trust III, Inc. (Incorporated by reference to Exhibit 3.1 to the Companys pre-effective amendment to Form S-11 (File No. 333-149290), filed on September 29, 2008). | ||
3.2
|
Amended and Restated Bylaws of Cole Credit Property Trust III, Inc. (Incorporated by reference to Exhibit 3.2 to the Companys pre-effective amendment to Form S-11 (File No. 333-149290), filed on May 7, 2008). | ||
3.3
|
Articles of Amendment (Incorporated by reference to the Companys Current Report on Form 8-K (File No. 333-149290) filed on April 9, 2010). | ||
3.4
|
Second Articles of Amendment of Cole Credit Property Trust III, Inc. (Incorporated by reference to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). | ||
4.1
|
Form of Subscription Agreement and Subscription Agreement Signature Page (Incorporated by reference to Exhibit 4.1 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). | ||
4.2
|
Form of Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.2 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). | ||
4.3
|
Form of Alternative Subscription Agreement (Incorporated by reference to Exhibit 4.3 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). | ||
4.4
|
Form of Alternative Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.4 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). | ||
4.5
|
Form of Alternative Subscription Agreement (Incorporated by reference to Exhibit 4.5 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011). | ||
4.6
|
Form of Alternative Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.6 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011). | ||
10.1
|
Credit Agreement dated June 27, 2011 by and between Cole REIT III Operating Partnership, LP as Borrower and Bank of America, National Association as Administrative Agent, Swing Line Lender and LIC Issuer, JP Morgan Chase Bank, National Association as Syndication Agent, U.S. Bank National Association, Wells Fargo Bank, National Association and Regions Bank as Co-Documentation Agents and Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC as Joint Lead Arrangers and Joint Book Managers (Incorporated by reference to Exhibit 10.66 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). | ||
31.1
|
* | Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
* | Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
** | Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS
|
*** | XBRL Instance Document. | |
101.SCH
|
*** | XBRL Taxonomy Extension Schema Document. | |
101.CAL
|
*** | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF
|
*** | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB
|
*** | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE
|
*** | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith | |
** | In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. | |
*** | XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. |